China's New Deal: Economic Development Under International Financial Crisis

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GLOBAL ECONOMIC STUDIES

CHINA‟S NEW DEAL ECONOMIC DEVELOPMENT UNDER INTERNATIONAL FINANCIAL CRISIS

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GLOBAL ECONOMIC STUDIES

CHINA‟S NEW DEAL ECONOMIC DEVELOPMENT UNDER INTERNATIONAL FINANCIAL CRISIS

LI XIAOXI AND

HU BILIANG EDITORS Institute of Economics and Resource Management, Beijing Normal University (BNU) Development Institute, Southwestern Uuniversity of Finance and Economics (SUFE)

Nova Science Publishers, Inc. New York

Copyright © 2011 by Nova Science Publishers, Inc. All rights reserved. No part of this book may be reproduced, stored in a retrieval system or transmitted in any form or by any means: electronic, electrostatic, magnetic, tape, mechanical photocopying, recording or otherwise without the written permission of the Publisher. For permission to use material from this book please contact us: Telephone 631-231-7269; Fax 631-231-8175 Web Site: http://www.novapublishers.com NOTICE TO THE READER The Publisher has taken reasonable care in the preparation of this book, but makes no expressed or implied warranty of any kind and assumes no responsibility for any errors or omissions. No liability is assumed for incidental or consequential damages in connection with or arising out of information contained in this book. The Publisher shall not be liable for any special, consequential, or exemplary damages resulting, in whole or in part, from the readers‘ use of, or reliance upon, this material. Any parts of this book based on government reports are so indicated and copyright is claimed for those parts to the extent applicable to compilations of such works. Independent verification should be sought for any data, advice or recommendations contained in this book. In addition, no responsibility is assumed by the publisher for any injury and/or damage to persons or property arising from any methods, products, instructions, ideas or otherwise contained in this publication. This publication is designed to provide accurate and authoritative information with regard to the subject matter covered herein. It is sold with the clear understanding that the Publisher is not engaged in rendering legal or any other professional services. If legal or any other expert assistance is required, the services of a competent person should be sought. FROM A DECLARATION OF PARTICIPANTS JOINTLY ADOPTED BY A COMMITTEE OF THE AMERICAN BAR ASSOCIATION AND A COMMITTEE OF PUBLISHERS. Additional color graphics may be available in the e-book version of this book. LIBRARY OF CONGRESS CATALOGING-IN-PUBLICATION DATA The development of China's economy under the international financial crisis / editors, Xiaoxi Li and Biliang Hu. p. cm. Includes index. ISBN 978-1-61324-864-5 (eBook) 1. China--Economic policy--2000- 2. China--Economic conditions--2000- 3. Financial crises--China. 4. Global Financial Crisis, 2008-2009. I. Li, Xiaoxi. II. Hu, Biliang. HC427.95.D46 2009 330.951--dc22

Published by Nova Science Publishers, Inc. † New York

2010016086

Task Managers

Li Xiaoxi Hu Biliang

Task Coordinators

Gan Li Liu Fangjian Zeng Xuewen

Task Assistants

Fan Gangzhi Lin Yongsheng Liu Yimeng

CONTENTS Preface

xi

Columns

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General Remarks: The China Model and Green New Deal Introduction Chapter 1

1 Four-Trillion (RMB) Economic Stimulus Plan: China‘s Response to the International Financial Crisis Zhang Shengling, Jin Sanlin, Liu Yimeng and Zhangshuai

Comments on Chapter 1 Keynes‘s Philosophy in China: Assessing the Four-Trillion-Yuan Economic Stimulus Package Shu Yan Chapter 2

Building a New Countryside: The Breakthrough Point of Stimulating Domestic Demand Li Jing, Zhang Jiangxue, Feng Tao and Zhang Ning

Comments on Chapter 2 Facts Behind Figures: Preliminary Thoughts on Building a New Countryside and Stimulating Rural Demand in China Hu Rong Chapter 3

Supporting Agricultural and Rural Development: The Dilemma and Reform in Rural Finance Zeng Xuewen, Qin Jianguo, Peng Linlin and Zhang Yifu

Comments on Chapter 3 Improving Rural Finance Under the Industrial Structure Change Zhang Tong Chapter 4

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Ten Major Industries Stimulus Plan: New Strategies for Structural Adjustment Han Jing, Xu Yan, Sun Peng, and Feng Rui

3 29

35 59

65 87

91

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Contents

Comments on Chapter 4 Ten Industries Stimulus Plan Calls for Smart Implementation: A View Based on Lessons of Industrial Policy Zhang Jin Chapter 5

Real Estate: New Changes in the International Financial Crisis Zhang Qi, Wang Hao, Li Hongyi and Zhang Ai

Comments on Chapter 5 The Subprime Crisis in the U.S. Real Estate Market and its Implications Yuan Yan Chapter 6

New Energy: New Exploration on Energy Development in China Lin Weibin, Li Xiaozhong, Rong Tingting and Song Tao

Comments on Chapter 6 Getting Ready for the Coming of the New Energy Era Liu Shiyong Chapter 7

Emission Trading: New Mechanism for Responding to Climate Change He Jinyu, Xiao Boqiang and Zhang Mingming

Comment on Chapter 7 Market Mechanism and the Low-carbon Economic Growth in China Huang Jeff Chapter 8

New Growth Engine: The Rise of Green Economy in China Shao Hui, Lin Yongsheng, Qin Jian and Xiao Huaiyang

Comments on Chapter 8 Green Market and Green Economy Mou Pu Chapter 9

The New Healthcare Reform: The New Starting Point of Healthcare Development Wang Nuo,Yang Weibin, Ren Ran, Cong Yajing and Hou Rui

Comments on Chapter 9 China‘s Healthcare Reform: New Beginning and New Challenges Liu Yuanli Chapter 10

Pilot Zones for Supporting Comprehensive Reforms: A New Platform for Further Institutional Reforms Zhao Shaoqin, Fan Lina and Wang Xiwei

Comments on Chapter 10 On the Setting-Up and Construction of the Pilot Zones for Supporting Comprehensive Reforms Huang Lin

119

123 145

151 179

187 211

215 237

243 269

273 301

Contents Chapter 11

New Stage: Current Economic Developments and Prospects in Ethnic Regions Zhang Wenguang, Zhang Qing‟an, Dong Xiaoyu and Wang Ying

Comments on Chapter 11 Let One Hundred Flowers Bloom: The Economic Development in the Ethnic Regions of China Yuan Jing‟an Chapter 12

The New Measures: Hong Kong and Macao Tackling the Financial Crisis Zheng Yanting, Zhao Zheng, Wu Wenshi and Du Yamin

ix

307 327

331

Comments on Chapter 12 How Hong Kong and Macao Tackle the 2008 Global Financial Crisis Sun Yong

359

Postscript

365

Index

369

PREFACE It is best if the author could film the breathtaking moments, and record the turning points. The period of 2008-2009 is an uncommon period, during which a financial crisis not encountered for almost half a century broke out suddenly. What were the author Chinese thinking about during this period? What have the author done? And with what effects? This book aims to record all these things for us to remember forever. However, what impressed us the most in 2009 is not disaster but cooperation. Statesmen all around the world are seeking cooperation, including the willingness to cooperate indicated as well as various achievements made by the leaders of China and the United States. The author have witnessed unreserved appreciation from the European countries and the United States, if not the whole world, when the Chinese government took major measures in response to the crisis, which has rarely been seen for years. This beautifully printed book in front of you is also a product of cooperation. The New York NOVA Press in the U.S. and the Encyclopedia of China Publishing House have, within the shortest time possible, reached a cooperation agreement with us to publish this book both in Chinese and English in China and the U.S. respectively. The act itself is full of the spirit of trust and cooperation, which has imbued my memory with pleasure and appreciation. The writing process per se is even more of a cooperative process. Young professors happily cooperate with even younger graduate students; the scholars and students from Beijing Normal University, Southwestern University of Finance and Economics, and Harvard University and MIT efficiently cooperate with each other; doctors who have earned their degrees domestically and overseas cooperate complementarily; scholars from various specialized fields in and out of school also cooperate with exchange of ideas. Why do people all agree to cooperate? Is it because of the need to unite to weather through the storm of financial crisis, or is it that the growing power of China attracts it more partners, or that greater complication of the issues the author are facing requires joint exploration? All in all, our consensus can be summarized as: only cooperation can bear more fruits, bring in more opportunities, and create a brighter future. The author still have a long way to go on the road of cooperation. The Development of China‟s Economy under International Financial Crisis is just the first volume of the series of The Research Report on China‟s Economy and Resource Management. The author are looking forward to future cooperation with the publishing houses and the authors, as well as to meeting the demand of readers both at home and abroad, in order to bring on new volumes.

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Li Xiaoxi Let us bless the world an everlasting favor from cooperation. Li Xiaoxi Translator: Zhang Li(SUFE) English Version Editors: Xiao Rong (SUFE), Chen Jinzhu (Harvard)

COLUMNS 1-1. 1-2. 2-1. 2-2. 2-3. 3-1. 3-2. 3-3. 4-1. 4.2. 4-3. 4-4. 5-1. 5-2. 6-1. 7-1. 8-1. 9-1. 9-2. 10-1. 10-2. 11-1. 12-1.

Chinese Leaders Express Their Standpoints in Response to the Financial Crisis The U.S Economic Stimulus Plan Objectives and Tasks of Rural Reform and Development Before 2020 Experiment of New Rural Pension Reform Scrap Rate of Methane-generating Pits Worth Hundreds of Millions Yuan (RMB) Exceeds 90% in the Rural Area in Heilongjiang Province ABC Launching ‗Huinong‘ Card The First Village Bank in Shanghai Founded Hainan Province Commencing A New Pilot of ‗Linkage of Bank and Insurance‘ Distributing Map of the Provincial Primacy in Annual Value-added of 9 Key Industries in 2008 Why Real Estate Industry Is Excluded in the Stimulus Plan? The ―Most‖ of Ten Major Industrial Stimulus Plans China‘s Sales Volume of Automobile: Infinite Potentiality The ‗Real Estate Tycoon‘ into ‗Pig Magnate‘ From ‗Failed Estate Auction‘ to ‗Recurrence of Land King‘ Wonders of the World in the Utilization of New Energy Chinese Airlines Have Been Incorporated Into EU Emission Trading System Plastic (Bags) Limit Order in China The Emergency Medical Response to The Wenchuan Earthquake A Case of New Rural Cooperative Medical Insurance in Lufeng County, Yunnan Province Shanghai Pilot of ‗Governance, Handling, Assessment‘ Reform in Educational Sector ‗Land Ticket‘ Trade in Chongqing China‘s Important Policies for Supporting Economic Development of Ethnic Regions in Recent Years Hong Kong-Zhuhai-Macao Bridge

GENERAL REMARKS: THE CHINA MODEL AND GREEN NEW DEAL Li Xiaoxi *

―China‘s Economic and Resource Management Research Report 2010‖ launches the discussion on the theme of ―China's economic development under the international financial crisis‖. As the title suggests, it is necessary for us not only to be aware of the international financial crisis, but also to expand analysis and exposition on China‘s current developing situation affected by the crisis. Undoubtedly the emphasis should be placed on ―China's development‖, which includes many elements to be shared with readers, such as the background for Chinese government‘s introduction of ―four trillion‖ economic stimulus package and its content and progress. After finishing some chapters, readers may inquire about what are the most obvious features of China‘s economy reflected in these issues. Or equally, about what are the most heated topics that are concerned by both China and the globe in China‘s current development context. Our answer is: the China Model and Green New Deal.

I. THE FINANCIAL CRISIS INTENSIFIES DISCUSSION ON “THE CHINA MODEL” Within 30 years after its economic reform and opening up, China has witnessed its GDP per capita soaring from 381 Yuan in 1978 to 22640 Yuan in 2008, its GDP per capita growing 1 nearly 60 times. In 2007, former World Bank President Paul Wolfowitz said that about 67% of the world's achievements in poverty reduction should be attributed to China during the past

* Li Xiaoxi is Professor of economics as well as the Dean of Institute of Economics and Resource Management at Beijing Normal University, who earned his PhD degree at Graduate School of the Chinese Academy of Social Sciences. Email: [email protected] 1 1978 data from China Statistical Yearbook 2008, detailed in http://www.stats.gov.cn/tjsj/ndsj/2008/indexch.htm; 2008 data from National Economic and Social Development Statistical Communiqué 2008, detailed in http://www.stats.gov.cn/tjgb/ndtjgb/qgndtjgb/t20090226_402540710.htm.

Li Xiaoxi

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25 years. As the world gets impressed by China's rapid economic development, appraises from scholars and other professionals all over the world have been given on ―the China Model‖ that leads China to the world. In May 2004, Joshua Cooper Ramo, senior editor of ―Time‖ magazine and senior consultant of Goldman Sachs, published a report entitled ―the 3 Beijing Consensus‖ at UK Foreign Policy Center in London. The study points out that the Chinese have worked out a development model suited to their national conditions through hard work, innovation and bold initiative and independent practice. He addresses this model as ―Beijing Consensus‖. The report says that the Chinese are moving in the direction of building a powerful country. Instead of a simple imitation of Western models, this effort is based on their own model, which has been studied by many other countries and regions as a role model. In its report entitled ―New World Order, Starting from the London Summit‖, Du Ping, commentator of ―Lianhe Zaobao‖ of Singapore, pointed out that ―we have many different development models in the G20 groups. A particular one of them is the ―China Model‖ that has already been going on for 30 years. As we ought to see, were there no China Model, the current global economy would appear much more spiritless, its prospects for 4 recovery short of a hope and driving force.‖ A number of well-known scholars are also interested. Joseph Stiglitz, a professor in Columbia University, a famous Nobel Prize laureate 5 in economics, published a monograph China's New Economic Model. John Naisbitt, who enjoys a good reputation around the world for his once published book Megatrends predicating American society‘s moving direction, has published his new book ―China 6 Megatrends ". Lin Yifu, World Bank Chief Economist and Senior Vice President, discusses the China Model from the perspective of the experience of China's development and transformation in his book entitled ―China's Miracle: Development Strategy and Economic 7 8 Reform‖ published in 1994. There are many more papers and monographs in this area. Now, as for European and American developed countries as well as Africa and Latin America countries; government officials, experts and scholars as well as corporate executives and business leaders; political scientists, economists as well as sociologists and historians, they frequently use the term ―the China Model‖ when talking about China. As the Chinese people are celebrating the 30th Anniversary of reform and opening up as well as the 60th anniversary 2

China Central Television: (How foreigners comment two meetings) interview with former World Bank president, ―two observers: 67% of the world's achievements in poverty reduction owned by China‖, March 13th, 2007. Detailed in http://news.cctv.com/china/20070313/106619.shtml 3 Joshua Cooper Ramo: The Beijing Consensus, detailed in http://fpc.org.uk/fsblob/244.pdf. 4 Du Ping, April 30th,2009. New World Order, Starting from the London Summit. Lian He Zao Bao. Detailed in http://www.zaobao.com/special/forum/pages7/forum_zp090403.shtml 5 Joseph E. Stiglitz. China‟s New Economic Model. Detailed in http://www.project-syndicate.org/ commentary/ stiglitz86 6 Xxxx: Leading futurist John Naisbitt launches China‟s Megatrends in Beijing, November 9th, 2009. Detailed in http://chinaglobalspeakers.com/?p=2582 7 Zhuang Juanju. Review of Research on “the China Model”. www.People.Com.cn. Detailed in http:// theory. people.com.cn/GB/49154/49155/8992114.html 8 Such as Wu Jinglian, Lin Yifu, Hu Angang, et al., research on the path of China's market economic reform from the economic perspective; Zheng Bijian, Yu Keping, Lin Shangli, et al., research on globalization and China's development model from the political perspective; Huang Ping, Li Peilin, Sun Liping, et al., study social transformation and China‘s experience from the sociological perspective; Luo Rongqu, Zhang Kaiyuan, Qian Chengdan, et al., conduct international comparative studies on the development path of China's modernization from the historical perspective. All of them have had a major impact.

General Remarks: The China Model and Green New Deal

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of the founding of New China, the enthusiasm in discussion ―the China Model‖ is being elevated, and the appraisal is being more affirmed. Interestingly, at the same time, the international financial crisis intensified the discussion of the China Model. Scholars re-understand and judge ―the China Model‖ from both positive and negative aspects. Considering the numerous different arguments, I summarize them as follows: For the positive evaluation, whether it is because China's more stringent financial supervision that prevented the international financial gamble‘s massive penetration, or it is the result of the style of Chinese government in concentrating power to hold the most important matters, China has been clearly immune from the adverse external effects, and the Chinese model has demonstrated high efficiency and strength in the face of international financial crisis. For the negative evaluation, the present financial crisis originates from the global economic imbalances, particularly the U.S. economy of high consumption and unregulated financial derivatives, coupled with China's high savings, high investment and high exports. Therefore, from the international economic perspective, the China Model is not sustainable. It is in this context that debate on ―the China Model‖ is inspired among academicians and other professionals. Facing the international financial crisis, the Chinese government takes powerful actions, which gains high affirmation from the international society. In particular, the announcement of Chinese government‘s ―four trillion‖ economic stimulus plan has captured the world‘s attention and surprise. ―Washington Post‖ published an article considering it as "A New Deal 9 with Chinese characteristics". ―Economist‖ called this stimulus package ―A New Deal, 10 Chinese-style‖. What role has this plan played? Will it trigger a new problem? Is it a typical case on ―the China Model‖? We will discuss these issues in the first chapter of this book. Similarly, the analysis of Chinese government's newly published ―Top Ten Industries Stimulus Plan‖ in the fourth chapter is based on the same goal. Facing the international financial crisis which originates from the sub-prime loan crisis, how does China perform in the real estate industry which is tightly integrated with the financial development? We will have a thorough discussion on this topic in Chapter Five. How did the international financial crisis affect Hong Kong and Macau, the two most important special economic zones in China? Did the Chinese government implement corresponding support measures? These interesting issues will be discussed in the last chapter. ―The China Model‖ comes as a generalization among theorists. Then do the public approve the formulation of ―the China Model‖? A thematic investigation ―How do you think the China Model?‖ was initiated by the People's Forum Magazine collaborated with People's Daily Online Magazine and the People's Forum Network, etc. A total of 4970 participated in the survey. In addition, the journalists from the People's Forum also interviewed 192 from the public on a random basis, summing it up to a total of 5162 participants. Results show that 75% of those surveyed believe that there exists ―the China Model‖. 56% of those surveyed felt that ―having become the fastest growing economy in the world‖ is the greatest 9

Ariana Eunjung Cha, Maureen Fan: China Unveils $586 Billion Stimulus Plan. ―The Washington Post‖ November 9,2008, detailed in http://www.washingtonpost.com/wp-dyn/content/article/2008/11/09/AR 2008 110900701. html 10 Economist: Reflating the Dragon: Can the world‘s fastest-growing economy avoid a sharp downturn? ―Economist‖ November 9, 2008, detailed in http://www.economist.com/ world/asia/PrinterFriendly.cfm? story _id=12606998

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achievement of ―the China Model‖. The top three answers to the main features of ―the China Model‖ are: a strong government‘s dominance (2918 votes, 57% of the total), development strategy based on gradual reform (2424 votes, 48% of the total), domestic reform and opening-up at the same time (2276 votes, representing 45%). Except for its totally different emotion coloring, such perception coincides with the comment of Rowan Callick from the American Enterprise Institute, who summarizes ―the China Model‖ as ―economic freedom 11 plus political repression.‖ It represents the mainstream views on ―the China Model‖ from some western countries. The survey also shows that ―the China Model‖ in the public‘s eyes mainly refers to ―the market liberalization with Chinese characteristics‖ (3172 votes, 64%), with none of other replies surpassing 40% of those surveyed. The survey also shows why people don‘t think there is ―the China Model‖. On one hand, they don‘t think China's development pattern can form a model. On the other hand, ―the China Model‖ formulation 12 has not been acknowledged worldwide. I understand that all the different summaries of ―the China Model‖ have their own reasons, to which I have deep respect. However, the excessive diversity has easily resulted in the vagueness of the conception, which also makes ―the China Model‖ a topic difficult to communicate. For example, is ―the China Model‖ equivalent to ―the Chinese pattern‖ including political reform? Is it similar to ―the East Asian Model‖? Is it the summary of China's 60 years of development experience? Should ―the China Model‖ be an ―economic growth model‖ or ―social development model‖ or ―the pattern of high investment, high exports and low consumption‖ (―two-high-and-one-low‖ Mode) summed up by some scholars? It is the summary of ―two-high-and-one-low‖ that has intensified the debate on ―the China Model‖ in the context of international financial crisis. Despite of the possible recommendations and conclusions it may render for future development, I believe the summary is hasty generalization and unacceptable. Clearly, the total denial of ―the China Model‖ which turns China from being economically backward to a country that can affect the world economy is definitely not able to convince the Chinese people or even most of the world. A total acceptance is also considered to be troublesome, because there do exist serious problems including excessive consumption of resources and severe environmental degradation in China's rapid economic growth, which is emergent to be dealt with. Thus, while affirming ―the China Model‖, I hope it becomes ―greener‖ instead of being ―gray‖ or even ―black‖. Combining the public‘s understanding, the scholars‘ various viewpoints, and my own thinking, I wonder if I can stress: the China Model mainly refers to China's economic development model since its reform and opening-up, the core of which is the socialist market economy. China‘s socialist market economy not only surmounts the capitalism, but also develops the good and discards the bad of the traditional socialism; it not only implements the government's macro-economic control, but also gives full play to the vitality of the market. As a result, the ―invisible hand‖ and the ―visible hand‖ functions properly and 11

Rowan Callick: The China Model, The America, November/December 2007 Issue, by American Enterprise Institute. Detailed in http://www.american.com/archive/2007/november-december-magazine-contents/thechina-model/?searchterm=China Model 12 ―74.55% of the public approve 'the China Model‖. www.People.com.cn. January 13, 2009. Detailed in http://politics.people.com.cn/GB/143465/143480/8669715.html


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simultaneously. Where do Chinese characteristics lie in? It lies exactly in combining ―socialism‖ with ―market economy‖. ―The China Model‖ is a socio-economic development model which actively participates in economic globalization and development. She adheres to socialism, and emphasizes the national characteristics, promoting the harmony and mutual benefits among different social systems. The China Model is an unprecedented great creation by Chinese people. China has enriched and developed the development models of the world. At this point, I think the interpretations given by most foreign scholars and Chinese, although starting from a personal experience, has captured the essential characteristics of ―the China Model.‖

II. “GREEN NEW DEAL” AGAINST THE FINANCIAL CRISIS While people discussing ―the China Model‖ heatedly, another term, ―Green New Deal‖, has entered people's vision. Let me briefly review: in 1971, the Canadian engineer Mctaggant initiated the ―Green Peace Organization‖. In the summer of 1984, ―Green Committees of Correspondence 13 (GCOC)‖ was set up in Virginia, the United States, aiming to set up local ―green groups‖. ―Green economy‖ was first proposed by the British economist David Pearce in his book ―Blueprint for A Green Economy‖ published in 1989. Green economy advocates: the social and ecological conditions should be considered in the economic development. We should make them ―bearable‖, i.e., bearable to the natural environment and mankind themselves. It will never cause social imbalance and ecological crisis for the blind pursuit of growth and production, and maintains a sustainable development without exhausting the natural 14 resource. With the social development, ―the green concept‖ has gradually become the mainstream 15 thinking in the field of public policy, and gradually becomes internationalized and globalized. The United Nations Environment Program (UNEP) proposed the ―Global Green New Deal‖ in October 2008, suggesting the 21st century a historic opportunity for focusing on environmental protection and investment model, which will ensure economic prosperity 16 and create job opportunities; in April 2009, the agency published ―Global Green New Deal 17 Policy Summary‖ (A Global Green New Deal), and described the six elements of ―Global 13

Green Committees of Correspondence—Green Politics http://greenpolitics.wikia.com/wiki/Green_Committees_of_Correspondence 14 UK Conservatives‘ Blueprint for a Green Economy http://www.worldchanging.com/archives/007254.html 15 Source: A Green New Deal for Asia: How Asia-Pacific countries are expanding the green sector in their economies. Detailed in http://www.spireresearch.com/pdf/archive/ejournaljun09/A%20Green%20New%20Deal%20for%20the%20emergi ng%20world.pdf 16 Source: UNEP: Global Green New Deal-Environmentally-focused Investment Historic Opportunity for 21st Century Prosperity and Job Generation. Detailed in http://www.unep.org/Documents.Multilingual/Default.asp?DocumentID=548&ArticleID=5957&l=en 17 Data source: UNEP: A Global Green New Deal, detailed in http://www.unep.org/greeneconomy/docs/ggnd_Final%20Report.pdf

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Green New Deal‖: (1) clean energy and clean technologies including recycling; (2) rural energy, including renewable and sustainable biomass; (3) sustainable agriculture , including organic agriculture; (4) ecosystem infrastructure; (5) reduced emissions from deforestation and forest degradation; (6) sustainable cities including planning, transportation and green building. The report calls for state leaders to implement the Green New Deal, which means to put within two years 1% of gross national product or equivalently about 750 billion U.S. dollars into the development of five key areas, including wind, solar, geothermal, biomass and other renewable energy sources within two years. The report notes that in the case of enhancing the energy efficiency of both old and new buildings, the use of current energysaving technologies can reduce the present buildings‘ energy consumption by 80%. The related investments in the field will not only stimulate revitalization in construction industry and other related industries, but also create a large number of green employment opportunities. Within only Europe and the US, it is likely to create 2 to 3.5 million job opportunities. The potential of developing countries in this regard would be even greater. Till 2030, investment of 630 billion U.S. dollars in renewable energy will add at least 20 million 18 job opportunities. In June 2009, UN Secretary General Ban Ki-moon attended the World Environment Day activities on the theme of ―Your planet needs you– Unite to address climate change‖ in Mexico. In his speech, Ban said that the world needs a ―Green New Deal‖, focusing on investment in renewable energy, constructing eco-friendly infrastructure, improving energy efficiency, and investing in the green economy as part of the huge economic stimulus plan. As a result, we would be able to put today's crisis into tomorrow's sustainable growth, enable countries transiting to a low-carbon society to get more generous 19 returns, and share new technologies with other countries in a superior position. On the theme of ―Development and Climate Change‖, the World Bank ―World Development Report 20 2010‖ suggests building ―climate-smart world.‖ Developing countries could promote development and poverty reduction by carbon-reduction model, which requires all countries work together to promote global sustainable economic development. The wave of ―Green New Deal‖ heats up in the context of global economic crisis. Countries are making increased efforts to promote green economic development. On one hand they take this opportunity to get rid of an economic recession. On the other hand they seek new development opportunities. Some experts have pointed out that if the climate, economy and financial system were looked as a whole, the global economy would face a 21 ―triple crunch‖: a combination of a credit-fuelled financial crisis, an accelerating climate change and the soaring energy, particularly oil prices. It is increasingly clear that these three

18

UNEP: ―Global Green New Deal‖-Environmentally-focused Investment Historic Opportunity for 21 st Century Prosperity and Job Generation. Detailed in http://www.unep.org/Documents.Multilingual/Default.asp?DocumentID=548&ArticleID=5957&l=en 19 UN‘s Report: Your Planet needs You—Unite to combat climate change. Detailed in http://www.unep.org/wed/2009 20 Taken from the World Bank: ―World Development Report 2010‖, November 2009. Detailed in http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/EXTWDRS/EXTWDR2010/0,, menuPK:5287748~pagePK:64167702~piPK:64167676~theSitePK:5287741,00.html 21 The Green New Deal Group: UK needs ‗Green New Deal‘ to tackle ‗triple crunch‘ of credit, oil price and climate crises http://www.neweconomics.org/gen/greennewdealneededforuk210708.aspx


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overlapping events threaten to develop into a perfect storm, which has not been seen since the Great Depression, with potentially devastating consequences. ―Green New Deal‖ launches rapidly in each country. First, looking at the United States, Obama's ―Green New Deal‖ constitutes of promoting energy efficiency, developing new energy sources, and combating climate change and so on, among which the development of new energy is the core of ―Green New Deal‖. In February 2009, President Obama signed the economic stimulus package with developing new energy sources as an essential component in Denver, the value of the package amounting to 787 billion U.S. dollars. 22 In April 2009, President Obama said in a speech that the United States must carry out a comprehensive reform, of which one important aspect was to establish a new economic growth driving force, i.e., Green Economy. 23 Since then, the U.S. government has introduced several policies: increasing investment in new energy sources; formulating strict vehicle exhaust emission standards; introduction of ―The American Clean Energy and Security Act‖. Use the carbon emissions in 2005 as the base, ―Clean Energy and Security Act‖ 24 proposed to reduce emissions by 17% in 2020, and 83% in 2050. In addition, a carbon trading market to promote alternative energy development will also be established. As a result, Obama have been addressed as ―the first green US president‖, and the ―New Deal‖ he signed is also regarded as ―Green New Deal‖.2526 Other countries have also launched ―Green New Deal‖. In the UK, ―Green New Deal‖ plays an important role in promoting employment, alternative energy development, sustainable developing transportation system and energy-saving efforts. It requires economic 27 development to be transited to a low-carbon economy at the same time. In New Zealand, using ―a warm home and a cool planet‖ as the slogan, a stimulus plan named ―Green New Deal‖ was introduced, providing a total of 3.3 billion U.S dollars in the next three years, 28 maintaining balanced development and transformation between urban and rural areas. Japan has the world's leading technology in solar power, low fuel consumption cars, electric cars and other aspects. However, the current problems Japan facing is the possibility of setting up industry with international competitiveness for next generation and making a great contribution to world‘s achievement in solving environmental and energy problems through 29 the realization of key technology‘s practical application in low- carbon-emission society. 22

www.news.cn Washington February 18, 2009: Obama signed 787 billion U.S. dollar economic stimulus package. Detailed in http://news.xinhuanet.com/photo/2009-02/18/content_10838401.htm 23 Gerald F. Seib, April 17, 2009. Obama‘s ―House Upon a Rock‖. The Wall Street Journal. Detailed in http://online.wsj.com/article/SB123991149634726345.html 24 The American ― Clean Energy and Security Act‖ Detailed in http://www.pewclimate.org/acesa 25 Anna Fifield, United States: Is Obama the first green US president? Detailed in http://www.ft.com/cms/s/0/81e7ed9a-a3e9-11de-9fed-00144feabdc0,dwp_uuid=c3def9ac-a3ec-11de-9fed00144feabdc0.html?nclick_check=1 26 John M. Broder, February 17, 2009. Obama‘s Greenhouse Gas Gamble. New York Times. Detailed in http://www.nytimes.com/2009/02/28/science/earth/28capntrade.html?ref=business 27 Green New Deal Group: Put People First: Demand a Green New Deal. Detailed in http://www.greennewdealgroup.org/?p=125 28 A Green New Deal for New Zealand: A Warm Home and A Cool Planet. Detailed in http://www.greens.org. nz/greennewdeal 29 OZAKI Masahiko, April 20, 2009. Japanese version of the effect of green new deal － is helpful to the maintenance of technological superiority. Japan Economic News. Detailed in http://www.rietigo.jp/cn/ papers/contribution/ozaki/01.html

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China adheres to the road of sustainable development and firmly takes the green economic development model in the long course of economic development. Under the international financial crisis, the green imprint of China's policy was striking and clear: China's new exploration in energy development, emissions trading and green economies have become the new engine of economic development. Firstly, let‘s look at the development of new energy sources. In order to cope with contradiction in energy supply and demand and environmental pressures in the course of economic and social development, China is stepping up its efforts in new energy and renewable energy development, and actively exploring an energy development path that is suitable for national conditions of China. China introduced the ―The People's Republic of China Renewable Energy Law‖ and ―renewable energy medium and long-term development plan‖ in 2005 and 2007 respectively. The Chinese government has also formulated a series of new energy and renewable energy policies which have greatly promoted the wind, solar, 30 biomass and nuclear power and other new energy sources and renewable energy development. In the sixth chapter of this book, the authors analyzed China‘s exploration in the development of new energy, and also pointed out barriers of technologies and institutions in the development of new energy, which is worth reading carefully. In the analysis we have also noted that China is constrained by shortage of independent innovation, out-of-date energy development and utilization system, poor financing channels and limited market space and many other restraints in current industrial development of new energy sources. How to break through a variety of technical and institutional barriers to boost the proportion of new energy consumption will be a core issue in China's energy development strategy. Secondly, the issue of emission right trading, one of the focuses of this book, is the main discussion topic in Chapter Seven. Conducting emission right trading as an effective model for low-carbon development is necessary in China‘s realization of sustainable development in economy and society, active response to global climate change, and effective implementation of Chinese energy-saving and emission reduction development targets. The introduction of emission right trading has a certain foundation in China. In the 1990s, the state environmental protection departments have already begun research on SO2 emission right trading of the U.S. electric power industry. Under the Clean Development Mechanism (CDM) required by ―Kyoto Protocol‖, China has become the country who achieved the most reduction in certified CO2 emission. Since 2008, China has set up a number of emission right exchanges in Beijing, Tianjin and Shanghai and some other cities, actively exploring the experimental sites of emission right trading. Of course, everything is just beginning, and there are still difficulties and obstacles such as weak legal basis, immature market conditions, and unstable global market framework. But looking to the future, China's emissions trading market is expected to form a more mature market framework on the basis of a clear legislation and policy, to set market model on the basis of an exact mid-term goals upon the global climate change, to expand the market space by improving emission-reduction technology and financial support efforts.

30

In the strict sense, the nuclear power does not belong to new energy, but considering its importance in China‘s future energy structure adjustment and energy strategy choice, the authors take the nuclear power as a part of China‘s ―new energy‖.


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Both developing new energy and carrying out emission right trading are organic integral parts of the green economy. The development of green economy is the choice of this era, and the fundamental requirement of changing the growth pattern. It determines a country's future developing competitiveness. The development of the green economy brings a good opportunity to optimize the economic structure and enhance competitiveness of China. Both the Chinese government and different social communities pay much attention to and support the green industry, and actively participate in activities related to international organizations, signing a number of relevant agreements, such as ―the Montreal Protocol about Depleting the Ozone Layer Substances‖ which entered into force in 1989, the Kyoto Protocol and the Bali Agreement and so on. China has also been actively involved in a number of global technical cooperation and extensively worked with other countries on issues such as clean-coal research. But as a large developing country, China faces a variety of contradictions in improving people's livelihood, enhancing well-being as well as developing green economy. Green economy is a complete system which needs support and action provided by all groups of the society. China is now committed to building and improving the system of protecting the green economic development, including the amendments to relevant laws and the establishment in green economic policy system involving public finance, finance and emission right trading. Among China‘s reported 1.18 trillion Yuan investment program, 210billion Yuan will be invested in environmental protection to cope with the international financial crisis. We will conduct detailed discussion on these elements in Chapter Eight ―New Growth Engine –The Rising of Green Economy in China.‖

III. THE COUNTRYSIDE IS ORIGINALLY GREEN When we use the green evaluation standards to measure, we find a new charm of the countryside. Our mountains, rivers and forests cross the motherland by passing through the vast field in rural areas. Our beloved prairie is closely linked with the survival of farmers and herdsmen. The numerous rivers and trees are closely intertwined with our small villages in rural areas. When big trees are replaced by skyscrapers and chimneys, when streams are turned into foul ditches by industrial wastewater, when blue sky and white clouds are darkened by the gray sky, we become nostalgic for rural areas, for the ecology in our childhood as well as the poor but fresh time. People have a new idea when comparing the lives between rural areas and urban cities. As is written by an internet user, the many shortcomings of urban life are full of risk, pollution, crowdedness and interference. We can say that city life is the least beneficial to health, and the least beneficial to life. Our human beings can maintain health and longevity to ensure high quality of life only when we live as close to nature and scatter settlements as possible as we can. If people focus on narrowing the differences between urban and rural areas as soon as possible but not on urbanization, if they make efforts to develop information and transportation means and achieve the rural-oriented 31 development, then we can definitely promote our efficiency and degree of progress. It is in this sense that I would like to call for attention that ―the countryside is originally green‖! 31

Guang Di. ―City, This Piece of Human Work‖. http://bbs.koubei.com/thread_178_3211_1.html

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However, isn‘t the green countryside linked with poverty over the years? Isn't it because the hope of having a better life why people advocate urbanization and industrialization? For many years, people believe that urbanization is a worldwide trend and it is reasonable to narrow the rural area and to reduce the number of peasants. A country‘s powerfulness and the people's happiness depend on industrialization and urbanization. Nevertheless, we have been worrying about that too much emphasis on urbanization may result in the loss of rights and interests of farmers. For example, the government seeks to profit from the restructuring of 32 land resources in the process of the implementation of urbanization. Some experts criticize sharply, pointing out that one driving force in the process of the implementation of China‘s urbanization is that the local government would get extra non-taxation revenue by changing farm land into urban use, with another driving force being that the urbanization would help officials get promotion. Experts believe that the different systems and dynamic mechanism will result in very different urbanizations, and that we should adopt the urbanization of ―free flow of the market portfolio‖, rather than that of ―administrative planning and rent-driven 33 powers‖. Other experts support urbanization in which people will have the same national treatment and can obtain approximately the equal public service, but they don‘t think China 34 has conditions for such comprehensive urbanization. Another expert clearly expressed his own idea by saying that ―I advocate a steady urbanization strategy with an urban-rural interaction, by which farmers can enter into city and return to their native villages freely, while oppose the advancement of an urbanization strategy by encouraging farmers to buy apartments or building a city slum. Otherwise, once world-wide economic crisis happen, under which exports will decline substantially and the coastal processing businesses will massively close down, there would be no escape route for large quantities of peasant laborers, 35 as a result of which China would lose the ability to cope with major crises‖. In short, the experts don‘t ignore the social prosperity produced by urbanization and industrialization, nor they object to urbanization or industrialization, they just object the tendency of sacrificing the interests of farmers and rejecting the practice of polluting the environment in industrialization. To sum up, we have never forgotten ―green‖ in the past, but we need to have new ―green‖ means which is both profitable and environmentally friendly. Clearly, the ―green‖ we are promoting is associated with the modern ―green‖, which has gone beyond the traditional ―green‖ in countryside and agriculture. However, the rural resources and the ecological and environmental problems have become increasingly prominent in the process of long-term economic development and construction. What should we do when we are losing the old ―green‖ without the blossom of the new ―green‖? The countryside can neither be separated from the green nor isolated from the modern green civilization. Therefore, it‘s extremely important to propose to ―build a new countryside‖. In this sense, we can deepen 32

Li Xiaoxi. China: The New Concept of Development. China Economic Press, 2009 edition, 16. It is a speech made in China Economic Forum on Urban and Rural Development, June 9, 2007 33 Zhou Qiren. ―Urbanization, a by-product‖. November 8, 2001. From

http://zhouqiren.org/archives/268.html

34 35

Wen Tiejun. ― the Agricultural Policy, from Discussing Principle to Deal with Concrete Issues‖, http://www.caogen.com/blog/Infor_detail.aspx?ID=95&articleId=13467

He Xuefeng, May 16, 2008. Reflections On China's Urbanization Strategy. From ―China with Three Rural Issues‖. http://www.chinavalue.net/Article/Archive/2008/5/16/115662.html


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understanding about the significance of the ideas proposed by the Chinese government in 2006. The Chinese government sketched out a new blueprint of ―the production development, the wealthy life, the local custom civilization, the clean village, and the democratic management‖ for the countryside, not only to raise farmers‘ income and improve their quality of life, but also to improve the overall appearance of the countryside and the ecological environment, and reproduce the beautiful rural scenery and landscapes. The problem of China‘s building a new countryside will be specially introduced and analyzed in the second chapter of this book. It is necessary to point out that the urban and rural overall plan experimented in the city of Chengdu and Chongqing manifests a very valuable way of thinking. Urban and rural overall plan is different from the simple urbanization or the simple new rural reconstruction. It is an important way to simultaneously complete the urbanization and construction of the new countryside. The urban and rural overall plan should put equal importance on urban residents‘ and farmers‘ problems, with priority on the weak farmers first. Such action entitles with us a long-term basis for urbanization. Not only to attain the extra income from farmers‘ land, the urban and rural overall plan needs also to have the economic potentiality. Therefore, we must bring in the advantage of the market forces in the operation, which will facilitate the large promotion of government‘s ability of management and coordination. But, till today, are the destitute local people able to get rid of poverty by only depending on the green economy? In the summer of 2009, I visited Qinghai, a big province in China's western area, the area of which is equal to that of four Guangdong Provinces, but with the population of only 5,000,000. When experts appeal the Qinghai people to develop green economy, we must answer a question ―can the green plan support 5,000,000 Qinghai residents?‖ I reply self-confidently by saying that the answer is definitely yes. The reasons I have are easily understood as following. One is about the particularity of Qinghai's ―green‖. Here locates Yangtze River and Yellow River's sources, which is called the Chinese water tank, and here has the snowy mountain and the plateau, which is called China's ecology shield. Therefore, Qinghai‘s ecology not only affects itself but also affects the whole nation. The second is Qinghai's ―green‖ on the basis of vast land. The vast land offers us hope and space to afforest despite the heavy pressure from desertification and the frail ecology, with which many provinces in the eastern parts is hard to compare. The third is that Qinghai has green animal husbandry, green industry and ecological tourism. It has the Sanjiang-source ecosphere, Lake Qinghai ecosphere, Tsaidam ecosphere, South Qilianshan Mountain foothill ecosphere as well as Huangshui ecological preservation ring. Besides, there is the ―new energy‖ which is becoming an important element in the development of Qinghai‘s ecologic economy. All of these provide material base for Qinghai‘s green economy. Lastly, Qinghai is also changing its non-green industries into ―green‖ ones, which is a comprehensive development under the ―green‖ idea. There are two state-level circulated economic bases and one batch of environment-friendly industrial enterprises. Certainly, the governments at all levels need to support the green industry development and the superior industry‘s greenization, to improve the implementation of ecology compensation and each kind of green projects (including returning farmland to pasture, wetland protection, desertification control and ecological immigration, etc.), to protect and strengthen popular base for the marvelous economic development (such as poverty reduction, social undertakings, livelihood projects, etc.). On this basis, I believe that Qinghai‘s economy not only needs to be ―green‖ but also can be more ―green‖, and that green economy will ensure the long lasting happiness for the

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people in Qinghai now and future! Here, of course, the words need to be repeated: Each local area has its own reasons for developing the green economy and can work out ways to gain happiness by the means of developing green economy despite of different conditions. In response to the adverse effects caused by the financial crisis on China's rural development, the State Council executive meeting proposed ten policies and measures to expand domestic demand in November 2008. Among them, taking the new rural development as a breakthrough, one of the policies is to expand rural consumption and rural infrastructure construction. Since then, the Chinese government launched a series of policies in rural consumption, such as Home Appliances Going to the Countryside, Automobiles Going to the Countryside, and so on. These stimulus policies soon came into effect because of the great potential the China's rural consumer market has. During the first half of 2009, the growth rate of rural consumption kept higher than that of urban consumption for 6 months. This shows that it is quite necessary and correct for the Chinese government to implement the policy to stimulate rural consumption to cope with the international financial crisis. The international financial crisis has also affected China's agricultural finance, which is mainly manifested in the declination in the share of agricultural loans. The proportion of farmers‘ loans in China to the total remained at about 4.2% until the third quarter of 2008, and it began to decline rapidly in the fourth quarter, and reached the lowest point of 3.84% in the first quarter of 2009. Since the third quarter of 2008, China's agricultural wholesale price index fell sharply, which directly affects the sustainability of agricultural capital chain, and then leads to the rise of the non-performing loan ratio of financial institutions and the increase of business risk. These effects will definitely decrease the loan delivered by financial institutions to agriculture. The Chinese government has intensified its policy support for the ―the rural areas, agriculture and farmers‖, which has made significant progress in rural finance. Agricultural Development Bank (ADB) has increased its support on the construction of rural infrastructure. The Agricultural Bank of China (ABC) has developed various types of special credit products related to the ―Three Agricultural Issues‖. Compared with the beginning of this year, agriculture-related loans has increased by 88.1 billion Yuan (RMB) in the first half of 2009, accounting for 40% in ABC‘s loan increment. Rural credit cooperatives have strengthened their services for the ―Three Agricultural Issues‖, with asset quality improved significantly. By the end of June in 2009, the non-performing loans and its proportion in Rural Credit Cooperatives to the whole country has declined by 23.8 billion and 0.7% respectively. Within the first half of 2009, China's agricultural insurance achieved 7.003 billion Yuan (RMB) in premium income, a year-on-year increase of 59.81%. In the third chapter of this book, focusing on the difficulties of rural development, the authors deeply analyzed the plight and reform of rural finance, provided detailed and specific facts and data, and clearly described the potential achievements made by China's rural finance in the financial crisis.

36

See Chapter Five of ―Thinking of China's Market-Oriented Process‖. The People's Publishing House, 2009 Edition. It is a speech entitled ―strategic thinking of the green economic development‖ made by the Beijing expert adviser group participating in the forum of ―Great Western Development Review and Outlook‖ held in Qinghai on August 10, 2009.


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IV. GREEN VITALITY IN THE MINORITY-CONCENTRATED REGIONS The academic circle and community in European and American developed countries have many years of deep thinking about ―green‖ and rich practice of green protection and development. These are well worthwhile for our study. European and American ecology thoughts emphasize on integration, systematization and 37 diversity. This is very inspiring. We apparently do not only mean green when we advocate ―green‖ ecology. We love flowers with profusion of colors .We love year-round snow surrounded by white mist. We love all the colors created by the nature. All of them can also be integrated into our green ecology thought. One day in 2007, I participated in a conference on the Chinese ecology modernization undertaken by the Chinese Academy of Sciences. At the meeting I proposed one question about the relation between ecology modernization and ecology primitivation. I said that we saw the blue sky, snowy mountains, green lakes and lawn, all of which were holy and serene when we visited Tibet and some sparsely inhabited area. Finding the great ecological conditions there, we felt obliged to keep this pure land. Then, is this kind of ecology primitivation better than the ecology modernization? Is it one of 38 the goals that the ecology modernization needs to pursue? Let me extend this topic. The ecology condition and present situation of economic development in the national minority areas including Tibet and Xinjiang are extremely important components of Chinese green economy and development pattern. Without the analysis on the ethnic areas, our judgment will be only confined to half area of China. China is a multi-ethnic country which contains 56 ethnics. Up to the end of 2008, our ethnic areas possessed a population of 191.56 million, which was 14.42% of China‘s total population, with its distribution occupying the larger part in Chinese land area. For instance, the southwest and the northwest of China are the two most centralized regions in terms of the distribution of minorities. The west part of China containing 12 provinces, autonomous regions and municipalities accommodate nearly 70% of national minority population, and about 60% of national minorities are living in 9 provinces of the border provinces and the autonomous regions. Most Chinese minority community is of vast territory with a sparse population and abundant resources. The prairie area, forest and hydro-electric resources reserves in the multi-ethnic areas surpass or are close to half of the total possession in China. China has more than 22,000 kilometer land boundary line, of which 19,000 kilometers are in minority-concentrated regions. The national natural reserves in the minority regions cover more than 85% of the protection areas of the whole country. It is our nation‘s important 39 ecology shield. Therefore, when talking about the new green deal and ―the China Model‖, we must emphasize specially on the analysis on China's multi-ethnic areas. Chapter Eleven in this book specially briefs and analyzes the present economic development situation of China‘s

37

Wang Jianming, 2008. ―Red‖ and ―Green‖ reveal the new ecological, political and philosophical thinking of a new era of globalization (Chinese) [J]. Natural Diagnostic Method Research 12. 38 My speech on China‘s Modernization Report sponsored by the Chinese Academy of Sciences, January 27, 2007. 39 Taken from the White Paper, ―China's ethnic policy and the common prosperity and development of all ethnic groups‖ published by the State Council Information Office, September 27, 2009 (Reporter Wei Wu, Wei Minli, Fu Shuanqi).

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multi-ethnic areas It also gives thorough analysis on the characteristics of economic development in the multi-ethnic areas under the current financial crisis. Let us continue to include the European and American scholars‘ ecology thoughts in the discussion on the economy and the development pattern in China‘s minority-concentrated regions. The European and American ecology thoughts value the relation between humanity and the nature, even up to the political level. To the Green Parties in the European and American countries, the ecological problems appear not only as general technical and scientific issues, nor just as economic and legal issues, but rather a great problem concerning healthy co-existence and sustainable development of human beings and ecology. Therefore, 40 we must look at and deal with it as a major issue from the political perspective. This really makes sense. The current ecological environment and the climate problem have already become big issues listed on the most important agenda by the global leaders. It is a critical issue about the harmony between man and man, man and nature, and even more related to whether the livelihood on the Earth could sustain human beings to continue to survive. In fact, the discussion about ―Green New Deal‖ proposed by this article is exactly a response to this question. Let‘s discuss the relation between human beings and the nature first. The God-like nature, as we see, has created a world filled with the green color no matter it is called the God or the Buddha that the Oriental believe in. If there were no human beings, the vast land on the earth would be like a green ocean. The places which have already become desert today were once the heaven of water and plant long ago. But nature is also showing his power, controlling the expansion of green through earthquake, thunder and lightning and so on. After their birth, human beings have obtained the basic survival condition under the protection of nature. In ancient China, the philosophers proposed the union of Heaven and Man, Tao (the way of nature) following Nature, emphasizing the harmonious co-existence between man and nature as well as human‘s reverence for the laws of nature. Since the industrialization, with formidable power, the humanity has employed the nature to create a modern world. However, the nature started to retaliate against the human beings at the same time. It is not until now that the humanity, truly united, has expressed good intentions to and cooperation with the nature through the ―Green New Deal‖. China's minority regions fall behind comparatively in the economy, but they do the best in co-ordination between mans and nature as well as in natural protection. Regardless of where their philosophies come from, all deserves worth our respect. Now we need to discuss the relation between man and man in the green ecology. In all human relationships, the most destructive one to nature is not others but war. The green is destroyed into pieces by gunfire, disappearing forever. Under the wrong concepts and policies, the natural color is also being destroyed by greedy claims and stupid plans. For the green, we need peace; for the green, we need ecological new deal, thus we need our country to play a better role. We realize that the modern country has assumed the leading responsibility in charge of ecological protection, green protection and climate protection. A series of international joint pledge to protect the Earth and the ecology and to prevent the air 40

Wang Jianming, 2008. ―Red‖ and ―Green‖ reveal the new ecological, political and philosophical thinking of a new era of globalization (Chinese) [J]. Natural Dialectics Research 12. Reference on Cheng Rong Ning, 2003. ―Analysis of green politics – A kind of new development concept‖. Realistic 5.


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pollution are signed on an inter-country basis. That has given rise to a problem faced by all countries, which is how to keep harmony between their citizens and their ethnics, with neither hatred nor war. China's answer is that we need national equality and ethnic unity. To respect minorities, the Chinese government implements regional ethnic autonomy. That is the most concentrated expression of such goodwill. Of course, this kind of regional autonomy for ethnics should be implemented under the national unified leadership and takes the national approval as the premise. Why does it need the national approval? This may invite the history to reply, invite our older generation and national brothers‘ ancestors to reply; also may invite statesmen and the scholars from Europe and America to reply. They will tell you how a modern country maintains unification and realizes prosperity. As far as I am concerned, one is not qualified to enjoy the national autonomy right if he does not acknowledge his nation. In addition, might as well mention, the practice of national melting in the U.S. is also very worthy of thinking of China. In recent years, in order to accelerate the development of ethnic minorities and minority areas, China has adopted the western development strategy, with ―actions to realize prosperity for the border areas‖ and more focus on supporting the development of 22 nationalities with a small population. Through the training of ethnic minority cadres and developing the science, education, culture and public health undertakings, and full respect for and protection of minorities‘ freedom of religious belief, increasing their investment and quickening the pace of opening up in the ethnic minority areas, economic development in the ethnic minority areas shows a new vitality. Until 2008, the accumulative fixed assets in the western region has totaled 7.7899 trillion Yuan (RMB), of which 1.8453 trillion Yuan (RMB) was made in 2008, an increase of 5 times more than that in 2000, an average annual increase rate of 23.7%. The ―West-to-East Natural Gas Transportation‖, ―West-to-East Electricity Diversion Project‖ and a number of key projects have been completed. We have finished the construction of a number of airports, highways, water controls and other infrastructure projects. Our country also provides certain financial compensations to the ethnic areas which have contributed to the output of natural resources, national ecological balance and environmental protections. In 1994, the state adjusted the central government and autonomous regions' sharing of mineral resources compensation ratio to 4:6, other provinces and cities to 5:5. In 2004, our country began to establish the compensation mechanisms in ecological construction and environmental protection. In the exploration of the rich oil and natural gas resources, focusing on driving local development, the ―West-to-East Gas Transportation Project‖ alone has been able to make an annual increase of 1billion Yuan (RMB) for Xinjiang fiscal revenue. In the meantime, we need to develop the green economy in the minority areas. For many years, our country has paid close attention to the ecological environmental protection and construction in the ethic areas. In particular, since the implementation of the western development strategy, a series of policy and measures have been introduced, including prohibiting forest harvesting in the upper reaches of major rivers, implementing the policy of returning farmland to forest and grassland, closing hillsides to facilitate afforesting and using grain to relief, coupled with others. The state resolves the issue of compensation for ecological construction properly. Food subsidies are provided for farmers and herdsmen whose farmlands have been returned to forest and grassland. Meanwhile, fiscal subsidy is offered to local government suffering from revenue reduction due to the prohibition of forest harvesting. In 1999, the Chinese government stressed that the grassland and farmland capital construction should be arranged to an equally important position, which will benefit more than a dozen of ethnic minorities

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including Mongolian, Tibetan, Kazakh, as China's main pastoral areas are places where these minorities live in, while the animal husbandry is their livestock business for generations and 41 the foundation industry for survival and development. In 2008, the international financial crisis continued to spread and deepen, which had a serious influence on the Chinese economy. In such a macroscopic background, what are the characteristics of the economic development in the multi-ethnic areas? In the eleventh chapter of this book, the authors have induced the following characteristics. First, there has been a high GDP growth in the ethnic minority areas, which is higher than that of the national average level. Since 2008, GDP has grown by 9% compared with that of last year, but the economic growth rate in multi-ethic areas was averagely 12.15%, for some region such as Inner Mongolia, as high as 17.2%. Second, the national investment in fixed assets maintains a rapid growth in the ethic regions. The western region of China including the ethnic minority areas is one of the most important regions where the 4 trillion economic stimulus is to benefit. In 2008, the investment in the fixed assets in Tibet, Xinjiang and Inner Mongolia amounted to 30.333 billion Yuan (RMB), 231.4 billion Yuan (RMB) and 559.645 billion Yuan (RMB) respectively, which grew by 12.5%, 25.0% and 27.1% respectively compared to that of last year. Third, it maintains a steady import and export growth in the ethic areas. In 2008, the ethnic regions' total amount of imports and exports reached 60.75 billion U.S. dollars, an increase of nearly 37% compared with 2007, which is higher than the national growth rate. Fourth, the minority areas maintain a steady growth in consumer demand. For more details, please read our specific sections.

V. THE PURSUIT OF “GREEN” MEANS HAPPINESS FOR GENERATIONS OF MANKIND There are some wonderful words I'd like to share with everyone. ―The so-called green economy, according to experts, is defined as a new economic form oriented by the market, based on the traditional industrial economy, guided by the harmony of economy and environment, a state of development produced and shown by the industrial economy to meet human needs of environmental protection and health. The fundamental distinction between the green economy and the traditional industrial economy lies in that the former is no longer a loss-style characterized by the destruction of ecological balance, heavy users of energy and resources or damages to human health, but is a balance-like economy characterized by the maintenance of human survival environment, the rational protection of resources and energy, and benefits to human health. The green economy is not only a realistic choice for every country to defeat the financial crisis, but also a long-term strategy bound to protect the global environment. That's why the green economy is regarded as the fourth industrial revolution in the history, and its significance and impact is even greater than that of the last three industrial revolutions. In the coming 50 years to 100 years, the global economy will be confronted with

41

Compiled according to ―China's Ethnic Policy and the Common Prosperity and Development of All Ethnic Groups,‖ 2009 White Paper, and other information et.


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the transformation from industry civilization towards ecology civilization.‖ Those words give us clear understanding of the connotation and historical localization of developing green economy. But we still want to figure out a question: what is the pursuit of green all for? The answer will take many forms. One of the more common answers goes like this: the pursuit of the green is to realize sustainable development of human beings, to achieve green development which will save resources, to protect human survival space and to benefit all mankind. Here, I would like to recommend an answer with a high level of generality to readers. That is to build a ―harmonious society‖ and ―harmonious world‖ proposed by the Chinese government. As we discuss the Green New Deal and the China Model, we often mention the concept of ―Heaven and Man‖ in ancient Chinese civilization, that is, to respect nature and to live in harmony with nature. But the significance of ―harmony‖ is not only confined to this. As early as in Fu Xi Era, human beings had understood that the harmony of the opposites, ―yin‖ and ―yang‖, is the root cause of all things flourishing. It is a great idea that the ancient Chinese civilization has contributed to contemporary world. Therefore, the ―harmony‖ offers the idea of dealing with conflicts, that is, coordinating relations, resolving conflicts, balancing and integrating society, and striving to create a social atmosphere in which people can do their bests and live in harmony. It can be said that ―harmony‖ is a potential equilibrium point for contradictory movement of everything, the new development of traditional virtue, a guide to improve the system, and a requirement of social civilization. So the faith and pursuit of harmony not only conform to the trend of world progress, but also reflect an assiduously social ideal of human. What is the pursuit of harmony for? The final goal is for people's happiness. China takes ―people-orientation‖ as the goal which contains five aspects as the basic contents, i.e., harmonious development of city and countryside, different regions, economic and social development, human and the nature, home and abroad. The nation takes the goal of ―moving towards the harmonious society‖ as the highest ideal in which the pursuit of happiness for people is always the theme. The implementation of ―Green New Deal‖ is to create more employment opportunities for people, to lead a new turn of economic growth, and to realize humanity's survival, happiness and development. The Green New Deal is distinguished from the environmental protection economic policy. The former pays close attention to spending money and materials in protecting and restoring the ecological environment, nevertheless, the latter emphasizes on propelling economic development by investment in the environmental projects. Further more, we have realized that the pursuit of green was not only to deal with the financial crisis or to make happy life for people today, but also to pursue happiness for generations. Were our water and air polluted, were the earth dredged and natural resources over-consumed, how could our generations survive and develop? For the future, for our descendents, we must turn the development model into a ―green‖ one and have a green lifestyle. Our Chinese have made a great resolution and much effort, and will continue to do so. In September 2009, during the United Nations General Assembly period, Chinese President Hu Jintao made a commitment to the international community at the UN summit on climate change: In the future, China would further integrate climate change into economic 42

Source: Xie Li, September 12, 2009. Developing the Green Economy, China Has Been On the Road. Financial Times. Detailed in http://finance.sina.com.cn/g/20090912/04166740347.shtml

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and social development plan, continuing to take strong measures, and strive to make the proportion of non-fossil energy in the primary energy consumption reach about 15% in 2020. By 2020, the forest area will have been 40 million hectares more than that of 2005, an increase of 1.3 billion cubic meters' forest reserves compared to 2005. These solemn and important commitments won high praise from the international community. Foreign dignitaries share the view that China's choice will have a decisive impact on other countries, 43 the same as that from global rules, laws and changes in the market on China. On the other hand, we also notice that experts worldwide are pondering over the future of the green economy and making many predictions. Nicholas Stern, the former chief economist in the World Bank, published ―Stern Review Report‖ in November 2006, which showed that by 2050, the carbon content in the world energy industry will have been reduced by 60—75% to stabilize greenhouse gas emissions of carbon dioxide at the level equivalent to 550ppm or below, and then the annual output value of low-carbon energy products will have reached 44 more than 500 billion U.S. dollars. According to the prediction from McKinsey' report, from the present to 2030, China will raise a ―green revolution‖, which includes green electricity, green transportation, green industry, green building and green eco-systems in five 45 major fields. Many predictions show that the green economy will create millions of job opportunities. But undoubtedly, one thing is that it is difficult to achieve a rapid change in certain fields of the green economy, especially the energy and transport systems which require massive input. There is a topic need to be extended. When we talk about the happiness of people passionately, we shouldn't forget to integrate economic growth with social development. Here, people's health is one of the most important elements. The medical and health system is related to the maintenance of life and happiness of generations. At present, most countries regard the public health and basic medical care as an important livelihood issue. In the economic stimulus plan signed by President Obama, health care reform is one of the main events besides the energy and education. The public health reform and investment are also taken as one of the keys in the four trillion economic stimulus package introduced by the Chinese government. To illustrate the people-centered objective in Chinese Green New Deal, in Chapter Nine the authors deliberately brief the new health system reform started in 2009, which aims to not only solve the short-term problems, but also take the long-term arrangements for people's welfare. The Chinese government intends to invest 850 billion Yuan (RMB) to support the implementation of health reform program in three years, which expresses not only their positive attitude in determination to deal with the financial crisis, but also a concept of pursuing a harmonious society. In such a big country as China, it is necessary to go forward step by step in the implementation of any major initiative. In the process of 30 years‘ reform and opening up, the pilot exploration has played a very important role. The pilot special economic zones in cities 43

Tao Zhipeng, September 25, 2009. The International Community Spoke Highly of China's ―Emission- Reduction‖ Commitments. Source: www.Xinhua.com. Detailed in http://news.xinhuanet.com/world/2009-09/25/content_12109923.htm 44 UK Ministry of Public Finance: Stern Review ReportDetailed in http://www.hm-treasury.gov.uk/stern_review _report.htm 45 Martin Joerss, Jonathan Woetzel, March 2009. Green Opportunities in China. Mckinsey Quarterly. Detailed in: http://china.mckinseyquarterly.com/Chinas_green_opportunity_2364


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such as Shenzhen have made tremendous achievements grasping the attention of the whole world. In the new century, the pilot exploration becomes more important in taking a peopleoriented development road with harmony and co-ordination. In Chapter Ten, from the new platform in system reform, the authors specially analyze a batch of new comprehensive pilot reform areas, including comprehensive pilot reform areas in Pudong New Area of Shanghai in 2005 and Binhai New Area of Tianjin in 2007, the national urban and rural comprehensive reform pilot areas approved to be established in Chongqing Municipality and Chengdu city in 2007, and the national comprehensive resource-saving, environment-friendly and societybuilding pilot reform areas in Wuhan City Circle and the Changsha-Zhuzhou-Xiangtan (CZX) City Group. Many provinces also launched comprehensive reform of the provincial-level test. Through comprehensive reform experiment, integrating the solution to practical problems in local areas and the exploration of national common problems, the breakthroughs in key areas and overall innovation, and integrating the reform of economic system and other reforms, emphasizing on conducting the reform safely, stably and orderly, we will achieve new progress in China‘s moving forward to a society with urban and rural co-coordinated, resource-saving, environment-friendly and sound system, and bring greater happiness to the people. Green is the color of life, a symbol of hope, harmony and vitality. To protect ―green‖ is to protect human beings themselves and the pursuit of the ―green‖ is for the well-being of our generations. Today, when China's development model becomes ―greener‖, we find that it conforms to the ideas proposed by the ancient sages and sacred laws of nature, in line with both the nature and people, and good for the succeeding generations. Therefore, let's strive together for the realization of the Green New Deal and the China Model, the two great goals! Translator: Yu Chunmei (SUFE) English Version Editor: Xiao Rong (SUFE), Liu Xuzhi (Harvard)

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[2]

[3] [4]

[5]

UNEP: Global trends in sustainable energy investment 2009 [EB/OL]. http://sefi.unep.org/fileadmin/media/sefi/docs/publications/Executive_Summary_2009_ CN.pdf Geoff Mulgan ， Omar Salem: Green economy: background, current situation and prospects [EB/OL]. http://www.shantoudialogues.cn/uploadfile/200812/22/124499025.pdf UNEP: Globalization and environment－Global crisis: international chaos [EB/OL]. http://www.unon.org/confss/doc/unep/unep_gc/gc_25/gc_25_16/k0843093.pdf State Council Information Office: ―China's ethnic policy and the common prosperity and development of all ethnic groups,‖ White Paper, November 27th,2009 [EB/OL], http://news.xinhuanet.com/politics/2009-09/27/content_12117333.htm Obama‘s ― Green new deal‖. International finance, August 17th, 2009.

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Marty. Vanhanen, April 19th,2009. The ―Green New Deal‖ led ―green economy‖, theme luncheon speech in BoAo Asian Forum [EB/OL]. http://news.sina.com.cn/o/2009-0420/064715494274s.shtml Rowan Callick. The China Model. The America. (November/December 2007 Issue, by American Enterprise Institute) [EB/OL]. http://www.american.com/archive/2007/ november-december-magazine-contents/the-china-model/?searchterm=China Model UK Conservatives: Blueprint for a Green Economy[EB/OL], http://www.world changing.com/archives/007254.html A Green New Deal for Asia: How Asia-Pacific countries are expanding the Green sector in their economies [EB/OL], http://www.spireresearch.com/pdf/archive/ ejournaljun09/A%20Green%20New%20Deal%20for%20the%20emerging%20world.p df UNEP ： Global Green New Deal-Environmentally-focused Investment Historic Opportunity for 21st Century Prosperity and Job Generation [EB/OL], http://www.unep.org/Documents.Multilingual/Default.asp?DocumentID=548&ArticleI D=5957&l=en The World Bank, November 2009. World Development Report 2010 [EB/OL], http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/EXTW DRS/EXTWDR2010/0,,menuPK:5287748~pagePK:64167702~piPK:64167676~theSite PK:5287741,00.html The American Clean Energy and Security Act of 2009 (ACES) ， http://www. pewclimate.org/acesa Nicholas Stern: Stern Review Report [EB/OL], http://www.hm-treasurygovuk/ stern _review_report.htm Martin Joerss, Jonathan Woetzel, March 2009. Green Opportunities in China [EB/OL]. Mckinsey Quarterly http://china.mckinseyquarterly.com/Chinas_green_opportunity_2364 Hu Angang, 2008. ―Green rise‖: China's new contribution to the world - China should make five contributions to human development (Chinese) [J]. The People's Forum 9. Chang Xiuze, 2007. China's development model: to explore the diversity in the development of human civilization (Chinese) [J]. China Economic Tribune, 22. Wang Jinnan, Li Xiaoliang, Ge Chazhong, 2009. The current development situation and prospects of China's Green Economy (Chinese) [J]. Environment Protection, 5. Xu Chongwen, 2009. Foreign comments on the China Model (Chinese) [J]. Flag Presentations, 8. Wang Jianming, 2008. ―Red‖ and ―Green‖: reveal the new thinking in ecology, politics philosophy in a new era of globalization (Chinese) [J]. Natural Dialectics Research 12 Qi Si, 2009. The philosophical reflection on issues about Chinese Model development (Chinese) [J]. Philosophical Trends, 1. Fang Zhengzhu, 2009. The scientific concept of development to promote change in the pattern of economic development—Analysis on the transformation of economic growth mode for 30 years (Chinese) [J]. Discussion on the Modern Economy, 1. Zhuang Junju, Zhang Xili, 2009.: A Summary of Recent Research on the ―China Model‖ (Chinese) [J]. Red Flag Digest, 2.

In: China's New Deal: Economic Development under... Editors: Xiaoxi Li and Biliang Hu.

ISBN: 978-1-61668-486-0 © 2010 Nova Science Publishers, Inc.

INTRODUCTION The period of 2008-2009 is an uncommon period, during which a financial crisis not encountered for almost half a century broke out suddenly. What were we Chinese thinking about during this period? What have we done and with what effects? This book aims to record all these things for our references in future. This book is covered with but not limited to the following fields: How the financial crisis intensifies discussion on ―the China Model‖? The comprehensive interpretation on the scale, structure and effects of the 4 trillion economic stimulus plan. The countryside is originally green and how the new countryside needs to be better constructed in China. How is the development of rural finance in China under circumstances of worldwide financial crisis? How the 10 Major Industries Stimulus Plan is favorable to the present and even more to the future? The Interpretation and analysis on the China Real Estate market in comparison with the Subprime Crisis in the U.S. Real Estate Market. What are the difficulties and prospects in China‘s new energy development? Market Mechanism and Low-carbon Economic Growth in China. The pursuit of ‗green‘ means happiness for generations of mankind. How are the comprehensive and coordinated experimental reforms ongoing in China energetically and systematically? The one who fails to acknowledge his country won‘t deserve the autonomous right. Surviving the financial crisis, Hong Kong and Macao are bound to see a better tomorrow.



Chapter 1

FOUR-TRILLION (RMB) ECONOMIC STIMULUS PLAN: CHINA‟S RESPONSE TO THE INTERNATIONAL FINANCIAL CRISIS Zhang Shengling*, Jin Sanlin, Liu Yimeng and Zhangshuai Since the second half of 2008, the international financial crisis triggered by the U.S. sub-prime mortgage crisis has spread rapidly, and the world's major economies have stepped into recession. Due to the international financial crisis‘ effects on China's economic development, coupled with a number of accumulated structural problems in a long term, China‘s economy has experienced a substantial decline. The Chinese government made a resolute decision in time to adjust China's macroeconomic policies by implementing a proactive fiscal policy and loose monetary policy appropriately and quickly unveiling the ―four trillion economic stimulus plan‖ which focuses on investment. These measures are being implemented and have made interim progress.

SECTION 1: THE BACKGROUND OF “FOUR-TRILLION-YUAN (RMB)” ECONOMIC STIMULUS PLAN Since 2003, China's economy has remained more than 10% of the high-speed growth for years‘ running. However, the rapid growth in national economic strength brought such problems including increasing inflationary pressures, structural imbalances of economic growth and other issues. Since 2006, the Chinese government has begun to implement relatively tight economic policies in order to solve these problems. The main methods are controlling the two ―brakes‖ and raising a ―threshold‖, that is, to strictly examine and approve the use of land, to control money supply and credit growth, and to enhance the industry entry threshold. In 2007, the Chinese government continued to make great efforts on controlling by abolishing export tax rebate on ―high energy consumption, high pollution, resource-based‖ * Zhang Shengling is associate professor of the Institute of Economics and Resrouce Management, Beijing Normal Universiy and she earned her PhD degree from Beijing Normal University. Email: [email protected]

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Zhang Shengling, Jin Sanlin, Liu Yimeng, et al.

products, raising RMB deposit reserve ratio for 10 times and benchmark deposit and lending interest rates for six times, lowering the interest tax rate from 20% to 5%, putting more efforts on open-market operations and controlling the excessive growth of monetary credit. Despite taking these measures, China's economic growth, increasing price pressures and the structural imbalances of economic growth are still accelerating. Therefore, Central Economic Work Conference held by the end of 2007 proposed that the primary task of macroeconomic regulation and control should be to prevent relatively fast economic growth from becoming overheated, to prevent structural price increases from becoming obvious inflation for the purpose of promoting China's economic development with quality and speed. The conference also determined to implement steady fiscal policy and tight monetary policy in 2008. It was the first time the Chinese government switched monetary policy from ―steady‖ to ―tight‖ during the past 10 years. However, in the second half of 2008, the international financial crisis spread to China and made the economic downward pressures increased. Foreign trade, industrial production and employment were greatly affected. The Government promptly adjusted macroeconomic policies by implementing the proactive fiscal policy and moderately loose monetary policy, and unveiling a large-scaled economic stimulus plan.

I. The Effects of the International Financial Crisis on China‟s Economy In 2007, the outbreak of U.S. sub-prime mortgage crisis eventually evolved into a global financial crisis, which affected the real economy. It was the first time that the whole developed industrial countries plunged into recession since World War II. As China‘s economy depends on investment and exports, the international financial crisis has affected China's economic development through a variety of channels including finance, trade, price and psychological expectations in varying degrees.

1. A Substantial Decline in Exports Financial crisis led to the global credit crunch, and made investors‘ confidence cracked down. The prices of global stock market, housing market, commodity and other assets declined sharply, which resulted in dramatic shrink of developed countries‘ demand. As a result of demand shrink, China's exports only increased 4.3% year-on-year, imports fell 8.8% year-on-year in the fourth quarter of 2008, which had been the lowest quarter growth rate since 2002. The growth rates of exports and imports between China and its major trading partners such as the United States, European Union, Japan, ASEAN were in decline. Bilateral trade between China and EU increased by 19.5% in the year, 8.2 percentage points lower than the growth in the first half of the year; Sino-US trade increased by 10.5%, 2.1 percentage points lower that growth in the first half of the year; Sino-Japanese trade increased by 13%, 4.7 percentage points lower than the growth in the first half of the year; China-ASEAN trade increased 14%, 11.8 percentage points lower than the growth in the first half of the year. As for China's exports, the exports to the United States were 252.3 billion US dollars, increasing by 8.4% year-on-year, 6 percentage points lower than the growth in the first half of the year; the exports to EU were 292.88 billion U.S. dollars, increasing by 19.5% year-on-year, a 9.6 percentage points lower than the growth in the first half of the year; the exports to ASEAN were 114.14 billion U.S. dollars, increased by 20.7% year-on-year, 11.7 percentage points

Four-Trillion (RMB) Economic Stimulus Plan

5

lower than the growth in the first half of the year. The growth rate of exports to countries and regions mentioned above reached its lowest point since 2002. The only exception was the exports to Japan, which were 116.13 billion U.S. dollars, increased by 13.8% in 2008, 2.4 percentage points higher than that in the first half of the year. In the first half of 2009, China's imports and exports to its major trading partners continued exhibiting a trend of sharp decline. China-EU trade was 159.97 billion U.S. dollars, decreased by 20.9%, while China exports to EU were 103.45 billion U.S. dollars, decreased by 24.5%, and the China imports from EU were 56.5 billion U.S. dollars, decreased by 13.2%. China-US trade were 132.09 billion U.S. dollars, decreased by 16.6%, of which, China exports to US were 97 billion U.S. dollars, decreased by 16.9%, and China imports from US was 35.01 billion U.S. dollars, decreased by 15.6%. China-Japan trade was 99.73 billion U.S. dollars, decreased by 23.1%, of which the exports to Japan were 44.03 billion U.S. dollars, decreased by 20.3%, and the imports from Japan were 55.7 billion U.S. dollars, decreased by 25.1%.China-ASEAN trade was 88.06 billion U.S. dollars, decreasing by 23.8%. Table 1-1. The Trade Information of China and Its Trading Partners in the First Half Year of 2008-2009(Unit: billion dollars, %) 01-06-2009

01-06-2008

01-12-2008

Imports & Exports

Year-onyear growth rate

Imports & Exports


Imports & Exports


Total trade volume

946.12

-23.5

1233.8

25.7

2561.6

17.8

China –EU （ 27countries）

159.97

-20.9

202.14

27.7

425.58

19.5

China-US

132.09

-16.6

158.31

12.6

333.74

10.5

China-Japan

99.73

-23.1

129.61

17.7

266.79

13.0

China- ASEAN

88.06

-23.8

115.79

25.8

231.12

14.0%

Sources: Ministry of Commerce of the People‘s Republic of China, http://www.mofcom.gov.cn/tongjiziliao/tongjiziliao.html

2. The Rapid Decline of Industrial Added Value Affected by the international financial crisis, China's industrial growth has started its rapid decline since June 2008. The growth rate of industrial added value has fallen from 16% in June to 5.4% in November 2008, which was the lowest growth rate since March 2002. Since the industrial added value almost accounted for 43% of GDP, the industrial employment in the urban areas accounted for 35% of total employment, and the rapid decline of industrial growth directly led to the decline of GDP growth and the increase of the unemployment.

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Figure 1-1 The Month-on-Month Growth Rate of China‘s Industrial Added Value in 2008 and the First Half of 2009.

3. The Labor Market Suffered a Big Blow The Chinese economy depends on exports to large extent, and the exports decline results in many factories‘ temporary shutdown, or even bankruptcy, so unemployment is becoming increasingly prominent, particularly in a large number of migrant workers unemployed. At the end of 2008, China's registered urban unemployment rate was 4.2%, increasing by 0.2% compared with the end of 2007, a reversal of employment improvement in the past few years. By the end of 2008, up to 20 million rural migrant workers had returned home after losing their jobs due to the continuously deteriorating operating environment in the coastal areas, the decline of the growth rates and profits of importers and exporters as well as the failure of some small and medium sized export-oriented enterprises. Therefore, a great number of migrant workers lost job opportunities. In addition, the pressure of creating new jobs has been gradually increased. The employment rate of university graduates in 2008 was 65%, dropping by nearly 8% compared with that of 2005. The serious unemployment problem is directly 1 related to the global financial crisis‘ short-term impact on China's labor market.

4. The Rapid Decline in Asset Prices The international financial crisis led to a rapid fall of asset prices in global stock market, housing market, bulk stock and other assets. The decline rate of stock market of the top10 countries was from 97% to 68.81%, and China's stock market decline leaped into the front rank of the world. In the fourth quarter of 2008, the decline of Shanghai Composite Index was 20.62%, and fell to 1664.93 points on October 28 which was the lowest point for nearly two years. Compared with 5522.78 points on January 14, the highest point of 2007, it fell to 1

Chen Jiagui, 2009. Analysis on the Prospect of China‟s Economy (2009). Beijing: Social Sciences Academic Press, 4.


7

69.85% which was the biggest historical decline record within the same period time. The trading volume in Shanghai and Shenzhen stock market sharply shrank. The average daily trading volume declined from 210 billion Yuan (RMB) at the beginning of the year to 50 billion Yuan (RMB) in September and then went up to 80 billion Yuan (RMB) in the fourth quarter.

In 2008, China's real estate investments significantly declined from 32.27% in the first quarter to 9.97% in the fourth quarter. Prices had also continued the downward trend in the first three quarters, and dropped further. Particularly, in December, housing sales prices in 70 large and middle-sized cities fell 0.4% year-on-year, being 0.6% lower than the year-on-year growth rate of November, with a comparative decrease of 0.5% comparing with November, which was the first year-on-year decrease in housing prices since the release of the index in July 2005.2

5. Rapid Decline of Economic Growth Rate China‘s exports decline and housing price decline resulted in the decline of investment growth rate. The rising unemployment rate had influenced residents‘ income and their expectation for income and then influenced the consumption. The effects of the international financial crisis on China have spread from export to the field of investment and consumption, resulting in a decline of aggregate demand. The economic growth rate has slid since the third quarter, and the growth rate in the fourth quarter was only 6.8%. China‘s GDP reached 30.067 trillion Yuan (RMB) in 2008, increased by 9.0% compared with the last year, and the growth rate fell by 4 percentage points compared with that in 2007. Considering the economic growth rate, the annual growth rate of 9% was a little bit lower than the average growth rate between 1979 and 2007, but it was not the lowest one. However, the economic growth rate dropped within a year by four percentage points, which was the biggest economic fluctuation over the past decade.

Figure 1-2. China‘s Quarterly GDP Growth Rate from 2007 to the First Half of 2009. 2

Li Xiaoxi ， 2009. China's Economic Trajectory in the New Century— — Sub-quarter Economic Situational Analysis Report2007-2008. Beijing: People‘s Publishing House，606,623.

8


As mentioned above, China's development has been faced with a more severe situation. In order to ensure sound operation of China's economy and avoid big ups and downs, we should implement effective economic stimulus plan through investment, stimulating domestic demand and foreign trade co-ordination for the purpose of achieving sound and rapid economic growth.

III. The Announcement of “Four Trillion” Economic Stimulus Plan In light of major changes in the economic situation at home and abroad, the Chinese government responded quickly and unveiled a ―four-trillion-Yuan (RMB)‖ economic stimulus plan timely.

1. The First Proposition of “Four-Trillion-Yuan (RMB)” Economic Stimulus Plan by the State Council Executive Meeting In September 2008, the U.S. financial crisis fully deteriorated, and quickly spread to worldwide real economies. Major Western economies plunged into deep recession one after another. China's exports and industrial output growth sharply declined. In view of this increasingly grim situation, the State Council executive meeting decided to implement a proactive fiscal policy and moderately loose monetary policy in November 2008. The meeting also negotiated 10 measures to further expand domestic demand and promote economic growth:

(1) To accelerate the construction of housing projects by building more affordable and low-rent housing , speeding the reconstruction of slums, implementing projects in nomads settlement, and expanding the pilot projects in reconstructing dangerous buildings in rural areas; (2) To speed up construction of rural infrastructure by enhancing the construction of rural marsh gas facilities, safe drinking water project, countryside roads, by completing rural power grids, accelerating the construction of the north-to-southwater-division project and reinforcing risky reservoirs and strengthening the watersaving transformation in large-scale irrigation districts; by reinforcing poverty alleviation efforts; (3) To accelerate the construction of infrastructure including railways, highways and airports by constructing a number of passenger dedicated lines, projects of coal transportation corridors and western trunk railways; by improving high-way networks, planning the construction of trunk-line and feeder-line airports and strengthening the transformation of urban power grids ; (4) To speed up health care, cultural and educational development by strengthening the health services and medical system at grass roots, by accelerating the reform of junior high schools in the central and western regions, and by promoting the construction of special educational schools and comprehensive cultural centers in towns; (5) To improve ecological environment construction by enhancing the construction of sewage and rubbish disposal facilities and preventing water pollution in key areas, by strengthening the construction of both the natural and protective plantation forest


9

, by supporting the construction of key energy-saving and emission reduction projects; (6) To enhance self-innovation and industrial restructuring by supporting the development of the high-tech and service industries; (7) To accelerate the reconstruction in the areas hit by Wenchuan Earthquake; (8) To raise average incomes in the rural and urban areas by raising the minimum purchasing price of grain in the next year and the standard of agricultural comprehensive direct subsidy, seed subsidies, farming machinery subsidies, by improving the social security for the low-income groups, increasing spending on allowances in the urban and rural areas, continuing to enhance the standards of basic pension for enterprise retirees and the special assistance subsidy for living; (9) To extend reforms in value-added tax rules to all industries through encouraging technologically upgrading of enterprises and cutting the corporate taxes by 120 billion Yuan (RMB); (10) To enhance financial support to maintain economic growth by removing the restriction on commercial bank credits and reasonably expanding the credit, by increasing the credit support to key project construction, the construction concerning agriculture, countryside and farmers, the credit support to middle-sized, small-sized enterprises, technological transformation, mergers and reorganization, by targeting to foster and consolidate consumer credit growth. It is estimated that the government should invest four trillion Yuan (RMB) to implement the construction of those projects mentioned above at the end of 2010.

Column 1-1: Chinese Leaders Express Their Standpoints in Response to the Financial Crisis China‘s state leaders have clearly expressed China‘s confidence, resolution and action in response to the financial crisis when participating in major international events on many occasions. On November 15th 2008, the G20 summit on financial markets and the world economy was held in Washington D.C. Chinese President Hu Jintao attended the meeting and delivered a speech entitled Making Joint Efforts to Tide over Difficulties. He said, ―China has taken such measures like reducing bank deposit reserve ratio, cutting deposit and lending rates, cutting corporate taxes and other measures in order to promote the economic development. Recently, China announced another more forceful measure to expand domestic demand. China also decided to increase100 billion Yuan (RMB) investment to accelerate the construction of projects for people‘s livelihood, infrastructure and ecological environment, and post-disaster reconstruction, expecting to lead the community‘s total investment to reach 400 billion Yuan (RMB). From the fourth quarter in 2008 to the end of 2010, China has made an investment of 4 trillion Yuan (RMB) on the construction of these projects. The implementation of these measures will further promote China‘s economic development as well as the world‘s economic development. Source: Summarized on basis of speech by Chairman Hu Jintao on G20 summit on financial markets and the world economy in Washington. People’s Daily, November 16, 2008,

http://politics.people.com.cn/GB/8346583.html

10


2. The Central Economic Conference Proposed to Maintain Growth, Expand Domestic Demand, and Adjust Structure In December 2008, the Central Economic Conference clearly stated that the primary task of economic work for the next year should be to maintain stable and rapid economic development. Expanding domestic demand is the fundamental way to maintain growth. Speeding up the transformation of development patterns and adjusting structures are the main direction for maintaining growth. Opening up, deepening major sectors and reforming key links are driving force in maintaining growth. Improving livelihood for the people is the basis for maintaining growth. The meeting proposed five key economic tasks in 2009: (1) To strengthen and improve macro-economic control, implement proactive fiscal policy and moderately loose monetary policy, increase public spending at a relative large rate, implement structural tax reduction and promote the rational growth of monetary credit supply. (2) To consolidate and develop the agricultural economy in a good shape, guarantee the efficient supply of agricultural products, put emphasis on the employment of peasant workers, continue to raise the income of farmers, and greatly increase the input in agriculture, villages and peasants. (3) To speed up the transformation of development patterns, promote the strategic adjustment of economic structure, put emphasis on speeding up the transformation of development patterns, maintain the direction of promoting the strategic adjustment of economic structure, adjust the national income distribution pattern, optimize industrial structure, improve urban-rural structure, and adjust regional structure. (4) To deepen reform and opening up, improve the mechanism and system benefited to scientific development, improve the price formation mechanism of resources and production factors, promote the reform of the public financial management system and speed up the reform of the financial system. (5) To solve the issues concerning the interests of the masses, maintain social stability by implementing more active employment policies and promoting all-round employment growth.

3. The Government Work Report Proposed the Package Plan for Promoting Steady and Rapid Development of Economy At the Second Session of the Eleventh National People's Congress in March 2009, Premier Wen Jiabao presented the government work report. He said that we should take the response to the international financial crisis and the promotion of steady and rapid economic development as the major task of government work in 2009. We should make overall plans and take all the factors into consideration, focus on the key point, and comprehensively implement the package plan for promoting the steady and rapid economic development. The tasks mainly consist of increasing government spending on a large scale, implementing and adjusting the industrial revitalization plan and increasing the level of the social security . In 2009, the Chinese government will give high priority to the following work focusing on the implementation of the package plan:


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(1) Improving and strengthening macroeconomic control and maintaining steady and rapid economic development. The Chinese government needs to adhere to a flexible and prudent control policy, implement proactive fiscal policy and moderately loose monetary policy. The government has set the central government deficit at 750 billion Yuan (RMB) in 2009 and the state council will allow local governments to issue 200 billion Yuan (RMB) government bonds. Moreover, the government will increase the broad money supply by about 17% and grant over five trillion Yuan (RMB) newly increased loans to ensure that the supply of money and credit meets the requirements of economic development. (2) Actively boosting domestic demand, especially consumer demand, and strengthening the role of domestic demand in driving economic growth. (3) Consolidating and strengthening the position of agriculture as the foundation of the economy, and promoting steady development of agriculture and continuous increase in rural incomes. (4) Accelerating transformation of the pattern of development and energetically promoting strategic economic restructuring. (5) Continuing to deepen the reform and opening up, and further improving systems and mechanisms conducive to developing in a scientific manner. (6) Energetically developing social programs and vigorously improving people‘s livelihood. (7) Intensifying government self-improvement and enabling itself to better manage overall economic and social development. As for the launch of China‘s economic stimulus plan, some international media have made their comments. The American newspaper ―Washington Post‖ published an article said that Beijing's new policy drive of upgrading infrastructure, rural land reforms, and expansion 3 of social welfare is akin to a ‗New Deal‘ with Chinese characteristics. The British journal 4 ―Economist‖ called China‘s fiscal stimulus plan as ―A New Deal, Chinese-style‖. On November 11th, the French newspaper ―Le Figaro‖ published an editorial believing that China were willing to make efforts to seek for the solutions of the international financial 5 crisis.

SECTION 2: THE INTRODUCTION TO CHINA‟S ECONOMIC STIMULUS PLAN Since the fourth quarter of 2008, Chinese Government adjusted the macro-economic policies timely and launched an economic stimulus plan in order to tackle the international

3

Washington Post: China Unveils $586 Billion Stimulus Plan，11-10-2008.. http://www.washingtonpost.com/wp-dyn/content/article/2008/11/09/AR2008110900701.html?nav=emailpage. 4 http://theory.people.com.cn/GB/49154/49155/9679301.html，07-19-2009. 5 http://news.xinhuanet.com/world/2008-11/12/content_10348969.htm, 11-12-2008.

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financial crisis. The package plan has been enriched and completed in practice. This plan consists of five areas.

I. The Implementation of Proactive Fiscal Policy Focusing on Four-trillionYuan (RMB) Investment The main contents of the proactive fiscal policy are: the implementation of a two-year investment plan of a total amount of ―four-trillion‖ Yuan (RMB) which includes a newly increased Chinese central government fund of 1.18 trillion Yuan (RMB), accounting for 30% of the total investment, the implementation of the structural tax reduction to expand of domestic demand, and the increase of export tax rebate to stabilize exports.

1. The Central Government Funds Guide the Local Funds In the economic stimulus plan of four trillion Yuan (RMB), the central government provided 1.18 trillion Yuan (RMB), and the rest came from local government budget, local 6 government bonds, policy loans, bank loans and non-government investment. The investments will cover the projects concerning people‘s livelihood, the need of countryside, agriculture and farmers, the courses about healthcare, culture, education, the construction of ecological and environmental protection, self-innovation and economic structural adjustment. The detailed outlay for the stimulus plan is following: 400 billion Yuan (RMB) will be spent on the construction of low-cost renting housing and the transformation of slums; 370 billion Yuan (RMB) on projects of people‘s livelihood and infrastructure including water supply, power grids, gas supply and housing in the rural areas; 1.5 trillion Yuan (RMB) on the construction of roads, railways, airports, water projects, and on the transformation of urban power grids; 150 billion Yuan (RMB) on developing the courses of health care, education, culture; 1 trillion Yuan (RMB) on post-disaster reconstruction. Of which, 37.5% will be spent on the construction of important infrastructures such as railways, roads, airports and water projects, which is the largest investment one. 25% will be spent on the postearthquake reconstruction. 10% will be spent on the construction of indemnificatory housing. 2. Issuing Local Government Bonds by the Ministry of Finance In March 2009, the two sessions, NPC and CPPCC were held. China‘s central government would issue bonds of 200 billion Yuan (RMB) on behalf of local governments, and the allowance for each province was also determined in the two sessions. The local government bonds will be issued by the Ministry of Finance through the present circulation of treasury bonds by bidding. The maturity period for the bonds would be 3 years. The interest rate will be the same as the interest rate of treasury bonds or a little bit higher than that of treasury bonds. In terms of solvency and economic strength, the eastern coastal areas occupy a distinct advantage, but the fund raised by issuing local government bonds will support the central and western regions to develop their infrastructure, environmental protection and people‘s livelihood. 6

http://www.infzm.com/content/28912


13

Figure 1-3. Major Industries Involved in China‘s Four-Trillion-Yuan Economic Stimulus Plan.

3. Implementation of Structural Tax Reduction Policy The structural tax reduction policies are following: (1) Fully implementing the consumption-based value-added tax, easing corporate tax burdens, promoting enterprises to increase the investment in self-innovation and technical transformation. (2) Implementing the reform of refined oil tax, improving the tax-burden fairness, promoting energy saving and emission reduction. (3) Increasing the salary standard deductions for individual income, lowering stamp duty on securities transactions with unilateral collection. (4) Free from the savings deposits and securities transactions settlement funds on interest income. (5) Reducing housing transaction tax. (6) Substantially increasing the export tax rebate rate of some products, cancelling and reducing export tariffs on some products.

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4. “Autos and Home Appliances Going to the Countryside” Program through Financial Subsidies On May 19th 2009, the State Council executive meeting decided to implement autos and home appliances trade-in policy through financial subsidies. The Ministry of Finance will raise subsidies for auto replacements from 1 billion Yuan (RMB) to 5 billion Yuan (RMB), and allocate 2 billion Yuan (RMB) to encourage home appliance upgrades. On the basis of subsidy for auto replacement policy, the range and amount of subsidy will be expanded. Under the program, consumers who trade in their used mid- and small-sized trucks and some types of mid-sized passenger cars for new ones will receive a subsidy. Subsidies will also be given to consumers who sell automobiles that no longer meet the government's new emission standards but are still within life expectancy. The subsidy will be no more than the purchase tax of the automobile.

III. Implementation of Moderately Loose Monetary Policy On the subject of moderately loose monetary policy, efforts will be made to promote the rational liquidity of monetary credit supply through interest rates and other monetary policy instruments. With the focus on the adjustment of credit structure, efforts will also be made to improve the quality and benefit of credit, to enhance the credit‘s support to the balance and sustainability of economic and social development.

1. Continuous Decline in Interest Rates In order to ensure the liquidity of the banking system and support the economic growth, the People‘s Bank of China (PBC) cut the benchmark deposit and lending rates on five occasions within four months since the middle of September to the end of the year 2008. The benchmark one-year lending rate was lowered by 198 basis points, falling from 7.47% at the beginning of the year to 5.31% at the end of December. One-year deposit rate was reduced from 4.41% to 2.25%, of which, the decrease on November 26th was as high as 108 base points which is unprecedented in history. As the core meaning of moderately loose monetary policy, the successive reduction of interest rates is the traditional approach to promote investment of private assets, maintain the loose monetary environment and ensure the liquidity of monetary market. 2. Reduction of Reserve Requirement As a quantitative instrument of monetary policy, the reserve requirement has direct controlling effects on liquidity. To meet the requirements of tight monetary policy, strengthen the liquidity management in the banking system and maintain the rational growth of credit, the PBC had raised the reserve requirement up to 17.5%, increased by 3 percentage points cumulatively on five occasions in the first half of 2008. In the wake of September, to cope with the gradually severe international economic and financial situation, and maintain the rapid growth of domestic economy, the PBC lowered RMB reserve requirement for financial institutions on September 25th, October 15th, December 5th and December 25th respectively. Specifically, the reserve requirement for large financial institutions decreased to 15.5%, cut by 4 percentage points cumulatively. Meanwhile, the reserve requirement for small and


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medium financial institutions decreased to 14.5%, cut by 3 percentage points cumulatively. Particularly, the PBC lowered the reserve requirement for large, small and medium financial institutions by 1 and 2 percentage points respectively on December 5th. The adjustment is unprecedented in history.

Figure 1-4. Readjustment of Interest Rate 2007－2008.

3. Increase in Money Supply After deciding to implement the moderately loose monetary policy, at the end of March 2009, the outstanding balance of M2 money supply amounted to 53.06 trillion Yuan (RMB), increased 25.51% year-on-year, which was 7.69 percentage points higher than that in the end of 2008, and was 5.11 percentage points higher than that in February. The outstanding balance of M1 money supply reached 17.65 billion Yuan (RMB), increased 17.04% year-onyear, which was 7.98 percentage points higher than that in the end of 2008, and was 6.41 percentage points higher than that in February. The cash in circulation (M0) grew 10.88% year-on-year to 3.37 trillion Yuan (RMB). In addition, the PBC granted 149.225 billion Yuan (RMB) by open market operations, breaking the practice of net funds withdrawal from circulation in one quarter. In the first half of 2009, the PBC granted 275.5 billion Yuan (RMB) through open market operations, which provides strong financial support to maintain economic growth to some extent. 4. RMB Settlement of Cross-border Trade Pilot Launched On April 8th 2009, the State Council executive meeting decided on the pilot scheme of RMB settlement of cross-border transactions in five cities including Shanghai, Guangzhou, Shenzhen, Zhuhai and Dongguan. The meeting called for the relevant departments of the State Council to issue the administrative rules as soon as possible in order to standardize the RMB settlement of cross-border transactions and promote the pilot program. The pilot

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enterprises should have the right of pricing products and be the excellent enterprises with the ability to make the trading partners accept RMB. On June 29th, Zhou Xiaochuan, Governor of the PBC, and Joseph Yam, Chief Executive of the Hongkong Monetary Authority (HKMA), signed a supplementary Memorandum of Co-operation, to prepare for the implementation of the pilot scheme for the use of RMB in settling cross-border transactions between the enterprises in Hongkong and the enterprises in Shanghai, Guangzhou, Shenzhen, Zhuhai and Dongguan.

III. Large-scale Implementation of Industry Revitalization Plan The industry revitalization plan is mainly concerned about promoting all-round adjustment and upgrading of industrial structure; implementing mergers and acquisitions, eliminating backward production capacity, preventing duplicate construction and promoting development of SMEs.

1. China Launched the Revitalization Plan for Major Ten Industries In 2009, to enhance business investment information, and promote social investment growth, the State Council launched the adjustment and revitalization plan for major ten industries including steel industry, auto industry, shipbuilding industry, petrochemical industry, textile industry, light industry, non-ferrous metals industry, equipment manufacturing industry, electronics and information technology industry and logistics industry. The revitalization plan of major ten industries covers the following five areas: (1) Expanding the domestic demand and export policies, opening up domestic and international markets for the industrial development and stability of market demand. (2) Rationally adjusting corporate taxes, easing the tax burden of enterprises and industries, and lowering economic operating costs. (3) Supporting the enterprises of production to establish their own brand, strive to achieve the industry leading role in the near future. (4) Expanding the investment on advanced, technological equipments while eliminating backward production capacity and promoting the upgrading of industrial structure. (5) Promoting mergers and acquisitions of enterprises and improving the large enterprises‘ international competitiveness in industries. Besides the five areas, the Chinese government will study to launch mid-term or longterm plans for scientific technology development, and combine the implementation of major scientific projects with economic development in order to strengthen the function of science and technology to economy.

2. Efforts to Solve SMEs’ Difficulties in Financing. In the first half of 2009, the Central Government and the Ministry of Finance allocated 1 billion Yuan (RMB) of guarantee fund to 330 guarantee institutions, which will grant 250 billion Yuan (RMB) loans for 40,000 SMEs. Meanwhile, the Ministry of Industry and


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Information, the People‘s Bank of China, China Banking Regulatory Commission and other departments have also taken a number of measures to promote SMEs‘ financing.

3. Adjustment of the Proportion of Capital Funds for Fixed Asset Investment Projects The State Council decided to adjust capital ratio of fixed assets investment projects since May 25th 2009. The capital proportion of urban rail transit, coal mining, airports, ports were reduced while the capital proportion of project about calcium carbide and titanium alloy which is high-pollution, high-energy-consuming and resource-dependent. After adjustment, the minimum capital ratio of steel and electrolytic aluminum projects increased to 40%, of which, the capital ratio of electrolytic aluminum project increased five percentage points than that of 2005. The capital ratio of the cement project continued to maintain 35%. Meanwhile, the minimum capital ratio of coal mining, calcium carbide and inland navigation projects was lowered to 30%, of which, the capital ratio of coal mining was decreased by 5 percentage points than previous standard. The minimum capital ratio of railway and road projects decreased to 25%. The minimum capital ratio of ordinary commodity housing projects was reduced from 35% to 20%. Therefore, housing industry has become the greatest beneficiary of the capital ratio adjustment.

IV. Vigorous Promotion of Scientific and Technological Progress and Innovation The State Council executive meeting held in May 2009, required that it should be further promoted to make science and technology play an important supporting role in expanding domestic demand, promoting economic growth, adjusting structures, upgrading and benefiting people‘s livelihood.

1. Setting Tasks Efforts will be made to fully carry out the work concerning economic development and enterprises supported by science and technology, start to implement projects in scale application of self-innovation products, speed up the implementation of technological innovation projects and create newly economic growth point. 2. Increasing Investment Besides the 32.8 billion Yuan (RMB) in 2009 and 30 billion Yuan (RMB) in 2010 allocated by the central government budget, enterprises will be encouraged to make investment. 3. Priority Setting Efforts will be made to promote the implementation of 11 scientific and technological projects including advanced digital-control machines, basic manufacturing equipments, large aircrafts, next-generation broadband wireless mobile communication network, core electronic devices, advanced general chips and basic software products, large-scale integrated circuit manufacturing equipment and complete sets of technology, the development of large-scale oil and gas fields and coal seam gas, large-scale advanced pressurized water reactor and HTR

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nuclear power plant, water pollution control and management, new varieties of GMO cultivation, creation and production of new drugs, prevention and control of AIDS and viral hepatitis of major infectious diseases.

V. Substantially Improving Social Security Benefits To improve social security benefits includes enhancing the basic pension for enterprise retirees, unemployment insurance, insurance for work-related injuries, increasing the margin of the minimum living allowance by the government to urban and rural residents and the ―five guarantees‖ of food, clothing, medical care and burial expenses in the rural areas, launching a new agricultural insurance pilot project, and actively promoting the reform of medical and health system. (1) Promoting the construction of systems. The Chinese government made efforts to improve the basic retirement insurance system, continue to carry out pilot projects in order to establish personal accounts so that funds can be accumulated, comprehensively promote provincial coordination and formulate the implementation schemes of retirement insurance for migrant workers. The new rural social security pilot project will cover 10% counties and cities around the whole country. China will launch ―the transfer of pension insurance and its continuation methods‖, improve the insurance for work-related injuries and maternity insurance system, and the urban and rural social relief system. (2) Expanding the social security coverage. The priority is to make non-state owned businesses, migrant workers, the peasants whose land has been requisitioned, people employed in a flexible manner and freelancers covered by the social insurances system. The Chinese government should help those low-income families cover their insurance, increase the national social security funds through various channels and earnestly strengthen the supervision of social security funds for the purpose of ensuring the safety of funds. (3) Increasing the social security funds. From 2009 to 2010, the government will continue to raise the basic retirement pension for enterprises‘ retirees by an annual average of about 10% per capita, and increase unemployment insurance and industrial injury insurance pension. The guarantee of the minimum standard of living for urban and rural residents, the ―five guarantees‖ in the rural areas will be further raised as well as the living allowances for key entitled groups. The government will vigorously develop social welfare and charity programs. (4) Guarantee of capital investment. The Chinese government will allocate 850 billion Yuan (RMB) which is not included in 4 trillion Yuan (RMB), to carry out the 7 pharmaceutical and health care reform. The central government plans to spend 293 billion Yuan (RMB) on the social safety net this year, up 17.6% over the estimated figure for 2008.

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Premier Wen Jiabao's Press Conference Record, http://www.infzm.com/content/25438, 2008.

Four-Trillion (RMB) Economic Stimulus Plan Column 1-2: The U.S Economic Stimulus Plan

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Contents of Economic Stimulus Plan

Amount (Billion Dollars)

Implementation Period

Feb2008

Economic Stimulus of 2008: (1) nearly 120 billion dollars tax rebate to individuals with 0.13 billion families benefited; (2) nearly 48 trillion dollars of enterprises tax reduction (accelerated depreciation and new investment); (3) raising loan limits for singleparent families.

1680

2008—2009(152 billion in 2008,16 billion in 2009)

Mar2008

Emergency Economic Stabilization Act: (1) Troubled Asset Relief Program; (2) Raising the federal deposit insurance limit from 100,000 dollars to 250,000dollars.

7000

From issuance to December 31th 2009(550 billion dollars spent in June 2009)

Establishment Time

Housing and Economic Recovery Act of 2008: (1) Purchasing debts and securities from enterprises invested by the government; (2) Hope for Jul2008 3000 Homeowners Program; (3) Rebating the first-time home buyer‘s tax; (4) The new Mortgage Guarantee Scheme（10-01-2008—09-30-2011）。 U.S. Recovery & Reinvestment Act of 2009: (1) 37% for individual and corporate tax reduction; (2) 30% for health care, education and scientific research; (3) 20% Feb2009 for constructing infrastructure and investing new 7870 Over the next decade energy; (4) 13% for real estate foreclosure and vulnerable group relief (including the low-income earners, the unemployed, retirees, etc.). Source: from information on official websites including http://www.usbudgetwatch.org, http://www.financialstability.gov, http://en.wikipedia.org/wiki, www.fdic.gov, http://www.newyorkfed.org, http://www.cbo.gov, http://www.cbo.gov, http://www.federalreserve. gov, etc.

SECTION 3: THE PROGRESS AND PRELIMINARY EFFECTS OF ECONOMIC STIMULUS PLAN The progress, preliminary effect of the economic stimulus plan and the trend of China‘s macroeconomy has attracted great attention of governments, enterprises, media and research institutions at home and abroad.

I. The Progress of Economic Stimulus Plan There are two years for China to implement its economic stimulus plan. Till the first half of 2009, 32% central government investment has been allocated to the right place, accounting for one third of 1.18 trillion Yuan (RMB). Funds were mainly channeled to major construction projects and livelihood projects, while the approval and process of construction

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projects has continued to accelerate, the combination of tax reduction measures and credit support has also been strengthened.

1. Rapid Allocation of Funds The 100 billion Yuan (RMB) of new investment launched in the fourth quarter has played a significant role in the economic recovery, which was allocated to the right place in the first quarter in 2009. In the second half of 2009, the central government has allocated 280 billion Yuan (RMB) and the total funds allocated is 380 billion Yuan (RMB) in all, of which, 104.3 billion Yuan (RMB) for people‘s livelihood projects and infrastructure construction in the rural areas, 87.1 billion Yuan (RMB) for the construction of major infrastructure, 57.3 billion Yuan (RMB) for health care and education, 37.5 billion Yuan (RMB) for guaranteed housing construction, 39.6 billion Yuan (RMB) for energy-saving emission reduction and ecological environment construction, 54.2 billion Yuan (RMB) for self-innovation and structural 8 adjustment. The funds channeled to the right place have gradually put into effects. Table 1-2. The Effect and the Availability of Investments from the Fourth Quarter of 2008 to the First Half of 2009（Unit：billion , RMB) Investment Areas

Investment Amount

The Investment Achievements

People‘s livelihood projects and infrastructure construction in the rural areas

104.3

Solved the issue of drinking water safety for19.6 million residents in the rural areas; constructed1.78million rural biogas projects, transformed 7500 kilometers rural power grids

Guaranteed housing construction

37.5

250,000 low-rent housing buildings 105 million low-rent housing buildings started

Major infrastructure construction

87.1

Four major railway lines including Harbin-Dalian, WuhanGuangzhou, Nanning-Guangzhou, Guiyang-Guangzhou; South-to-North Water Diversion Project; constructed 1360 large and medium-sized water conservancy projects.

Health care, education

57.3

Energy-saving emission reduction ,ecological environment construction Self-innovation, structural adjustment

39.6

Constructed more than 7800 projects of primary health care services; completed 3 million square meters of rural junior high school Afforestation over 3700 mu, and also additional sewage treatment capacity of 4 million tons / day

176 high-tech industrialization projects and 146 industrial projects with technological advances; some of these projects have stepped into the major project construction and equipment installation and adjustment phase. Source: website of the State Council Information Office of China, August7, 2009, http://gb.cri.cn/news/live/20090810.htm 8

54.2

State Council Information Office, August 7th (15:00) 2009, http://gb.cri.cn/news/live/20090810.htm


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2. Speeding up the Examination and Approval of Major Projects Some projects included in the ―four-trillion-Yuan (RMB)‖ investment were originally included in the ―Eleventh Five-Year Plan‖, such as roads, railways and other infrastructure constructions. Made after full argument, these projects will be accelerated and promoted between 2009 and 2010. Moreover, the National Development and Reform Commission speeds up the examination and approval of new major projects. The year of 2008 witnessed the approval of 18 major projects of railways construction with a total length of 7389 kilometers and feasibility study reports, of which, 6 projects were approved in October and November, with a total length of 1992 kilometers which accounts for 30% of the total projects and length approved in the year. In addition, 45 major construction projects of roads were approved in 2008, with a total length of 4536.3 kilometers, of which, 18 projects were approved between October and December, with a total length of 1664.3 kilometers accounting for 40% of the total projects and length. Table 1-3. Major Railway Projects Approved by China’s National Development and Reform Commission between October and November in 2008 Number 1

Time for Approval October 2008

2

October 2008

3

October 2008

4

October 2008

5

November 2008

6

November 2008

Project Name

Starting and End Points

Length (Kilometers)

Xilinhot-Ulanhot Railway

Xilinhot-Ulanhot

651

NanningGuangzhou

471

ChongqingLichuan

261

Jining-Baotou

263

Jinhua-Wenzhou

188

ShanghaiHangzhou

158

Litang- Guangzhou of Nanning-Guangzhou Raiway Chongqing-Lichuan and Feasibility Reports The feasibility report of building the Second Double Track between Jining and Baotou in Jining-Baotou railway The project proposal of enlarging railway transportation capacity of Jinhua-Wenzhou railway The project proposal of Shanghai-Hangzhou railway passenger line

18 major railway construction projects were approved between January and July 2009, of which, three large projects are beyond 1000 kilometers: the Project Proposal of the Second Double Track Construction for Lanzhou-Xinjiang Railway, the Project Proposal of Newlybuilt Changsha-Kunming Railway Passenger Line, the Project Proposal of Newly-built Railway Corridor in Central and Southern Shanxi. All of these three large projects are located

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in the central and western regions of China which represents the central government‘s strong 9 support to the construction of these regions.

Figure1-5. The Major Railway Projects Approved by the NDRC in the First Half of 2009.

From the examination and approval of major projects, it can be seen that the coordination of regional development is gradually enhanced. With the launch of a series of plans, policies and measures concerning the promotion of regional economic development, the Midwest and Northeast regions of China can seize the opportunities to strengthen the infrastructure construction, undertake industrial transfer and develop the industries with local features; the eastern region of China needs to overcome the impact of financial crisis and make new progress in promoting transformation, upgrading, self-innovation and competitiveness enhancement.

3. Substantial Enhancement of Structural Tax Reduction In addition to increasing investment, the implementation of structural tax reduction as well as easing the tax burden on business and residents is one part of China‘s economic stimulus plan. (1) Collecting the consumption-based value-added tax in an all-round way, easing corporate tax burdens, promoting enterprises to increase the investment in selfinnovation and technical transformation.

9

National Development and Reform Commission, http://zfxxgk.ndrc.gov.cn/PublicItemFrame.aspx


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(2) Reducing the tax burdens on low-income individuals. With the tax adjustment strengthened in 2008, the standard of cost deduction in individual income increased to 2000Yuan (RMB) per month. Individual Income Tax on interest from savings deposits and interest form securities transactions settlement funds will be exempt. Collecting from only one side of the stock traders the stamp tax followed the tax reduction. The government will take measures to reduce residents‘ housingpurchasing burdens by declining property deed tax for the people buying their first home only if it is smaller than 90 square meters, exempting the stamp tax and land value-added tax. (3) Increasing the export tax rebate rate of certain commodities. The adjustment policy of export tax rebate was implemented on August 1, 2008. The export tax rebate rate of some textiles and garments increased from 11% to 13%. The export tax rebate rate of some bamboo products increased to 11%. On November 1st, the export tax rebate rate of 3486 commodities of textiles and garments was readjusted. These commodities accounted for 25.8% of all commodities listed in China Customs Tariff. This adjustment of export tax rebate rate policy was the largest one which involved the most tariffs since 2004. Since December 1st, the government increased the export tax rebate rate and adjusted 3770 commodities‘ export tariffs, accounting for 27.9% of the total export commodities. In the wake of implementing the tax reduction measure, the growth rate of financial revenue declined to 19% in the second half of 2008. While the growth rate of financial revenue was 33% in the first half of 2008. In the first half of 2009, the government implemented the tax reform of refined oil and promoted the energy-saving gas emission, cancelled 100 administrative fees in addition to continuously carry out measures of tax reduction and exemption. As for house transferring, tax payers can have access to business tax reduction or exemption for a year. Passenger vehicles with 1.6liters of displacement or below can be collected 5% vehicle purchase tax. From April 1st, the export tax rebate rates were increased for goods under tariff code no. 3802. The commodities are as follows: textiles, garments, light industry, electronic information, steel, nonferrous metals and petrochemical products. Meanwhile, the export tariff of some steel, chemicals, grains will be cancelled and the export tariff on certain fertilizer will be reduced. It is estimated that the tax reduction amount in 2009 will reach more than 500 billion Yuan (RMB). According to the announcement of the Ministry of Finance of the People's Republic of China, the local government bonds worth 200 billion Yuan (RMB) had been issued completely till September 4th 2009, covered with all the provinces and autonomous regions except Hong Kong, Macau, and Tibet.

4. Substantially Relaxing Credit Since the second half of 2008, the PBC began to implement loose monetary policy by relaxing commercial bank‘s credit, reducing interest rates on savings, loans and reserve requirement for commercial banks. At the beginning of December, with the deterioration of economic situation, the PBC declared the cancellation of credit line and provided window guidance to banks in terms of the credit extensions and channels. Since the announcement of ―four-trillion-Yuan (RMB)‖ economic stimulus plan, the credit extension of financial institutions increased rapidly by the end of 2008. In the first half of 2009, the RMB loans

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reached 7.37 trillion Yuan (RMB), one point five times as much as the new loans of 4.91 trillion Yuan (RMB) in 2008, three times as much as the new loans of 2.45 trillion Yuan (RMB) in the first half of 2008. Thus, the accommodative monetary policy has provided significant additional liquidity into the economic field which plays an active role in promoting the economic recovery and stability.

II. The Preliminary Effects of Economic Stimulus Plan With the implementation of economic stimulus plan, China‘s economy has developed in a good trend with positive factors increased. The situation is stabilized with a marked economic recovery.

1. Stable Economic Recovery in China Based on the requirements of ―four-trillion-Yuan (RMB)‖ package plan, China‘s economy has stepped into recovery in terms of the progress in expanding the investment and consumption, stabilizing exports, adjusting and optimizing economic structure, improving people‘s livelihood and farmers‘ income. Firstly, China‘s GDP grows steadily. In the first half of 2009, the gross domestic product grew year on year by 7.1%, of which, 6.1% of growth in the first quarter, 7.9% of growth in the second quarter. It can be noticed that the GDP growth rate in the second quarter is 1.8 percentage points higher than that in the first quarter. During January and February, the above-scaled industrial production grew 3.8%, increased by 3.8% in March, declined in April, raised 8.9% in May, and increased by 10.7% in June. Secondly, the domestic demand grows rapidly. Expanding the domestic demand is the driving force and focus task of the economic recovery. In the first half of 2009, the total retail sales of social consumer goods increased by 15%, an actual increase of 16.6% after deducting price factors, up year on year 3.7%. It should be noticed that the commercial housing sales and the automobile sales increased by 31.7% and 17.7% respectively. Thirdly, the economic structural adjustment is actively promoted. To promote structural adjustment is the requirement and need of maintaining stable and rapid economic development. At first, the infrastructure and basic industries have been further strengthened. In the first half of 2009, the investment in infrastructure (power grid excluded) increased by 57.4%, of which, 126.5% increased in railroad transportation; 57.4% increased in road transportation; 54.5% increased in water conservancy, environment and public facility management industry; 71.3% increased in health care, social security and social welfare; 57.1% increased in culture, sports and entertainment. Secondly, the equipment industry has stepped into rapid recovery. It increased by 6.7% year-on-year in the first half of the year, 3 percentage points higher compared with that in the end of the first quarter. Finally, the coordination of regional development has been strengthened with the significant growth of investment and industrial production in the Midwest regions. In terms of fixed asset investment in the urban areas, the growth rate was 38.1% in the central region, 42.1% in the western region, 26.7% in the eastern region. As for industrial production, the above-scaled industrial added value increased by 6.8% in the central region, 13.2% in western region, and 5.9% in the eastern region.


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Fourthly, people‘s livelihood continues to be improved. The overall employment maintained basic stability. Particularly, the population of rural migrant workers increased gradually. In the first half year, there were 5.69 million new jobs created, accounting for 63% of the yearly target. At the end of the second quarter, the rural migrant workers increased by 3.78 million compared with that of the first quarter, an increase of 2.6%. Among them, there were 0.56 million people increased in the eastern region, raised by 1.6%; 0.8 million people increased in central region by 1.8%; 2.42 million people increased in western region by 6.5%. Secondly, the residents‘ income has grown steadily. In the first half year, the disposable income of urban residents reached 8856 Yuan (RMB) per capita, increasing by year on year 9.8%, a real growth of 8.1%. Per capita cash income of rural residents was 2733 Yuan (RMB), climbing up by year on year 8.1%, a real growth of 8.1% after deducting price factors. Third, the social security expenditure further increased. With the large financial revenue pressures in the first half year, the fiscal expenditures for social security and employment increased by year on year 29.2%. The minimum living security allocated by the central government and the Ministry of Finance for urban residents and rural residents 10 respectively increased by 49.9% and 140%.

2. Market Confidence Rebounded The government's economic stimulus plan is to convey a clear signal that the economy has to grow at least 8%. This signal is more important than any specific investment figures for it can help families and enterprises restore confidence and encourage enterprises to maintain the investment. The news that the five indexes rebounded in the second quarter of 2009 was released on the web site of China National Bureau of Statistics, China Macroeconomic Information Network and China Federation of Logistics & Purchasing. Among the five indexes, China‘s Entrepreneur Confidence Index (ECI) gained 110.2 in the second quarter, promoted 9.1 points over previous quarter. The National Business Climate Index (BCI) declined since the third quarter in 2008. This index was 115.9 in the second quarter, rising by 10.3 points from the first quarter. China‘s Consumer Confidence Index (CCI) has continuously declined in 2009. Compared with the CCI in April, the CCI in May rebounded which implied that the consumer‘s confidence had stabilized and slightly recovered. That fact that China's Manufacturing Purchasing Managers Index (PMI) was 53.2%, above the critical point of 50%, demonstrating that the manufacturing economy as a whole had shown a steady upward trend due to the implementation of the central government‘s policies and measures concerning expanding domestic demand as well as promoting stable, rapid growth of national economy. The rebound of China's Macroeconomic Early-warning Index indicated that the current Chinese economic situation would develop well. 3. Reflections and Concerns on Sustainable Economic Growth With the implementation of economic stimulus plan, China‘s package plan is already paying off. China‘s economy had shown the signs of economic growth in the second quarter of 2009. Besides the negative growth in foreign trade, other indexes have substantially rebounded. However, the investment-led economic recovery, inadequate consumption pulling 10

http://www.mof.gov.cn/mof/zhengwuxinxi/caijingshidian/jjrb/200907/t20090717_182756.html

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and too much credit loans have aroused people‘s reflections and concerns about inflation and economic growth sustainability. First of all, the possibility of inflation will increase. The continued loose monetary policy has led to ample market liquidity which will enter the capital market with high return on investment so that the asset prices will be pushed up. Meanwhile, the revival of real economy is a relatively slow process. The process of increasing credit to increase investment to speed up economic growth requires a certain period of transmission time. Therefore, the price level would not change from deflation into inflation in a short time. As a result, the asset price and commodity price will be deviated from each other. Since the rise of asset price is independent from the growth of real economy, bubble risks will come into life. If the risks can not be controlled, the collapse of bubble economy will lead to a greater impact on economy. Secondly, the stimulus effect of infrastructure construction on employment is limited. The new investments are highly channeled in capital-intensive heavy industry and infrastructure construction which is one important reason for non-further improvement in employment. However, the sectors mentioned above can create limited job opportunities. As a matter of fact, the maintenance of economic growth, in the final analysis, is to maintain the employment, people‘s livelihood and social security. Only solved the employment problems, coupled with a reasonable income distribution patterns and effective social security system, can we fundamentally solve the people‘s problems and achieve social harmony and stability. Thirdly, the investment-led economy may make the income distribution deteriorated. As for the three demands of GDP growth in the first half of 2009, the economic growth contribution rate of the gross capital formation, mainly including fixed assets investment and inventory, was 87.6%, pulling GDP increase by 6.2 percentage points. The contribution rate of final consumption to economic growth was 53.4%, boosting GDP growth of 3.8 percentage points. The contribution rate of net exports to economic growth was -41%, decreasing GDP growth rate by 2.9 percentage points. The funds were mainly from the central government, local government and bank loans. Although the construction of major projects has stimulated the economic growth significantly, the benefits for most labors are still inadequate, which 11 may result in further deterioration of income distribution. Finally, the investment in social security system is relatively smaller. Using Roosevelt‘s American New Deal for reference, the aim of the New Deal is striving to establish a series of economic security system in order to make people free from fear. It can be noticed that the core of the New Deal is to establish social security system and achieve balanced economic growth with stability in a long term rather than increase government spending to construct infrastructures. Although the projects of people‘s livelihood is included in the ―four trillion‖ economic stimulus plan, the investment proportion in these projects is still much less than that in supporting infrastructure construction, boosting economic growth. If we continue the current pattern of investment-led economic growth, with the rapid economic growth, the structural contradictions will be more and more severe. The income proportion of household and workers will be much lower in the economic system, which will lead to low consumption willingness. Therefore, only by improving the income distribution pattern and establishing a 12 sound social security system will China‘s economy maintain sustainable long-term growth. 11 12

Can Chinese Style Economic Recovery last? http://www.infzm.com/content/32207 Huang Yiping. The most difficult time is the best chance for reform. http://www.infzm.com/content/32224


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III. The Future Trend of National Economic Development With the further implementation of the world economic stimulus plan, there have been positive changes in the world economy in the first half of 2009: the asset price increases and the external economic environment of China has also been improved. China‘s economic growth rate rebounded in the first quarter of 2009. The economic growth was close to the fullyear target of 8% in the second quarter. The future fiscal and monetary policy will play a greater role in promoting stable and rapid economic development. As long as we can accurately predict the world economic development and recognize potential problems, diminish the unstable factors‘ impact on Chinese economy, it will move toward a sound development.

1. The Fixed Asset Investment’s Stimulus Effects on Economic Growth Will Further Increase For a long time, investment has played an important role in stimulating China‘s economic growth. Especially, the introduction and implementation of economic stimulus plan accelerated the investment growth further. The investment growth stamina is abundant, manifested as increased investment in infrastructure, the increasing new projects and the rapid growth of total investment in new projects. In particular, the construction of people‘s livelihood projects has been enhanced in the economic stimulus plan, which will solve the low-income group‘s problems, be beneficial to expand consumption and optimize economic growth structure. 2. Consumption Will Steadily Increase with Sustainability Since the breakout of the financial crisis, to improve residents‘ income and expand the final consumption demand, China has unveiled relevant policies to adjust national income distribution pattern, improve the proportion of residents‘ income in national income, adjust the enterprise retirement pensions, improve residents‘ property income and vigorously promote residents‘ consumption in the urban and rural areas. The financial and fiscal measures adopted by Chinese government, such as issuing coupons, guiding home appliances and automobiles to the countryside, new-for-old program, increasing grain subsidies to farmers, and other policies and measures are conducive to the expansion of domestic consumption demand, thereby stimulating economic growth. These measures will lead to sustainable consumption growth and achieve economic growth co-stimulated by consumption and investment under the premise of optimizing investment structure. 3. Positive Changes in Imports and Exports The international financial crisis not only lead to a drastic shrinkage of national wealth in the developed countries, decrease the current residents‘ consumption expenditure, affect the future economic growth prospects, but also aggravate the protectionism in many countries which causes negative impact on China‘ imports and exports. Although the situation of China‘s imports and exports is very grim, with negative contribution to the economic growth, we should pay attention to the positive changes. Firstly, the private-funded enterprises become much stronger than the state-owned enterprise and foreign-funded enterprises in terms of responding to crisis. In the first half of 2009, the rate of decline in imports and exports by private-funded enterprises was half of state-owned enterprises and foreign invested

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enterprises, and the imports and exports proportion of private-funded enterprises showed an upward trend in total national imports and exports. Secondly, the development momentum of domestic enterprises indicates the promising direction of improving the export enterprises‘ main structure of the market. The financial crisis has affected foreign-invested enterprises dealing with processing trade greater than domestic-funded enterprises. We should seize the opportunity to support domestic enterprises to cultivate export brands with their own intellectual property rights. With the implementation of national policy for supporting foreign trade growth, China's foreign trade will show a resumption of growth. Based on the comprehensive research at home and abroad, China‘s economy is expected to achieve growth target of 8% in 2009 and is likely to maintain rapid growth in 2010. However, the ultimate performance of ―four-trillion-Yuan (RMB)‖ investment remains unknown due to the uncertainty of domestic and international economic environment. Translator: Luo Liyun (SUFE) English Version Editors: Xiao Rong (SUFE), Jin Ji (Harvard)

REFERENCES [1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13]

Chen Jiagui, 2009. Analysis on the Prospect of China‟s Economy [M]. Beijing: Social Sciences Academic Press. Donald.J.Korn, 2009. Interactions between Monetary and Fiscal Policy in the Current Situation(Chinese)[J]. China Finance, 13, 33-35. Dwight.H.Perkins, 2009. Spectator perspective: China's existing and viable economic stimulus package (Chinese) [J]. China Development Observation 4, 46-47. Gao Peiyong, 2008. The People‟s Well-being & Public Finance [M]. Beijing: China Financial & Economic Publishing House. Gan Xingqiong, 2008. Tax Rebate and Tax Reduction - Comparison between Sino-US Economic Stimulus Plans (Chinese)[J]. Finance & Trade Economics 12, 69-72. Han Guangyu, 2009. China‟s Development in the Context of International Financial Crisis [M]. Beijing: China Renmin University. Jia Kang, 2009. Essentials of Fiscal Policy in 2009[J]. China TodayForum(z1), 25-26. Li Xiaoxi, 2009. China's Economic Trajectory in the New Century——Sub-quarter Economic Situational Analysis Report2007-2008[M]. Beijing: People‘s Publishing House. Wang Xiaolu, Fan Gang, Liu Peng, 2009. Transformation of Growth Pattern and Growth Sustainability in China(Chinese)[J]. Economic Research Journal, 1, 4-16. ANDREWS E L. Tracking the Bailout: Summary of U.S. bailout efforts. The New York Times:http://www.nytimes.com/2008/11/26/business/economy/26fed.html?_r=1. DOLLAR D．China's stimulus plan also aims to improve quality of life．November 12, 2008.http://eapblog.worldbank.org． LEE D．China's $586-billion stimulus plan could boost world economy．Los Angeles Times: http://articles.latimes.com/2008/nov/10/business/fi-china10． ROUBINI N．The Rising Risk of a Hard Landing in China: The Two Engines of Global Growth – U.S. and China – are Stalling．http://chineseculture.about.com/.



Comments on Chapter 1

KEYNES‟S PHILOSOPHY IN CHINA: ASSESSING THE FOUR-TRILLION-YUAN ECONOMIC STIMULUS PACKAGE Shu Yan  Triggered by the U.S. sub-prime mortgage crisis in April 2007, the current financial crisis has engulfed the world. Although China did not suffer the western-style financial crisis, it was deeply affected by the collapse in external demand due to this crisis. China is a labor abundant country and has comparative advantage in the production of labor-intensive manufacturing goods. Over a long period of time, the export sector of these goods has been an important driver of China‘s high economic growth. But recently, when the financial crisis led to a dramatic fall on the international demand for goods, China‘s export sector has got into trouble. Thousands of export-oriented enterprises have been forced to shut down. The unemployment rate climbed fast in China inevitably. Compared with 2007, the GDP growth rate in 2008 decreased by four percentage points. China‘s economy experienced a real crisis to some extent. Fortunately, the Chinese government responded very quickly. In November 2008, the government unveiled a four-trillion-yuan economic stimulus package to be spent over the next two years (i.e. 2009 and 2010), aiming at stimulating domestic demand to compensate for the reduction in exports, maintaining high economic growth and boosting employment. It is a concrete manifestation of Keynesian counter-cyclical economic policy. The current situation in China shows that the stimulus policy is gradually playing a role. The first chapter of China Economy & Resources Management Report 2010 describes in details the background, contents as well as developments and preliminary effects of this stimulus plan. Through the progressive implementation of the stimulus plan, China is showing signs of improvement. Official figures state that GDP growth hit 7.9 percent in the second quarter of 2009. This growth rate is very close to the target of ―bao ba‖ or ―preserve  Shu Yan is associate professor in Research Institute of Economics and Management at Southwestern University of Finance and Economics, P. R. China. She earned her PhD degree in Economics from Florida International University, USA.

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Shu Yan

eight‖, which means maintaining a pace of economic growth at 8 percent. Those who are skeptical of the quality of China‘s macroeconomic statistics can look over some associated specific data: for example, the production of electricity raised 5.2 percent in June 2009, completely changing its declining situation in the previous eight months1. Nevertheless, it is too early to hail success of the stimulus plan. We should pay more attention to the problems that occurred or may occur during the implementation of the stimulus package. Among these are, for instance, possible inflation and asset bubbles, limited impact on boosting employment and consumption, etc. This comment on the first chapter of the Report will provide a brief discussion of some main concerns about the stimulus package, which attract a lot of domestic and foreign interests.

NEW INVESTMENT VERSUS OLD PROJECTS China‘s four-trillion-yuan investment, the main component of the stimulus package, consists of several projects in the existing ―Eleventh Five-Year Plan‖, especially those for the rest two years in the Plan. Thus, actual amount of new investment in the stimulus package is more likely to be less than the headline figure of ―four-trillion-yuan‖. Although Keynesians tend to believe that only extra government investment can execute positive impact on the level of and growth rate of aggregate demand, China‘s declaration of ―Four-trillion-yuan Economic Stimulus Package‖ is justified by the following reasons. First, when considering a stimulus plan at national level, we should not only ensure to achieve its short-term goals but also care about its effects on the long-term economic growth of the country. We believe only if it is in accord with the ―Eleventh Five-Year Plan‖ can the four-trillion-yuan investment produce a long-standing constructive effect. Next, we must learn the lesson from the implementation of similar fiscal stimulus plan in China during the Asian Financial Crisis ten years ago. One of its key problems is that some investment projects were launched hastily at that time in order to have a fast influence on GDP growth2. As a result, there existed to some degree redundant construction and waste of resources. Since investment projects in the ―Eleventh Five-Year Plan‖ survived full feasibility studies before the scope of the crisis became clear, it is appropriate to contain them in the current economic stimulus package. Last, the key to the success of a national stimulus package lies in its ability to boost market confidence. Through the declaration of ―Four-trillion-yuan Stimulus Package‖, the Chinese government is sending the public such a signal that central government is capable of combating crisis and guaranteeing the sustainable and stable economic growth. From this perspective, the size of a stimulus package may not as important as that in theory. After all, it is difficult to know for sure how large the fiscal multipliers are and what scale of new investment is enough to rebound the economy from downturn or recession. If necessary, just as other countries, China can also add the second-round fiscal stimulus. But on top of that, we have to wait for further macroeconomic data to judge effects of the first stimulus package and then take corresponding measures. 1 YU Y. China‘s Stimulus shows the problem of success (August 25, 2009) Financial Times. 2 ZHENG Y., CHEN M. How Effective will China‟s Four Trillion Yuan Stimulus Plan Be? (March 2009) China Policy Institute, University of Nottingham.

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SOURCES OF FUNDING Another eye-catching question related to the four-trillion-yuan economic stimulus package is how China will come up with the cash. In May 2009, National Development and Reform Commission, China‘s macroeconomic management agency, first publicly disclosed detailed funding sources of the package. With regard to the four-trillion-yuan investment, central government will provide 1.18 trillion, which is about 30 percent of the total. The rest 2.82 trillion yuan will come from the provincial fiscal budget, local government bonds, policy loans (including subsidies on interest payments), corporate bonds and medium-term notes, as well as bank loans and private investment. However, the proportion of each fund was not published. Looking at the situation of the fourth quarter of 2008 and the first six months of 2009, we could know that central fiscal funds were issued very quickly and timely, which is the main force driving the total investment up. Over the past decade, China has had very low budget deficits, and even it ran a fiscal surplus in 2007. So the government has plentiful room to operate even if it needs to issue bonds to meet the requirement of the 1.18 trillion yuan central investment. In contrast, it seems likely that there is some uncertainty about the 2.82 trillion yuan ―social matching funds‖. At the moment large contribution to these funds comes from bank loans, local government bonds issued by the Ministry of Finance, corporate bonds and policy loans. Among these bank loans are the most important part. It is noteworthy that private capital occupies a very small proportion in the four-trillion-yuan economic stimulus funds. The main reason is that private capital does not want to enter non-profitable projects while it has little chance of accessing to profitable projects. Hence, it is very necessary to set policies to stimulate enthusiasm in private investment, such as policies of tax breaks, fiscal subsidies, etc. Attracting foreign investment should also be an important consideration in raising funds in theory. But due to the liquidity shortage caused by the current global financial crisis and weak international real economies, foreign investment, as a source of funding, will be rather limited.

CREDIT FLOWING To support the four-trillion-yuan economic stimulus package, China‘s central bank loosed control on credit scale. But things went far beyond that. In the first half of 2009, bank lending increased up to 7.37 trillion yuan, even greater than the official target of 5 trillion yuan for the whole year. Similarly, the broad money, M2, is growing at an exceptional rate.3 Thus, the accommodative monetary policy has provided significant additional liquidity to our financial market and economy. There are more and more people worrying about inflation risks that may come out of this policy. Although overcapacity in many industries is delaying inflation in some sense, the inflation itself could happen at any time due to internal or external shocks. In particular, when liquidity was quickly built up and the use of funds was lack of effective supervision, there occurred that some companies who obtained credit funds did not engage in real investments to enhance production and employment, but speculate in the stock 3

YU Y. China‘s Stimulus shows the problem of success (August 25, 2009) Financial Times.

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and property markets which produce a higher return at the time being. Possible result of doing so is continuously rising asset prices ending with the formation of asset bubbles. Therefore, to avoid repeating mistakes which triggered the present western-style financial crisis, an urgent task for China is to strengthen the supervision of credit funds, thereby ensuring credit flowing into productive investment. Meanwhile, banks should pay more attention to their own risk management.

BOOSTING EMPLOYMENT At present, one of important concerns to the Chinese government is that up to 20 million rural migrant workers lost their jobs or could not find jobs in 2008. Moreover, according to the report from China‘s Academy of Social Sciences, 7.8 million university graduates will enter the labor market in 2009. Among these, 40 percent (around 3 million) may not be able to find employment. 4 Right now, many people count on this four-trillion-yuan economic stimulus package to solve the employment problem. But indeed the package has very limited effects on creating jobs for the following two reasons. First, just as what the Report pointed out, the package focused on capital-intensive industry, for example infrastructure development, and will create relatively few jobs directly. Second, the vast majority of bank lending is flowing into large state-owned enterprises (SOEs). This exacerbates overcapacity in several sectors that are dominated by SOEs, such as steel, chemical, and telecommunication industries. In turn, their overcapacity squeezes hard private and especially small and medium-size enterprises (SMEs). As a result, SMEs faced difficulties to survive. Here comes the problem since these SMEs are the most important employment generators in the Chinese labor market. It is estimated that 75 percent of job positions in China comes from SMEs. Therefore, to boost employment, it is necessary for the government to provide SMEs financial guarantee and support their normal operations. On the other hand, China can also learn from the practice of Germany. The government could encourage enterprises to hire new workers or not dismiss original workers by means of fiscal subsidies.

STIMULATING CONSUMPTION Over a long time, Chinese people‘s high rate of savings has made impossible for domestic household consumption to be the main drive force of economic growth. To stimulate the consumption, a popular approach, in Keynes‘s philosophy, is tax cuts targeted at low-income consumers. The reason of targeting at this group is that they tend to have a higher marginal propensity to consume than the rich. Given the features of China‘s tax system, this approach will not take effect as expected in China. Unlike the United States, China does not make the income tax as the main component of its tax system. The low-income consumers in China basically do not pay income taxes or pay very little tax. Therefore, China has to turn to other options than tax cuts. In effect, improving the social welfare system is the crux of stimulating household consumption because the extraordinarily high saving rates in China are 4 ERNST D. China‘s Stimulus Package: A Catalyst for Recovery? (June 2009) East-West Center.

Keynes‘s Philosophy in China

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not accidental but results of the low level of social security services. Only if their top concerns about, for example, education, healthcare, and pension insurance, are resolved, the ordinary Chinese people could feel safe to withdraw their savings and consume. This problem has already come to the Chinese government‘s attention for a long time. Despite the fact that only 3.75 percent of the four-trillion-yuan stimulus money is put on ―social safety net‖ programs, the government is trying hard to change the status quo from other channels, such as investing additional 0.85 trillion yuan to carry out a three-year reform of medical and health system.

OPPORTUNITIES FOR FOREIGN-FUNDED ENTERPRISES Although state-owned enterprises and domestic private companies will benefit most from the four-trillion-yuan stimulus package due to the characteristics of China's economic policy and the restrictions on foreign investment, foreign-funded enterprises can also find opportunities within the stimulus package. 5 It is not easy for them to obtain contacts of investment projects directly. But they can make full use of their advantage and perform as subcontractors to the large contracts that Chinese companies already got. Foreign-funded enterprises have the distinct advantage in converting advanced intellectual properties and providing value-added services, for example, their clean energy technologies, and project management services that will be useful to the rural infrastructure development or earthquake reconstruction, etc. These advantages create opportunities for them when faced with China‘s stimulus package. Overall, from either political or economic perspective, China‘s four-trillion-yuan economic stimulus package is an important strategy to combat the global financial crisis. With the implementation of specific policies and measures, the stimulus package will gradually demonstrate its positive effects. At the same time, we should recognize problems and risks that may emerge from the implementation of the package and prevent and control those problems as soon as possible. Furthermore, we should fully seize opportunities within the stimulus plan and contribute to the realization of the goal of ―maintaining growth, boosting employment and stimulating domestic demand‖.

REFERENCES ERNST D. China‘s Stimulus Package: A Catalyst for Recovery? (June 3, 2009) East-West Center. JACKSON J K. The Financial Crisis: Impact on and Response by The European Union (June 24,2009). Congressional Research Service. KWAN C. A Balanced Approach – China‘s Economic Stimulus Plan (November 2008). U.S. Chinese Services Group.

5

REVELLE G., CHIANG J. China Stimulus Package (June 17, 2009) Stoel Rives LLP.

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PRASAD E., SORKIN I. Assessing the G-20 Economic Stimulus Plans: A Deeper Look (March 2009). Brookings Series. REVELLE G., CHIANG J. China Stimulus Package (June 17, 2009) Stoel Rives LLP. YU Y. China‘s Stimulus shows the problem of success (August 25, 2009) Financial Times. ZHENG Y., CHEN M. How Effective will China‘s Four Trillion Yuan Stimulus Plan Be? (March 2009) China Policy Institute, University of Nottingham.



Chapter 2

BUILDING A NEW COUNTRYSIDE: THE BREAKTHROUGH POINT OF STIMULATING DOMESTIC DEMAND Li Jing*, Zhang Jiangxue, Feng Tao and Zhang Ning In order to effectively cope with the negative effect of the international financial crisis on China, executive meetings of the State Council initiated 10 measures to expand domestic demand on November 15th, 2008. One of the main focuses of these measures is to building a new countryside byincreasing countryside consumption as well as improving its infrastructural facilities. From then on, in order to stimulate consumption in the rural area, Chinese government has put forward a series of measures such as household electric appliances going to the countryside, automobile going to the countryside, etc., which have already make some achievements. However, to expand consumption in the rural area is a long-term and arduous task which asks for not only amelioration of the problem during the execution of measures but also the coordination of macro policies and the reform of the distribution of national income.

SECTION 1: NEW COUNTRYSIDE CONSTRUCTION AND NATIONAL ECONOMY The primary problem existing in China‘s economic development for a long time is insufficient domestic demand. The potential consuming capacity in the rural area in China is huge, but the low income of farmers is the major factor that restricts consumption in the rural area. Therefore, the strategy of increasing farmers‘ income so as to build a new countryside is of great significance.

* Dr. Li Jing is a research fellow of the Chinese Academy of Social Sciences as well as a professor of the Graduate School of the Academy. Email: [email protected]

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Li Jing, Zhang Jiangxue, Feng Tao, et al.

I. RURAL ECONOMY AND NATIONAL ECONOMY 1. The Role of Rural Economy in National Economy China‘s economic reform is initiated in the rural area. The reform and development of rural economy used to be an important driving force of China‘s economic growth. However, due to the restriction of urban-rural dual segmentation system, the economic development between the rural area, the city and the whole nation are asynchronous. Since 1990s, the proportion of rural economy in the national economy has been gradually decreasing as a result of a slowdown in agricultural growth and a decrease in farmers‘ income growth. Amongst all components of the decrease in rural economic growth proportion, the decrease of the proportion of primary industry in the national economy is the greatest, while that of the secondary industry has stagnated in recent years, and that of the tertiary industry has also shown some decline (see Table 2-1). Table 2-1. The Urban-rural Structure Decomposition (Production Method) of Gross Domestic Product in the Three Industries (The National GDP is 100) Year

1991 1993 1995 1997 1999 2001 2003 2005 2007 2008

Primary Industry I

Secondary Industry

Tertiary Industry

II

Urban Area II

Rural Area II

III

Urban Area III

24.5 19.7 19.9 18.3 16.5 14.4 12.8 12.2 11.1 11.3

41.8 46.6 47.2 47.5 45.8 45.1 46.0 47.1 48.5 48.6

28.2 24.9 27.2 27.1 25.2 24.3 25.0 25.9 26.5 26.6

13.6 21.7 20.0 20.4 20.6 20.8 21.0 21.8 22.0 22.1

33.7 33.7 32.9 34.2 37.7 40.5 41.2 40.1 40.4 40.1

23.3 23.1 22.6 23.4 25.8 28.0 28.6 27.9 28.9 28.8

Rural Area III 10.4 10.6 10.3 10.8 11.9 12.5 12.6 12.2 11.5 11.3

Aggregate of Rural Area

48.5 52.0 50.2 49.5 49.0 47.7 46.4 46.2 44.6 44.7

Source: Quoted from ―Analysis and Forecast on China‘s Rural Economy (2008-2009)‖ (P.40, Social Sciences Academic Press, April 2009) collaborated on by the Institute for Rural Development of the Chinese Academy of Social Sciences and the Rural Social and Economic Survey Division of the National Bureau of Statistics.

Table 2-1 shows that the decrease of the primary industry in rural economy is the most rapid — the percentage of the primary industry in GDP declines from 24.5% in 1991 to 11.3% in 2008; the secondary industry has reached a plateau and has stayed at around 40% of the national economy from 2001 to 2008, although it was still growing in the 90s of the last century; the proportion accounted for by the tertiary industry also shows a decrease from 12.6% in 2003, which is the year of the highest percentage, to 11.3% in 2008.

Building a New Countryside: The Breakthrough Point of Stimulating…

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2. Fixed Asset Investment in the Rural Area The driving force of China‘s economic growth is investment, which means low investment growth normally results in low economic growth. Therefore, the decrease in the proportion of rural economy in the national economy is directly related to the decreasing proportion of rural fixed asset investment in the whole country (see Table 2-2). Table 2-2. The Volume of Fixed Asset Investment in the Rural Area and Its Proportion to the Whole Country (Unit: 100 million Yuan (RMB), %) Year

Volume of fixed asset investment in the whole country

Volume of fixed asset investment in the rural area

The proportion of fixed asset investment in the rural area

1996 1998 2000 2002 2004 2006 2008

22913.5 28406.2 32917.7 43499.9 70477.4 109998.2 172291

5346.3 5914.8 6695.9 8011.1 11449.3 16629.5 24124

23.3 20.8 20.3 18.4 16.2 15.1 14.0

Source: website of the National Bureau of Statistics of China, http://www.stats.gov.cn.

Table 2-2 shows that from 1996 to 2008, the amount of fixed asset investment in the whole country has increased from 2291.35 billion to 17229.1 billion with a multiplier of 7.52 times; while the amount of fixed asset investment in the rural area has just increased from 534.66 billion to 2412.4 billion, or a 4.51 times increase. During the past 12 years, the proportion of rural fixed asset investment in the whole society has kept decreasing from 22.3% in 1996 to 14.0% in 2008.

3. Consumption in the Rural Area For a long time, the consumption growth in the rural area has been slower than that in urban area. In the national retail market of consumer goods, the share of the rural area keeps decreasing continuously (see Table 3). Table 2-3 shows that from 1978 to 2008, the total volume of retail sales of consumer goods increases from 155.86 billion to 10848.8 billion, with a growth of 69.6 times; the total volume of retail sales of consumer goods at and below county level increases from 105.34 billion in 1978 to 3475.3 billion in 2008, with a growth of 33 times, which is less than a half of the former. It is safe to draw the conclusion that the past 30 years since the reform and open-up policy have witnessed the decline of the proportion of rural residents‘ consumption in the country, because the proportion of the total volume of retail sales of consumer goods at and below county level in the country decreases from 67.6% in 1978 to 32% in 2008.

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Table 2-3. Total Volume of Retail Sales of Consumer Goods at and below County Level and Its Proportion to the Country (Unit: 100 million Yuan (RMB), %) Year

Aggregate retail sales of consumer goods nationwide

Total volume of retail sales of consumer goods at and below county level

Proportion

1978 1980 1985 1990 1995 1999 2005 2007 2008

1558.6 2140 4305 8300.1 23613.8 35647.9 67176.6 89210 108488

1053.4 1406.4 2430.5 4411.5 10634.4 13446.1 22082.3 28799.3 34753

67.6 65.7 56.5 53.1 45.0 37.7 32.9 32.3 32.0


4. Disparity of Living Standards between Rural and Urban Residents The reason for the consumption decrease in the rural area is that the growth rate of rural income is lower than that of the city. From 1978 to 2008, rural income increases from 133.6 Yuan (RMB) to 4761 Yuan (RMB), with an increase of 36 times, while the income of urban and township residents increases from 343.4 Yuan (RMB) to 15781 Yuan (RMB), with an increase of 46 times (see Table 2-4). Numbers in Table 2-4 show that the income gap between rural residents and urban and township residents is widening, although the Chinese government keeps emphasizing the increase of rural income and has put forth a series of policies and measures with that aim. Due to the slow growth of per capita income of rural residents and the rapid growth of that of urban and township residents, the absolute income gap between urban and rural residents expands rapidly. In 2008, the income gap between urban and rural residents is 11020 Yuan (RMB). In 1978, per capita income of urban and township residents was 2.57 times of that of rural residents, while in 2008, the multiplier increased to 3.31. As the level of income determines the level of consumption, due to the low income of rural residents, the consumption level of rural residents is much lower than that of urban residents. The Engel coefficient (the proportion of residents‘ food expenses to living expenses) can be employed to comprehensively evaluate the gap in consumption and living standards between rural and urban residents. From Table 2-4, we can find that, in 2008, due to a large increase in food price, the Engel coefficient of both rural and urban households increased slightly. The Engel coefficient of rural households is 43.7, up by 0.6 percentage points over the previous year, while the Engel coefficient of urban and township households is 37.9, up by 1.6 percentage points. According to the Engel coefficient, the level of living standard and consumption of rural residents in 2007 was lower than that of urban and township residents in 1999, that is to say, the consumption level of rural residents is 8 years backward compared to urban residents.


39

Table 2-4. Per Capita Income of Rural and Urban Residents and the Engel Coefficient (Unit: Yuan (RMB), %) Year

Per capita net income of rural residents

1978

Per capita disposable income of urban and township residents 343.4

Engel coefficient of rural households

133.6

Engel coefficient of urban and township households 57.5

1980

477.6

191.3

56.9

61.8

1985

739.1

397.6

53.3

57.8

1990

1510.2

686.3

54.2

58.8

1994

3496.2

1221.0

50.0

58.9

1998

5425.1

2162.0

44.7

53.4

2000

6280.0

2253.4

39.4

49.1

2003

8472.2

2622.2

37.1

45.6

2005

10493.0

3254.9

36.7

45.5

2007

13785.8

4140.4

36.3

43.1

2008

15781

4761

37.9

43.7

67.7


II. NEW COUNTRYSIDE CONSTRUCTION STRATEGY New countryside construction strategy, put forth by the Chinese government in 2006, is based on the following concerns:

1. The Widening Gap between Urban and Rural Areas In 2005, Chinese GDP amounted to 18232.1 billion Yuan (RMB), equal to 2225.7 billion Dollar, and per capital GDP reached 1730 Dollar. Since then, China has entered into a phase of high frequency of conflicts, among which the one between urban and rural areas is one of the major conflicts that are prone to cause social differentiation and collision. Against this background, the Chinese government puts forth a strategy of the construction of a new socialist countryside, aiming at developing the rural economy and improving the income level of rural residents, thereby relieving the contradiction between urban and rural areas.

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Column 2-1. Objectives and Tasks of Rural Reform and Development

Before 2020 According to the new requirements of the objectives of building a well-off society in an all-round way and the claim of the construction of a new socialist countryside with developed production, well-off life, civilized atmosphere, neat appearance and democratic management, which are advanced by the 17th CPC National Congress, the objectives and tasks of the reform and development of the rural area before 2020 are as follows: the economic system in the rural area is sound; the social and economic development in the rural and urban areas has been integrated as a unified system; obvious progress has been made in modern agriculture construction; the comprehensive production capacity of agriculture rises notably; the national food security and the supply of main agricultural products are effectively guaranteed; net income of farmers is doubled compared to that of 2008, level of consumption is greatly improved, absolute poverty has been basically eliminated; organizations at grassroots level in the rural area have been further enhanced, the system of villagers‘ self-governance has been further perfected, and farmers‘ democratic rights have been effectively ensured; the equalization of public infrastructure between urban and rural areas has been notably enhanced, culture in the rural area flourishes, farmers‘ cultural rights and interests have been more effectively realized, all farmers have rights to good education, the system of basic living allowance and medical and public health becomes more comprehensive, and the social management system has been further improved; a resource-economical and environmentfriendly agricultural production system has been basically formed, human settlement and ecological environment have been notably enhanced, and the capacity of sustainable development has been continuously enhanced. Source: Excerpt from “CPC Central Committee‟s Resolutions on Some Important Issues Concerning Advancing the Reform and Development in the Rural Area”

2. The Necessity of Expanding Domestic Demand in Our Country Before the financial crisis, the problem of apparently insufficient domestic demand already had emerged in China. However, because of the rapid growth of export, this problem has not foregrounded until the financial crisis, which forced China to face the predicament of insufficient domestic demand. In the domestic market of productive consumption, there is a severe lack of infrastructural construction in the rural area of China, while in the domestic market of personal consumption, the rural area whose population is 2/3 of that of the whole country only consumes 1/3 of the goods of the whole country; the daily per capita consumption in the rural area is only about 5 Yuan (RMB), which is almost 1/6 of that in the urban area. Therefore, by building a new countryside, the income of rural residents can be raised, which will in turn increase the consumption capacity of the rural area, and the problem of restrictions on the economic development of China imposed by insufficient domestic demand can be solved.


41

3. China‟s Economic Development Has Reached a Stage of “Industry Supports Agriculture, while the Urban Area Promotes the Rural Area” In 2005, China‘s per capita GDP was 4.73 times that in 1989, and the national revenue exceeded 3 trillion. At the same time, the proportion of agriculture in GDP declined from 25.6% to 12.2%; the proportion of rural to total population declined from 73.79% to 58.24%. According to the international experience, China‘s economy has already reached a stage of ―industry supports agriculture, while the urban area promotes the rural area‖. To implement the construction of new countryside is both the actual need and an urgent task of China‘s present social and economic development.

SECTION 2: GOVERNMENT‟S POLICY OF EXPANDING RURAL DEMAND Affected by the international financial crisis, China‘s economic development calls for the increase in domestic consumption demand, which makes it necessary to stimulate domestic consumption, particularly the rural consumer market. The population in China‘s rural area is more than 700 million, which constitutes the biggest consumption community in the world. Therefore, to develop the rural consumer market, whether for the purpose of coping with the influence brought by the international financial crisis or achieving sustainable development of the Chinese economy, is of great significance. In order to deal with the international financial crisis, the Chinese government has successively put forth package plans and measures to expand domestic rdemand and stimulate the economy. Measures and plans related to the expansion of rural demand are as follows:

1. Construction of Rural Infrastructure The 10 measures to expand domestic demand, promoted by the Central Government in November 2008, propose that the central government budget increases by 34 billion Yuan (RMB) to speed up the livelihood improvement program and infrastructure construction in the rural area. Departments like the Ministry of Agriculture and the Development and Reform Committee have completed the investment plan of newly added agriculture construction projects with a fund of 5.15 billion Yuan (RMB), which will be used in improving the 1

agricultural production facility and farmers‘ living condition . ―The 1st document‖ put forth by the central government emphasizes five key fields: countryside electrical network construction, country road construction, countryside potable water safety construction, countryside methane construction, and countryside dangerous house transformation. The specific measures include: adjusting the countryside potable water 1

The Ministry of Agriculture and other departments formulated the investment plan of newly added agriculture construction projects with a fund of 5.15 billion Yuan (RMB). Source：website of the Chinese Central Government, http://www.gov.cn

42


safety construction plan, increasing the investment and speeding up the construction, incorporating countryside schools, state-owned farms and tree farms into the construction plan; expanding the coverage of electric power network supply, speeding up the project of unified electric network and price between urban and rural areas, increasing the investment in countryside hydroelectric construction, expanding the substitution of small hydropower stations‘ electricity for fuel construction; speeding up the countryside highway construction so that by the end of 2010, basically all towns nationwide and qualified administrative villages in the middle east region will have asphalt (concrete) road, and qualified areas in the west will have roads, increasing the central budget allocation to countryside highway construction in the middle and west areas, establishing the policy-based subsidy system of countryside passenger transportation; increasing investment in the countryside methane construction project, expanding experimental demonstration sites for straw stalk solidification and gasification; developing countryside informatization; speeding up the transformation of national forest areas and shantytowns in reclamation areas, implementing the nomad settling 2 project, and expanding the experiment site of countryside dangerous house transformation .

Source: website of the Chinese Central Government, www.gov.cn) Figure 2-1. The Investment Plan of 5.15 billion Yuan (RMB) in Agriculture Construction Projects (Unit: 100 million Yuan).

2. Direct Agricultural Subsidy In 2009, the central government budget will further increase subsidies for planting crops, for growing superior crop varieties, for purchasing farm machinery, as well as agricultural material synthesis subsidy, with a planned total subsidy of 123 billion Yuan (RMB), which is 20 billion Yuan (RMB) more than that of the previous year. The measure of direct agricultural subsidy will possibly be a long-term policy, and will be unceasingly improved. 2

―The 1st document‖ of the central government (full text). Source ：Xinhuanet, http://www.xinhuanet.com, 02-012009


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The specific measures are: increasing the improved variety seed subsidy, raising the subsidy standard, incorporating paddy rice, wheat, corn and cotton into the subsidy, expanding the scope of superior seed variety subsidy for rape and soybean; increasing agricultural tools and machinery purchase subsidy massively, with a coverage across all the agriculture and husbandry counties/farms/pastures and a projected fund of 13 billion Yuan (RMB) from the central fiscal budget, or a 9 billion Yuan (RMB) increase from last year; increasing the agricultural material synthesis subsidy, consummating the dynamic adjusting mechanism of subsidy, and increasing the subsidy promptly in response to the rise of agricultural material 3 price and the actual sown area of crops .

3. The Plan to Revive Textiles and other Light Industries The small and medium-sized enterprises of light industry provide plenty of job opportunities for rural workers and increase the wage income of rural residents; 70% of light industry occupations and 50% of light industry output value are associated with the intensive processing of agricultural products and by-products, expansion of the agricultural product demand, enhancement of commercial and management income of rural residents; further expanding the state reserve of food and sugar, encouraging local governments to adopt measures like interest subsidy of liquid capital loan and so on, encouraging the enterprises to purchase and store agricultural product so as to solve the problem of agricultural product purchasing and storage; promoting the domestic consumption of textile clothing, actively developing the rural market, increasing sales in remote rural areas, making consumption for 4 farmers more convenient .

4. The Policy of “Household Electric Appliances Going to the Countryside” The Ministry of Public Finance and the Department of Commerce started the ―household electric appliances going to the countryside‖ in December 2007 at the experiment sites in Henan, Shandong, and Sichuan, which provides a subsidy of 13% of the selling prices when farmers purchase color television, refrigerator, mobile phone, and washing machine. The local government assumes 20% and the central government 80% of the subsidy. From December 2008 on, the policy of ―household electric appliances going to the countryside‖ has been launched in 14 provinces and cities, and will last for 4 years. According to farmers‘ wish and the development of the industry, more products will be eligible for subsidy under ―household electric appliances going to the countryside‖, with guaranteed quality and 5 satisfactory post-sale services . In 2009, subsidy capital for the ―household electric appliances going to the countryside‖ allocated by the central government budget is 20 billion Yuan 3 4

5

Report on the work of the government to the Second Session of the Eleventh National People's Congress. Source ：Xinhuanet, http://www.xinhuanet.com, 03-14-2009

―Opinions on Reviving and Readjusting Ten Industries‖. Source：Xinhuanet, http://news.xinhuanet.com.

Source: the information management system of ―household electronic appliances going to the countryside‖, http://jdxx.zhs.mofcom.gov.cn.

44


(RMB), up by 9 times compared with 2008. According to surveys of the Ministry of Public Finance, during the four years of the implementation of the subsidy policy, the sales of household electric appliances is estimated to reach 700 million units, which will contribute 6

2100 billion Yuan (RMB) to domestic consumption .

5. The Policy of “Automobile Going to the Countryside” According to the adjusting and reviving plan of automobile industry announced in January 2009, in 2009 the country will allocate 5 billion Yuan (RMB) to one-off subsidy for the scrap of three-wheeled motor vehicles and low-speed freight vehicles to exchange for light trucks as well as the purchase of miniature passenger buses whose displacement is below 1.3 liters. The subsidy standard is: the subsidy for the purchase of light truck with exchange or miniature passenger bus is 10% of the selling price, while that of the motorcycle is 13% of the selling price. The ―automobile and motorcycle going to the countryside‖ subsidy is jointly funded by the central and provincial governments, with 80% of the subsidy born by the central fund and the rest 20% by provincial fund. Through the price subsidy, the consumption of farm vehicle and mini vehicle will be stimulated in a short time. The fiscal subsidy policy of scrap and renewal of old motor vehicles is adjusted. The subsidy fund of the scrap and renewal of old motor vehicles in 2009 will increase from 600 million Yuan (RMB) in 2008 to 1 billion Yuan (RMB). Through increase in subsidy support, rise of subsidy standard, and 7

speeding up of elimination of old automobiles, consumption can be promoted .

6. The Policy of Logistics Construction in the Rural Area In 2009, central finance will increase special funds for the development of logistics service system in the rural area and the promotion of service industry development. The method of award instead of subsidy and interest discount is adopted so as to arouse the initiative in local and social investment and support the development of a circulation system 8 in the rural area . In 2009, the Department of Commerce plans to build and transform 150,000 countryside stores and 1,000 countryside commodity allocation centers nationwide, covering 70% of villages and towns and 50% of administrative villages, and forming a modern countryside circulation network with urban stores taking the leading role, town stores as the mainstay, and village store as the basis, so as to improve the network‘s allocation ability and increase the commodity allocation rate of countryside stores up by more than 50%. Accelerate 6

The central government budget allocated a subsidy fund of 20 billion Yuan (RMB) to ―household electronic appliances going to the countryside‖. Source: website of the central government, http://www.gov.cn, 03-072009. 7 ―Plans to Revive and Readjust the Automobile Industry‖. Source: website of the central government, http://www.gov.cn 8 The Department of Commerce and the Ministry of Public Finance‘s Announcements of the Fund Management concerning Supporting the Circulation and Expanding Consumption. Source: Ministry of Public Finance, P. R. C., http://www.mof.gov.cnl, 02-05-2009


45

the implementation of the ―countryside business information service project‖, advance the integration of the ―thousands of villages and towns‖ network with the network of supply and sales, postal service, telecommunication and so on, in order to provide services like market information, matching of supply and demand, and so on. Expand the variety of centrally allocated commodity, reduce the operational cost, and guide manufacturing enterprises to develop farmer-oriented products, so as to better satisfy rural residents‘ demand as 9 consumers .

7. The Policy to Guarantee the Supply of Agricultural Means of Production Build suitable large-scale nitrogenous fertilizer process units in places with rich resources, optimize the distribution of phosphate fertilizer, and increase the domestic and foreign prospection and exploration of potassium ore resource. In 2011, the chemical fertilizer output will amount to 62.5 million ton; the proportion of chemical fertilizer produced in places with raw materials will increase to 60%. Improve the central and local (two levels) commercial reserve system of chemical fertilizer and enhance the allocation and transportation of chemical fertilizer in the off season, establish a scientific and reasonable adjusting system that ―reserves in the off season and supplies in the high season‖, guarantee the supply, and stabilize the market price; adjust the product structure of pesticide products, develop those pesticides which are highly effective but minimally poisonous with low residue, promote the centralized production of technical material; unceasingly improve the county and township supply network of diesel oil for agricultural usage, so as to meet the seasonal consumption demand; implement the policy of subsidizing the procurement of 10

agricultural tools and machinery to households as soon as possible .

8. The Policy of Providing Basic Pension, Medical and Healthcare Insurance to Rural People, while Improving Culture and Education Services in Rural Areas New pension policy in the rural area: launch experiment sites of new countryside pension program in 10% of the counties (cities, districts) in 2009. The new countryside pension program adopts a basic model that unifies overall social planning and individual accounts and employs a mixed financing method incorporating personal payment, collectively pooled subsidy and government subsidy. Rural residents who are over 16 years old, not school students, and have not participated in the basic pension plan for urban workers are eligible for

9

The Department of Commerce and the Ministry of Public Finance‘s Announcements Concerning Speeding up the Implementation of ―Market of Thousands of Villages and Towns Project‖. Source: public inquiry system of government information of the Department of Commerce, http://file.mofcom.gov.cn. 10 ―Plans to Revive and Readjust the Petrochemical Industry‖. National Development and Reform Commission, http://zfxxgk.ndrc.gov.cn

46


the new countryside pension program . Those insured rural residents who are more than 60 11 years old and meet the relevant conditions can receive the basic pension . The new healthcare reform package: the government put forth a new healthcare reform package in April 2009, which provides the public with a basic medical and health system as public good. 850 billion Yuan (RMB) will be invested in the implementation of five key reforms of the package, including: Speed up the construction of a basic medical insurance system, establish a basic national drug system, improve basic medical and health services at the grassroots level, promote the equalization of basic public health services, and advance the reform of public hospitals at experiment site. By 2011, the basic medical insurance system 12

will benefit both urban and rural residents . Compulsory education in the rural area: in 2009, the Ministry of Public Finance allocates 66.25 billion Yuan (RMB) to further add to the rural compulsory education funds, which is up by 16.1% compared to last year. Free secondary vocational education with an allocated subsidy fund of 4.5 billion Yuan (RMB), which is up by 115.3% compared to last year, will be gradually implemented. A construction fund of 13.7 billion Yuan (RMB) is allocated to enhance the construction of county centers for vocational education and demonstrative secondary vocational schools, speed up the transformation of junior high-school buildings in the midwest rural areas, and improve the ancillary facilities of countryside boarding schools. A fund of 24 billion Yuan (RMB) is allocated to the financial aid to students whose families 13 are in financial trouble as well as to the student loan .

9. Credit Policy in the Rural Area In 2009, the People's Bank of China will continue to encourage and guide various financial institutions to make use of small guaranteed loans, etc., so as to help capable immigrant workers start their own businesses in or out of their hometown, as well as vigorously develop consumption credit and enliven the consumer market in the rural area. "Overall Working Plan of New Rural Finance Institution 2009 - 2011" issued by the China Banking Regulatory Commission in August 2009 is a plan to establish 1294 financial institutions in 35 provinces (regions, cities, excluding Tibet) and cities specifically designated in the state plan from 2009 to 2011 all over the nation. Among these 1294 financial institutions, 1027 are villages and township banks, 106 loan companies, and 161 mutual-aid countryside fund institutions. Those financial institutions will be mainly established in those areas: counties with a larger agricultural industry than the national average, midwest regions, counties where the coverage of financial institutions is low, poverty stricken counties, and counties with active small- and medium-sized enterprises.

11

Website of the Chinese central government, http://www.gov.cn, 06-24-2009. ―Recent Key Plans of Medical and Public Health Systems (2009-2011) ‖. Website of the Chinese central government, http://www.gov.cn, 04-07-2009. 13 The Ministry of Public Finance, ―Draft of Central and Local Budget in 2009‖, 03-05-2009 12


47

Column 2-2. Experiment of New Rural Pension Reform The national conference concerning the experiment site of new countryside social old-age pension insurance was held in August 2009 in Beijing, which decided that experiment sites of new countryside social old-age pension insurance would be established in 10% of all counties (cities, districts) in 2009, and later gradually spread to other areas so that the entire country will benefit from it by 2020. The basic principles of the new countryside social old-age pension insurance system are: First, start from the actual conditions of the countryside, start from a low level, and insist that the fund raising and treatment standard must comply with the economic development and various other capacities; Second, the responsibility is shared by the individual, the collective as well as the government, and rights and obligations should be matched; Third, combine government guidance and farmers‘ will, direct all the farmers to participate; Fourth, launch experiment sites first then gradually expand. The project of experiment sites of new countryside social old-age pension insurance mainly includes two aspects; one is to provide old-age pension, which is a combination of the basic pension and individual account retirement pension, with the minimum standard basic pension entirely born by the central public finance. The other is to employ a fund raising means that unifies individual payment, collective subsidy and government subsidy, with local subsidy for farmers‘ individual payment. The central finance provides a subsidy for the total amount of minimum standard basic pension in the midwest area, and 50% of the total amount of minimum standard basic pension in the east area at the same time, and guarantees that farmers covered by the old-age insurance program in the same area will receive the same amount of basic old-age pension in the future, so as to manifest the fundamentality, fairness and widespread benefits of the insurance system. Rural residents who are over 16 years old, not school students, and have not participated in the basic old-age pension plan for urban workers may participate in the new countryside old-age pension insurance program. Insured rural residents who are more than 60 years old and meet the relevant conditions can receive the basic old-age pension. On September 4, 2009, the State Council put forth the guideline on the experiment sites of new countryside social old-age pension insurance, which set the basic old-age pension for each person at 55 Yuan (RMB) a month. The local government may raise the standard of basic oldage pension according to the actual situation, and more basic old-age pension can be distributed to those rural residents who have paid for a long time. The extra pension payments should be born by the local government. Senior citizens over 60 years old with rural hukou and have not participated in the basic old-age pension plan for urban workers may receive the pension every month. Rural residents who participate in the new countryside social old-age pension insurance should pay insurance premium according to the stipulation. Currently the insurance premium is graduated in five levels: 100 Yuan (RMB), 200 Yuan (RMB), 300 Yuan (RMB), 400 Yuan (RMB), and 500 Yuan (RMB) per year. The local government can add other premium levels based on the actual situation. The national government will adjust the premium standards according to the changes in per-capita net income of rural residents. The insured person can independently choose the premium standard. The more premium they pay, the more insurance pension they will receive. At the time of implementation of the new countryside social old-age pension insurance, rural residents who are 60 years old and above and did not participate in the

48


basic old-age pension plan for urban workers can get the basic old-age pension monthly for free, but their qualified children should join the program and pay the insurance premium. For those who are expecting pension payments within 15 years, payment for the premium should be made annually, and makeup payments for the previous years are allowed, but with a total not exceeding 15 years. For those who can get the pension after 15 years, payment for the premium should be made annually for no less than 15 years. Source: 1. “The Conference on the Experiment Site of New Countryside Social Old-age Pension Insurance Held by the State Council on 18th”, http://www.gov.cn, 08-18-2009. 2. “The State Council Puts forward Guidelines on Experiment Site of New Countryside Social Old-age Pension Insurance, and Encourages Farmer to Get Insured”, http://www.xinhuanet.com, 09-042009.

SECTION 3: THE PROGRESS AND PROBLEMS OF IMPLEMENTING THE NEW POLICIES OF EXPANDINGRURAL DEMAND Until the first half of 2009, most of the Chinese government‘s policies to expand rural demand have been issued and actual effect can be traced. According to the statistical data from the National Bureau of Statistics, cash income per capita of Chinese rural residents is 2733 Yuan (RMB) in the first half of 2009, with an increase of 8.1% over that of the same period of last year; total retail sales of consumer goods at and below the county level increase by 16.4%, and the growth rate of rural consumption exceeds that of cities successively for six 14 months in the first half of the year . The contribution of countryside consumption to total consumption shows an upward tendency, which indicates that certain progress has been made in the implementation of the government‘s policy to expand domestic demand in rural areas. But in terms of the actual situation, some problems still exist in the implementation of these policies.

I. The Operation of the Policy to Expand Rural Demand By the end of 2008, the number of counties (cities, districts) where the new rural cooperative medical care system has been established amount to 2792 throughout the country, with a cooperation rate of 91.5%, and the number of service items of family planning at the grassroots level amount to 1,140; the transformed area of junior high-school building sums approximately to 1.5 million square meters, and the constructed area of secondary vocational school buildings amounts approximately to 900,000 square meters; the planned allocation to direct grain production subsidy, synthetic agricultural material subsidy, improved variety of seeds subsidy and agricultural tools and machinery purchase subsidy is 111.6 billion Yuan (RMB); 31 provinces (cities, regions) have established the rural subsistence security system,

14 Source: National Bureau of Statistics of China, 07-24-2009.


49

15

which covers 43,060,000 rural residents . By the end of April 2009, the central government investment project has solved the drinking water security problem for approximately 14.6 million rural population; 1.6 million rural households have started construction of methane for rural household usage; about 20,000 kilometers of countryside driving road and more than 40,000 kilometers of countryside electrical network have been completed; about 6500 items of medical and health service have been established. Up to June 2009, 7.81 billion Yuan (RMB) has been distributed as farm machinery purchase subsidy nationwide, the number of subsidized farm machines and tools surpasses 1.79 million units, the number of rural households who have benefited from the project exceeds 1.67 million, the rate of the implementation progress reaches 78.1%; the pre-allocated subsistence security allowance subsidy fund in the urban and rural areas is 27.447 billion Yuan (RMB), basic old-age pension insurance subsidy fund is 70 billion Yuan (RMB), special pension and subsidy fund for special-care recipients is 9.85 billion Yuan (RMB), and a lump sum living allowance of 9.067 billion Yuan (RMB) is granted to recipients of the subsistence security allowances. According to statistics from the China Banking Regulatory Commission, from the end of 2006 to the end of June 2009, 118 new rural financial institutions have gone into operation in the country, among which 100 are village and small township banks and 7 are loan companies. Those financial institutions have collected a capital of 4.733 billion Yuan (RMB) and deposit of 13.1 billion Yuan (RMB), and the loans issued to rural residents total 5.5 billion Yuan (RMB). The development of new rural financial institutions has effectively shortened the financial gap between urban and rural areas, and improved financial service in the rural area; The financial support toward the reform of rural credit cooperatives has been basically put in places, up to the end of June 2009, special bills of 159.60 billion Yuan (RMB) have been cashed for rural credit cooperatives in 2,296 counties (cities) with a cashing 16 progress rate of over 95%, and the issued special loans amount to 1.5 billion Yuan (RMB) . The policy of ―household electrical appliances, farm machinery, and automobiles (motorcycles) going to the countryside‖ and the halving of tax on passenger vehicle purchases with displacement of 1.6 liters and below have promoted consumption remarkably, among which the automobile industry is the most prominent one, for which nationwide production in the first 7 months accumulated to 7.11 million, up by 20.2% over the same period last year, 17 and the production and sales volume exceeded 1 million for five successive month . Since December 2007, notable successes have been achieved at the experiment sites of ―household electric appliances going to the countryside‖ in Shandong, Henan, and Sichuan provinces, in 2008, the sales volume of household electric appliances increased by 40% over the same period last year, and the growth rate increased by 30 percentage points. From Table 2-5, we can see that ―household electric appliances going to the countryside‖ was officially launched nationwide since February 2009, and the sales volume of household electric appliances in the countryside rose from 338,000 units in January to 2.921 million units in June, with a growth rate of 764.2%; the sales value also rose from 479 million Yuan 15

The investment project of the central government runs smoothly. 214,000 low-priced apartments for rent have been constructed. Source: China Internet Information Center, http://www.china.com.cn, 05-27-2009 16 ―Report on the Implementation of Monetary Policy (the Second Quarter of 2009)‖. 17 ―Automobile Going to the Countryside‖ Policy Stimulates the Sales and Production. Source: Website of Market Research in China, http://www.cu-market.com.cn, 8-13-2009

50


(RMB) in January to 5.481 billion Yuan (RMB) in June, with a growth of more than 10 times (see Table 2-5). Due to the guaranteed post-sale service and a subsidy of 13% of the selling price, the project was warmly received by farmers. Table 2-5. Statistics of the Sales of “Household Electric Appliances Going to the Countryside” form January to June in 2009 Month January 2009

Sales Volume （Unit） 338135

February 2009

875390

March 2009

1484517

April 2009

1763304

May 2009

2227725

June 2009

2921096

Total

9610167

Sales Value （Yuan (RMB)） 479，418， 972.40 1,305，471， 067.66 2,238，428， 402.10 2,778，494， 194.41 3,946，132， 921.07 5,481，072， 926.46 16，229，018， 484.10

Proportion of Sales Value （%） 2.95 8.04 13.79 17.12 24.32 33.77 100

Source: Information Management System of ―household electric appliances going to the countryside‖, http://jdxx.zhs.mofcom.gov.cn

II. Problems at the Present Stage of Implementation of the Policy to Expand Rural Demand However, problems also exist in the operational process of the policy to expand rural demand. For example, in the process of ―household electric appliances going to the countryside‖, some sellers infringed the relevant rules and cheated the consumers by faking it. Therefore, the Department of Commerce and other departments jointly promulgated the measures of ―cracking down on counterfeit goods‖ on July 13, 2009, in order to regulate the household electric appliance market and protect the interest of consumers. Moreover, in terms of the construction of countryside methane, road, water safety, electricity, and so on, too much importance has been attached to quantity rather than quality. As a result, some completed facilities can hardly be used because of poor quality. With regard to funds invested to benefit farmers, problems of waste, leakage, corruption and so on also exist. Putting together situations in different areas, reasons for these mentioned problems can be summarized as follows.


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1. Governments at the Grassroots Level do not Implement the Policy Effectively Governments at the grassroots level are the main executive agents of the policy formulated by the central government and governments at all levels, and should bear the most direct responsibilities. The limitations of governments at the grassroots level will impede policy implementation. The quality of some cadres at the grassroots level in villages and towns is relatively low. Thus, they, on the one hand, do not have an adequate understanding of the regulations and policies, which leads to insufficient publicity, while on the other hand it is hard for them to entertain the idea of administration according to law, resulting in the frequent appearance of the phenomenon of power substituting law and people overruling law in policy execution. Moreover, due to information asymmetry between the local government and the central government, discrepancy may exist in their departure point, available resources, utility and objectives in policy formulation, which may lead to discrepancy, perfunctoriness, or even resistance in policy implementation by governments at the grassroots level, thereby negatively affecting the effectiveness of the policy.

2. Farmers are not Proactive Enough in Policy Implementation Whether the execution of rural policy is successful or not also depends on its popularity with farmers and effective communication between policy subjects. If farmers are not proactive enough about the implementation of the policy, the evaluation on the result of rural policy implementation will be more difficult. On the one hand, the basic rural unit of livelihood and production is family in China, which makes it impossible for the central government to comprehensively understand each farmer's wish, and this kind of information acquisition is of great cost. All of these have led farmers to be passive in the central government‘s policy formulation process. On the other hand, in the face of poor or non-conforming enforcement by governments at the grassroots level of policies in favor of farmers formulated by the central government, farmers, in many cases, do not have a say, nor do they have access to an effective channel for feedback, which will also impede the implementation and execution of the policy. In addition, because of farmers‘ low education level and information asymmetry, they do not have an adequate understanding of many specific policies, thus they can not fully enjoy the preferential policy of the government.

3. Insufficient Material Conditions for Implementing the Policy The continuous increase of farmers‘ income and the improvement of rural infrastructure is the foundation of expanding rural demand and the consumption of rural residents, but these problems can not be solved in a short time, which constrains the stability and continuity of the policy to expand domestic demand. Although governments of all levels have been continuously building up investments that will benefit farmers, the total fund is still severely insufficient, the rural social security system is still deficient, and the rural infrastructure is still wanting investment. These problems manifest themselves in the following aspects: the investment to rural compulsory education is insufficient; the rural medical service and health care system is still facing the problems of insufficient investment, low efficiency, lack of security, weak public health and so on, and pressure on the medical front is ever-mounting; Supply is still insufficient in the construction of small farmland irrigation and water conservancy, the construction of farm road, the dissemination of agricultural science and technology, the improvement of socialized rural service system, and the spread of market supply and demand information relating to agricultural products; the agricultural insurance system and the rural social security system still have not been completely established, which leads to tremendous market and natural risks against agriculture.

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Column 2-3. Scrap Rate of Methane-generating Pits Worth Hundreds of

Millions Yuan (RMB) Exceeds 90% in the Rural Area in Heilongjiang Province ―China Economic Weekly‖ Reporter Cui Xiaolin, Ma Yuzhong/Heilongjiang, reported in Beijing: the rural household methane project supported by the national debt has been advanced since 2003 in the nation. It is listed as ―core technology to solve the pollution problem in the rural area‖ by the Ministry of Environment, ―reproducible clean energy in the new countryside‖ by the Ministry of Agriculture and ―comprehensive technology of the construction of a new socialist countryside‖ by the leading group of the central government in building a new countryside. The central government will subsidize 4/5 of the construction cost of a methane-generating pit in the rural area, which is definitely a beneficial project for farmers who are direct beneficiaries. But according to a survey published by ―China Economic Weekly‖, the scrap rate of completed household methane-generating pits exceeds 90% in many villages in Heilongjiang Province, and the project leaves an extremely bad impression on farmers there. The ―Working Report of Energy Construction of the Province in 2008‖ provided by the general energy office of the provincial agricultural committee reads, ―in 2008, 110,000 household methane-generating pits were built in the province, and the household methane project has covered all the cities (municipalities) in the province, and has been launched in 1,549 villages in 83 counties (cities, districts); in 2008, we received various national rural energy construction funds of 177 million Yuan (RMB), special funds at the provincial level of 108 million Yuan (RMB), aid-to-the-poor funds from the cities and counties of more than 40 million Yuan (RMB), and funds raised by farmers and enterprises themselves of 290 million Yuan(RMB), all of which have set new records.‖ But in the same report, something is really disappointing: on the one hand, we see 110,000 newly constructed methane-generating pits and a total of special funds exceeding 600 million Yuan (RMB) while, on the other hand, a large number of methane-generating pits are scrapped. On August 12th, the reporter of ―China Economic Weekly‖ saw at the Quality Controlling Bureau of Heilongjiang Province a document titled ―Investigation Report on the Construction and Usage of Brick and Concrete Household Methane-Generating Pits in the Rural Area of the Province‖, in which reasons for the scrap of methane-generating pits are listed as follows: 1.

2.

The construction is not in compliance with the technical standard, which leads to low quality of the project. Problem of inferior materials and shoddy work is prevalent in the project and somebody even use red bricks to build methane-generating pits. The reason for this lies in self-interest. In order to gain huge profits, the construction unit and some of the government officials collude to line their pocket with the invested funds, so that less than a half of the funds invested by the country and the province have actually been spent on the project. Driven by local interest. Although some local official were perfectly aware that largescale construction of red brick methane-generating pits is not suitable for their locality, they still construct several methane-generating pits in order to deal with inspection of their superiors, thus creating the illusion that the brick and concrete methane-generating pit is suitable for the entire province.

Building a New Countryside: The Breakthrough Point of Stimulating… 3.

4.

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Instead of actually carrying out the work under the instructions of the provincial energy office, the agricultural committees and energy offices, even some leaders in a few counties and cities, illegally obtained, diverted, appropriated and even secretly divided the funds of the project by making up the roster, which leads to fund insufficiency and the untruthful construction reports. Some energy office staff in a few cities and counties embezzled the project funds by using even viler method.

Source: http://news.QQ.com, August 31, 2009 00:47.

4. Deficiencies of the Surveillance and Management System The central government‘s policy to expand rural demand involves the interests of many groups, which include the policy formulating organization, the implementing organization and the target group. Because of the imperfection of the surveillance and management system at various levels, decisions by different groups out of their own interests have led to discrepancies between the policy implemented by the government at the grassroots level and the policy formulated by the central government. At present, there exists the problem of the absence of a management and surveillance mechanism in the implementation of the central government‘s policy. The absence of a management mechanism is manifested in a low concentration rate of investment for assisting agriculture and low efficiency of the fund for assisting agriculture. The absence of a surveillance mechanism is manifested in the asymmetry between fund allocation and its management and surveillance, the ignorance of management and surveillance, the imperfect evaluation system of fund utilization and so on. Moreover, beneficiary groups like the farmers are comparatively disadvantaged against the executing agency, and can be effectively supervised only with great difficulty. Therefore, a sound surveillance and management mechanism must be established to smooth the implementation of the central government‘s policy in the rural area.

SECTION 4: GOVERNMENT‟S NEW MACRO POLICIES‟ INFLUENCE ON NEW COUNTRYSIDE CONSTRUCTION To cope with the international crisis, the Chinese government has launched packages of economic stimulus plans since November 2008. With the rural economy as an essential part of the national economy, the government‘s macro policies will absolutely have some influence on new countryside construction and expansion of rural consumption. Nevertheless, it is difficult to judge the exact influence due to limited time. Here, some simple deductions will be made according to the content of those policies and previous experience.

I. Proactive Fiscal Policies‟ Influence on New Countryside Construction Central finance increases investment by 100 billion Yuan (RMB) in the fourth quarter of 2008, which is entirely distributed in the first quarter of 2009; meanwhile, in the first half year of 2009, 280 billion Yuan (RMB) is dispensed, making the total investment 380 billion

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Yuan (RMB), among which funds for rural civil engineering and infrastructure together add up to 104.3 billion, or 27.4% of the total. Thanks to the investment, 19.60 million rural population‘s problem of safe drinking water has been solved; 1.78 million rural methane projects have been completed; 75 thousand miles of rural network lines have been upgraded. The above-mentioned data show that proactive fiscal policies are making a positive impact on new countryside construction. In addition, out of the 4,000 billion which is the core of the proactive fiscal policies, 370 billion, or 9.25%, is targeted at civil engineering and infrastructure such as rural water, electricity, road, gas, and housing; massive investments in other aspects will bring some indirect and beneficial impact, for instance, extensive infrastructure construction and post-disaster reconstruction will enlarge provide migrant workers more job opportunities; energy conservation and emission reduction will improve rural living conditions; investment and expenditure in culture, hygiene, education, and social security will bring positive impact on rural residents and children of rural migrant workers in cities. However, judging from the implementation of the proactive fiscal policies of 4,000 billion Yuan (RMB), we can say that they are urban-oriented. Under recent proactive policies, the urban-oriented investment of 4,000 billion Yuan (RMB) may crowd out rural fixed asset investment. Although it seems that the amount of rural fixed asset investment in absolute terms is increasing continuously in 2009 and the following years, its proportion of it to overall social fixed asset investment remains decreasing.

II. Loose Monetary Policy‟s Influence on New Countryside Construction Under the stimulus of loose monetary policy, credit supply of China‘s financial institutions is proliferating. During the first half of 2009, aggregate loans increase by 7,370 billion Yuan (RMB), or 1.5 times of the amount of newly-increased loans of year 2008. Nevertheless, according to the statistics, only a small fraction of the fund streams to rural economic areas, and medium and small enterprises still have limited access to credit. A large part of the fund flows into large state-owned enterprises and state-owned monopoly enterprises, even into the real estate market and the stock market, which leads to assets price inflation. In the first half of 2009, the Shanghai Stock Exchange Composite Index rises from 1,641 to 3,478, registering the largest growth rate in the world; at the same time, housing price in China has picked up from the downturn in the second half of last year. In July, housing price in 70 large and medium cities in China increases by 1.0% over that of the same period of last year, with an increase of 0.8 percentage points over that of June; increase in housing price over June this year is 0.9%, which is 0.1 percentage points higher than that of June 18 . Increase in asset price is conducive to wealth expansion for urban residents with capital income, yet it at the same time reduces the relative wealth of rural residents with little capital income. In addition, as credit and loan balloons, the evidence of inflation is more and more obvious. Once inflation occurs, it will represent a substantial plunder of farmers‘

18

National Statistics Bureau, 10th August in 2009. ―The operation situation of the real estate market in China from January to July in 2009‖, China Information News.


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wealth. Therefore, loose monetary policy has not brought positive impact on new countryside construction yet.

III. National Industrial Policies‟ Influence on New Countryside Construction The State Council issued a series of plans for reviving and adjusting top ten key industries, including steel, automobile, ship, petrochemical engineering, textile, light industry, nonferrous metal, equipment manufacturing, electronic communication and logistics. However, agriculture is excluded from the list. Thus, the national industry reinvigorating plan does not have a direct positive impact on new countryside construction. However, from the perspective of indirect influence, it does. This is manifested mainly in the fact that industry reinvigorating policy promotes employment growth that further increases rural residents‘ wage income, which is the main source of rural income increase in recent years. Based on the statistics from the National Statistics Bureau, rural population going out for work has gone up in the first half of this year. Job opportunities in cities and towns increase by 5.69 million in the first half of the year, which achieves 63% of the target of the whole year. By the end of the second quarter, the population of rural labor out for work has risen by 3.78 million compared with that of the first quarter, or an increase of 2.6%. Though agriculture is not included in the industry reinvigorating plan, it does not mean that agriculture does not need reinvigoration, because unfavorable factors against agriculture‘s sustainable and stable development like aging and lagging agricultural facility, low level of agricultural technology, soil degeneration, etc. have not seen fundamental improvement. The government can not ignore agricultural input and construction despite good crops for five successive years. The drought from south to north in China this year is a living example.

IV. The Regional Reinvigorating Plan‟s Influence on New Countryside Construction The State Council‘s regional reinvigorating plan followed the 4,000-billion-Yuan (RMB) investment and the top ten industries reinvigorating plan. In the first half of 2009 alone, the State has already approved many regional reinvigorating plans for Haixi Area, Hengqin Island, the economic belt along the coast of Jiangsu, the Guanzhong—-Tianshui economic zone development plan and the economic belt along the coast of Liaoning. Through the regional reinvigorating policy, the Chinese government hopes to cultivate the designated areas into new growth belts of our country‘s next round of economic and social development. The approved or to-be-approved reinvigorating plans are all directed to economically backward areas or underdeveloped provinces in the coastal areas, which provides a good opportunity for the economic development of the targeted areas. However, in terms of the content of existing regional reinvigorating policies, the main focus of it is still the cultivation of local leading industries and pillar industries, which has no direct positive impact on agriculture and new countryside construction, but is beneficial for enlarging local farmers‘ non-agriculture employment, enhancing local economic strength, and building up a material basis for new countryside construction.

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To sum up, the Chinese government‘s policies for boosting rural consumption are both necessary and correct for coping with the international financial crisis. Though there are some problems in the process of implementation, the results are obviously positive on the whole. To sustain those positive results, it is not enough to solely rely on the existing policies, but other matching macro policies are much needed. More fundamentally, the national income distribution pattern has to be adjusted and farmers‘ income increased, which constitutes the foundation of expansion of rural domestic demand. Fortunately, the Chinese government has realized this, and the National Income Distribution Reform Suggestions drafted by the Development and Reform Commission has been handed to the State Council for a new round of advice-seeking. As is known to us, the core of it is to deepen the income distribution reform, to increase the proportion of household income to national income, and to improve the proportion of laborers‘ remuneration in primary distribution. Translator: Yang Ke (SUFE) English Version Editors: Xiao Rong (SUFE), Chen Jinzhu (Harvard)

REFERENCES [1]

Rural Development Institute of Chinese Academy of Social Sciences, Rural Social Economic Survey Department of National Statistics Institute, April 2009. Chinese Rural Economic Situation Analysis and Prediction 2008-2009. Society and Science Documents Press. [2] Gao Huiqing, Xiong Yizhi, Hu Shaowei, 2008. World Financial Crisis and Its Impact on China (Chinese)[J]. Studies of International Finance, 11, 21-25. [3] Chen Xiwen. Why Do We Put forward New countryside construction Recently [B]. www.jgny.net/news/200604/40633.htm [4] Li Zheng, 2009. Reflections on Startup of Current Rural Consumption Market(Chinese) [J]. Price Theory &Practice, 2, 69-70. [5] Research Team on Rural Consumption Issue, 2007. The Situation of Countryside Consumption and Relevant Suggestions (Chinese)[J]. Finance & Trade Economics, 2, 69-73 [6] Cai Yuezhou, 2009. Economic Stimulus Package and Start-up of Rural Consumption in China: Empirical Study Based on the Decomposition of Rural Household Income(Chinese) [J]. Journal of Finance and Economics, 7, 6-11. [7] Cheng Yi, 2006. Discussion on Obstacles and Solutions of Implementation of the Policy Peasant, the rural areas and Agriculture(Chinese)[J]. Truth Seeking, 3, 83-86. [8] Luo Ying, Yu Yanfeng, Daitian,2009. Problems and Solutions for Rural Policy Establishment and Implementation(Chinese)[J]. Rural Economy, 5, 20-22. [9] Yin Ping, Tian Weimin, 2007. Discussion on Improvement of China‘s Fiscal Policies to Support Agriculture(Chinese) [J]. Rural Economy, 7, 94-95 [10] Wang Feng, 2009. Developing Situation of Chinese Rural Consumption Market, Constraints, and its Outdoor Development Countermeasures(Chinese)[J]. Rural Economy3, 66-68.


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[11] Rural Development Institute of Chinese Academy of Social Sciences, Rural Social Economic Survey Department of National Statistics Institute, 2002. Chinese Rural Economic Situation Analysis and Prediction 1997-2002. Beijing, Society and Science Documents Press.




FACTS BEHIND FIGURES: PRELIMINARY THOUGHTS ON BUILDING A NEW COUNTRYSIDE AND STIMULATING RURAL DEMAND IN CHINA Hu Rong * This chapter briefs the readers on the agricultural economic development in rural China. It gives particular attention to China‘s concept of building a new socialist countryside, and China‘s policies of expanding rural demand. Agriculture has been an important sector in national economy. The issues of agriculture, rural areas and farmers (referred to as the ―three rural issues‖) are closely related with China‘s economic development and social stability under the current economic situation. The position given to this chapter in the entire book shows that building a new countryside is of vital importance to promoting steady and sustainable development of China‘s national economy. This drive is also of special significance to stimulating rural demand and expanding domestic demand. Using numbers and figures, the authors of this chapter introduce the role of building a new countryside in national economy. They also detail the policies of expanding rural demand. They further brief the readers on the status of implementation of these policies, and the problems associated with carrying out these policies. They analyze the impact of government‘s macro-policies on building a new countryside. All data show that steady and sustainable development of China‘s economy and the realization of domestic demand expansion are closely related with agricultural revitalization, rural development and rising affluence in farmers. The authors point out that despite the overall good trend of China‘s national economy and improved rural economic development in recent decade, agriculture obviously lags behind the development of other industries. The gap in development between agriculture and other industries is getting larger. The continuous widening in income disparity between urban and rural residents is the major obstacle to solving the ―three rural issues‖. The income difference

* Hu Rong, Ph.D. in Agricultural Economics, Texas A&M University， Associate Professor, Research Institute of Economics and Management, Southwestern University of Finance and Economics

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also restricts the sustainable growth of national economy, and directly affects social stability and harmony. At the end of 2006, the 5th Plenary Session of the 16th Central Committee of the Communist Party of China put forward the development strategy of building a new countryside. Government officials at all levels as well as scholars showed great interest in this strategy. There appeared a plethora of research and exploration of this topic in terms of theory and practice. As the world economy falls into recession, there are increasing risks as a result of the international financial crisis. Therefore, it is timely and appropriate to launch the strategy of building a new countryside which aims at promoting agricultural production and rural economic development, and increasing farmers‘ income. It is the strategic option for China to accelerate economic development by expanding domestic demand and promoting economic growth under the circumstances of international financial crisis. And furthermore, the strategy of building a new countryside naturally becomes the breakthrough point for stimulating domestic demand, particularly rural demand. The reform and opening up policy incorporates China with the world economy. Any changes in China‘s agricultural development and farmers‘ income growth will have impact on international agricultural trade. Any changes in China‘s agricultural production and rural consumption will bring about fluctuation to the world agricultural market (Lohmar et al., 2009). Not only the Chinese government and scholars give due emphasis to China‘s agricultural economic reform, but international organizations and scholars also show great interest in it. They have done extensive research on China‘s rural policies and the impact of these policies on China‘s agricultural economy. Examples include but not limited to the research on the price reform in grain market and market integration (Rozelle et al., 1997), rural labor market (DeBrauw et al., 2002) and rural income growth (Gale and Park, 2002). The researchers who closely study China‘s agriculture at Economic Research Service of the United States Department of Agriculture pointed out that despite the tremendous changes in China‘s agricultural economy after 30 years reform and development, China‘s rural economic development still face many problems. In addition to the scarcity of rural farm land and water resources as well as difficulties in agricultural technology extension, other problems difficult to solve are developing modern marketing mechanism, infrastructure construction, and increasing farmers‘ income (Lohmar et al., 2009). Farmers‘ income growth falls below that of the urban residents. There is a huge income difference between urban and rural residents. International scholars hold that there is a need to stimulate farmers‘ income growth, which in turn will impact China‘s agricultural structure and the competitiveness of its agricultural products in international market (Gale and Park, 2002). Because of the low level and slow growth of farmers‘ income, rural residents consume over 50% less than urban residents, though rural population in China constitutes the majority in the total population of the country. At present, the level and structure of consumption of rural residents are much less developed than those of urban residents. With social progress and economic development, consumption needs of rural residents have dramatically changed. They are no longer satisfied with the consumption style at the subsistence level. They are eager to have the consumption style of more luxurious content. They set higher requirements for the variety, quality and service of the commodities. Rural markets have greater potential. The environment for consumption has been improved compared with the one in the early years.

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The Chinese government issues specific policies for expanding rural demand. These policies include those related with infrastructure construction, public service system, agricultural subsidy, and rural credit system. The improvements in social protection system and infrastructure will solve the most concerned issues for rural residents such as affordability of education, healthcare, pension, and adequacy of clean water, electricity, road and gas supply. These policies also improve the living environment and the conditions for agricultural production. They further enhance the farmers‘ willingness to consume and confidence of consuming. The project of ―bringing-what-farmers-need-to- the-countryside‖ makes household electric appliances and vehicles affordable to rural residents. It enables rural residents to enjoy the cultural life, leisure activities and living conditions available only to the urban residents in the past. Given the geographical locations, geological conditions and natural resources of the large rural areas, China should develop its agriculture into a sector full of efficiency, modernization and environment-friendliness, which will bring about growth in farmers‘ income, and result in stable and sustainable agricultural economy. The areas with appropriate conditions could start industrialized agricultural production, establish specialized economic cooperatives, and set up standardized production bases. There is a need to assist and set up ―dragon head‖ enterprises of agricultural production and processing which have local characteristics and resource advantages. It is also necessary to speed up the process of urbanization, and remove the restrictions of resident permit system which will allow rational mobility of rural labor so that they could work and live in the cities. This will not only raise their income, improve their economic wellbeing of their families, but also will provide sufficient labor for the industry and service sector in the cities. These measures will transfer the surplus farm labor smoothly to non-agricultural jobs in the cities (Huang et al., 2008). Furthermore, it is essential to provide information, technology and training to the farmers who stay in production and processing in the rural areas. It is also essential to help them improve productivity and find markets for their agricultural products. The application, extension and transfer of agricultural technologies will greatly improve productivity and lower costs, which will be the key to enhancing competitiveness in the market. We should learn the experience from other countries in terms of industrialization of agriculture, supply chain management, food safety system, rural community development and small town construction. For example, many developed countries implement supply chain management for agricultural production and processing. Processors establish long term contracts with farmers by which processors have steady supply of the inputs and guaranteed quality. On the other hand, farmers reduce the risk in income by securing their profits in the contract arrangement. Supply chain management makes it possible to use financial resources effectively and to share technology. It becomes easy for farmers to have access to credit and loans, and technical assistance (Gale and Park, 2002). China has already started a production model of ―company plus farmers‖. This model has resulted in some effects. However, it is different from the contract production in other countries in that government involvement can be seen more or less in the Chinese model. Production and processing are not totally privatized in the Chinese model (Frederick and Gale, 2003). International organizations and companies have rich experience in assisting developing countries and exploring overseas markets. China‘s agriculture should take active steps to seize opportunities to participate in international cooperation and joint venture projects. These international projects could accelerate local economic development.

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Due to the small amount of land available to each farmer and the large number of small farms, intensive agriculture on large scale is not readily doable. The less intensive farming and processing cannot meet the demand of large super markets, hotels and luxury restaurants for products with consistent quality (Frederick and Gale, 2003). Small-scale production and marketing in rural China do not ensure food safety and quality (Lohmar et al., 2009). Many food products are still produced in small workshops not well-equipped. There is no quality guarantee of the inputs and final products, which in turn lead to health concerns in rural consumers with low income. If production, processing and distribution are vertically integrated, the food supply chain ―from farm to table‖ will realize economies of scale. Integration will also ensure product quality. Moreover, distribution system and channels will be more efficient and smooth. As mentioned by the authors of this chapter, there still exist many problems in building a new countryside at present. For example, there is no adequate publicity of this campaign. Local governments do not implement the policy effectively. Leaders in the townships and villages have limitations in understanding the policies, exercising proper leadership and identifying the problems. They may only see trees instead of the forest. They may have simple working style or even lack of enthusiasm at work. Farmers are not proactive enough. Due to their limited knowledge and education, they do not have the same understanding of the policies as the government officials and scholars. Farmers at different age and in different regions have different needs. Leaders at the grassroots level are farmers themselves. But they have different opinions and understanding of the policies from the ordinary farmers. Therefore, they differ in the effectiveness and outcomes when implementing the policies of expanding domestic demand. Other problems identified by the authors include insufficient material conditions for implementing the policy, and the imperfection of surveillance and management system. The Chinese government has attached great importance to developing national economy. It shows great concern about the issues of agriculture, rural areas and farmers. However, there are many problems and challenges in the rural areas. Although market-based mechanisms can solve some of these problems, it is not easy and takes no short time to establish these mechanisms (Lohmar et al., 2009). Research and practice are needed. Since the strategy of building a new countryside was carried out not long ago, it is inevitable to experience biased understanding of the policies and ineffectiveness in implementing them. Governments and scholars should listen to the voices of the farmers, and communicate farmers‘ needs and wishes to the higher level. They should promptly solve the problems with which farmers are concerned most. Governments and scholars also need to make adjustment to the specific implementation plans according to local conditions. There is a shortage of research from farmers‘ perspective on building a new countryside. Leaders at the grass-roots level may only report good stories to the upper level government. Therefore, it is necessary for the leaders and researchers to make field trips to rural areas to get first hand information. This helps to learn the real thoughts and needs of the farmers. If space permits, this chapter could include detailed discussion of the difficulties and suggestions of expanding rural demand. It could also analyze the difficulties and breakthrough points of expanding rural demand from farmers‘ perspective. It could also give more discussion about the townships and villages which do a good job in expanding domestic demand. If supplied with more case studies and international views, this chapter could provide more information and enlightenment to the readers. It is a long-term and difficult task

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to turn the huge rural market potential into consumption reality. We anticipate more problems to emerge during the process. This is a great mission to fulfill. And there is a long way to go. Common concern and concerted efforts are demanded from the governments and all walks of life.

REFERENCES DeBrauw，A., J. Huang, S. Rozelle, L. Zhang, and Y. Zhang. "The Evolution of China's Rural Labor Markets during the Reforms." working paper 02-003, Department of Agricultural & Resource Economics, University of California at Davis, 2002. Frederick, H., and F. Gale. ―China‘s Growing Affluence: How Food Markets are Responding.‖ Amber Waves, U.S. Department of Agriculture, Economic Research Service, June 2003. Gale, F., and A. Park. ―Can Rural Income Growth Accelerate?‖ China‟s Food and Agriculture: Issues for the 21st Century, F. Gale, F. Tuan, B. Lohmar, H. Hsu, and B. Gilmour (eds.), AIB-775, U.S. Department of Agriculture, Economic Research Service, 2002. Huang, J., K. Otsuka, and S. Rozelle. ―Agriculture in China‘s Development.‖ China‟s Great Economic Transformation, L. Brandt and T. Rawshi (eds.), Chapter 13, New York: Cambridge University Press, 2008. Lohmar, B., F. Gale, F. Tuan, and J. Hansen. ―China‘s Ongoing Agricultural Modernization Challenges Remain After 30 Years of Reform.‖ EIB-51, U.S. Department of Agriculture, Economic Research Service, 2009. Rozelle, S., A. Park, J. Huang, and H. Jin. ―Liberalization and Rural Market Integration in China.‖ American Journal of Agricultural Economics 79(2): 635-642, May 1997.



Chapter 3

SUPPORTING AGRICULTURAL AND RURAL DEVELOPMENT: THE DILEMMA AND REFORM IN RURAL FINANCE Zeng Xuewen*, Qin Jianguo, Peng Linlin and Zhang Yifu ―The Three Rural Issues‖ concerning agriculture, countryside and farmers are universally considered as a hard nut, with tremendous challenges and difficulties in financial institution service for them. From the historical perspective, China‘s rural finance has gone through many arduous transformations, such as the phases of development, adjustment, stagnation and reform. The recent years have witnessed a leapforward growth in the rural finance of China. Despite the impact of the international financial crisis, the rural finance of China has been rapidly developing with the support of government policy since 2008. And we can also see many institutional barriers and business risks, which call upon continuous efforts on the financial services concerning the ―Three Rural Issues‖.

SECTION 1: RURAL FINANCE IN THE INTERNATIONAL FINANCIAL CRISIS The impact of the financial crisis on the rural economy and finance has been increasingly intense, which primarily lies in the reduction of agricultural loans. Owing to the sharp decline in the demand from the foreign market, waves of farmer workers return to the countryside, a number of agriculture-related companies with export orientation and farmer workers as consumers, therefore, are short of labors, leading to the decreasing revenues, turnover slowdown and increasing loan risks. The undersupply of orders from agriculture-related enterprises, especially from the leading ones, would engender an even lower demand for agricultural raw materials eventually fewer orders and lower prices for farmers and less credit * Dr. Zeng Xuewen is associate professor of the Institute of Economics and Resource Management, Beijing Normal University. Email: [email protected]

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Zeng Xuewen, Qin Jianguo, Peng Linlin, et al.

loans of financial institutions for agriculture-related enterprises and farmers. In this sense, some of the credit supply for farmers would be squeezed out to some extent in the event of relatively limited credit resources (See Figure 3-1).

Source: RMB Credit Funds from Financial Institutions（by sector）2007-2009, the People‘s Bank of China. Figure 3-1. Comparison between the Total Amount of Loans and Loans to rural Households.

From Figure 3-1, the proportion of China‘s loans to rural households in the total amount of loans remains at 4.2% before the third quarter of 2008, but sharply declines in the fourth quarter of 2008, reaching the bottom at 3.84% in the first quarter of 2009. There has been a clear downward trend in loan issuing to rural households. It indicates financial institutions‘ reluctance to lend to farmers in the wake of the crisis. In reality, in every cycle of credit crunch of China, we can see considerable curtail in loans to agriculture, farmers and the rural areas due to the long production cycle, low profits and high risk of the agricultural industry. Take the capital chain of agricultural products for example. The international demand of agricultural products has apparently knocked down after the crisis, resulting in the continuous price cutting of agricultural products (See Figure 3-2). In Figure 3-2 there is a sharp decline in the wholesale price index of agricultural products in China after the third quarter of 2008. The prices of rice and corn have been reduced by 5.1% and 11.5% in Feb2009, respectively. The continuous price reduction of agricultural products is just a strike against the sustainability of capital chain of agricultural products, indicating an increase of accounts receivables, the slow-down of turnover of capital and a decrease of repayment and profitability of agriculture-related enterprises and farmers. Consequently, the non-performing loan (NPL) ratio and business risks of financial institutions tend to rise up, forcing banks to tighten credit. The increase of NPL in rural financial institutions would inevitably lead to a reduction in the supply of agricultural loans.

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Figure 3-2. Trend Chart of Wholesale Price Index of Agricultural Products between Jan2008 and Jun2009.

Furthermore, the informal financial institutions have taken up a relatively large part in the rural financial market of China, which has played an active role in absorbing agricultural production and operation capital, stimulating rural financial market, raising financial efficiency and promoting the development of self-employed and private businesses in particular. Nonetheless, the operational risks can be aggravated in view of complicated debtor-creditor relationships and irregular ways of making loans, so that more and more disputes on private lending have come into existence. With the deepening impact of financial crisis on China, we are confronted with serious problems and increasing uncertainties, all imposing adverse effects on China‘s rural finance.

SECTION 2: NEW ADVANCES IN CHINA‟S RURAL FINANCIAL SERVICES On the whole, China has entered into an important phase of development, i.e., promoting agriculture through industry and promoting the development of countryside through city, transforming traditional agriculture, and moving toward the agricultural modernization with Chinese characteristics. We exert our strength on deconstructing the dual structure in order to integrate economic and social development in the urban and rural areas. Decision on Several Major Issues of Promoting Rural Reform and Development of the Central Committee of the Communist Party of China (CCCPC) in Oct2008 has unambiguously brought up the initiation of establishing modern rural financial system and supporting the development of rural finance with great efforts. By virtue of the urge and support of government policy, China‘s rural finance has made significant progress to albeit the adverse effects of the international financial crisis.

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I. Agricultural Development Bank of China (ADBC) Keeping Expanding Service Domains According to national laws, regulations and policies, ADBC, as the only agricultural policy bank approved by the State Council in China, raises fund, undertakes the policyoriented financial service concerning agriculture, acts for the Ministry of Public Finance in raising funds to support agriculture, and offers service to the development of rural economy and agriculture using the state credits. Since 2008, ADBC has been expanding service domains and scopes of business in favor of stronger support for agriculture, farmers and the rural areas. Firstly, ADBC issues the purchase loans of grains, cotton and oil and backs up the industrialization of agriculture. ADBC has taken up an active part in financially supporting the leading enterprises in agricultural industrialization and the agro-processing industry , which were seriously impinged in the financial crisis and encountered more setbacks and potential risks, increasing credit guarantee of the leading enterprises in agricultural industrialization and agro-product processing with no bad records but good fundamentals, credit history, market and orders and temporary operation difficulties, and ensuring the avalability of collateralized loan to business owners or principal shareholders of small businesses. In the first half of 2009, ADBC has cumulatively issued purchase loans of grain, cotton and oil of 198.31 billion Yuan(RMB), a year-on-year increase of 39.81 billion, loans to the leading enterprises in agricultural industrialization and agro-processing of 47.663 billion 1 Yuan(RMB) , and supported the purchase of grain, cotton and grease by 193.8 billion jin (a unit of weight equal to half kilogram), 1.187 million dan (a unit of weight equal to 50 kilograms), and 5.2 billion jin, respectively, corresponding to an annual increase of 6.8 billion 2 jin, 3.512 million dan, and 3.25 billion jin . It has played an important role in stabilizing markets for grain, cotton and oil and standing up for the operation of agricultural industrialization. Secondly, ADBC has strengthened the support for infrastructural construction, earthquake relief work and post-disaster reconstruction. Since 2008, it has placed priority on the major rural infrastructural constructions fulfilling the policy orientation to increase domestic demand, receiving the concerns of national and provincial governments, and already having obtained the matched financial funds. In the first half of 2009, the cumulative issuances of middle-and-long-term loans for agricultural infrastructural construction and integrated agricultural development have amounted to 89.28 billion Yuan(RMB), increasing 3 year-on-year by 40.6 billion Yuan(RMB), and backing up 816 new projects . Under the circumstance of limited credit scale, it has increased the credit funds and satisfied the need of credit for the purchase of grain, oil and non-staple foods in the disaster areas in the way of setting up green channels of credit, given more funding support to the enterprises and enhancing support for the reconstructions of road networks, water and power systems in the disaster-stricken areas. It has made such a great difference for the disaster areas in working 1 The Outstanding Loan of ADBC Increasing by 140 billion Yuan(RMB) at the First Half of the Year, Farmers' Daily, Aug 14, 2009. 2 ADBC Further Enhancing Agricultural Maintenance Support in Terms of Credit, People's Daily, Aug 16, 2009. 3 Agricultural Information Network of China (http://www.agri.gov.cn/gndt/t20090817_1332667.htm).


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through difficulties that ADBC cumulatively input 61.98 billion Yuan(RMB) reconstruction 4 loans into the disaster area in 2008 . Thirdly, it has deepened the internal reform and accelerated the internal mechanism construction of risk management and control. ADBC has made effective adjustments in helping businesses cope with the international financial crisis and strengthen the risk management by deepening the internal reform since 2008. On one hand, according to the principle of ―dealing with each case on its merits and guaranteeing some expenditure while reducing others‖, it has intensified the support to the temporarily-in-trouble businesses of quasi-policy and commercial loans in terms of its degrees of loss, reasons of loss and potential risks; on the other hand, in light of different risk profiles, it has adopted distinct measures, such as limitation, contraction and evacuation, to take relevant precautions or remedial measures to manage and control risk, which has ensured the highest efficiency of credit in supporting the ―New Countryside Construction‖. By the means of deepening reforms, the lines of business of ADBC has been rapidly enlarged, switching from the unitary support for the purchases of grain, cotton and oil to the main business of purchases and loans of grain, cotton and oil accompanied by the intermediary business and the subsidiary business of the middle-and-long-term loans to the leading enterprises of agricultural industrialization and ―New Countryside Construction‖. ADBC has been fulfilling the function of ―supporting, strengthening and benefiting agriculture‖, and playing a more and more important role in rural finance and becoming an indispensable part in sustaining the development of rural economy and solving the ―Three Rural Issues‖.

II. ABC Set Up the Division of the “Three Rural Issues” to Offer Service to Agriculture, Farmers and Rural Area The Third Plenary Session of the 17th CPCCC in 2008 established the ideas of the development of rural finance i.e., focusing on business, cooperation and policy orientation. The emphasis of rural financial reform of China has started shifting from the single transformation of Rural Credit Cooperatives (RCCs) to the shared responsibility in both RCCs and Agriculture Bank of China (ABC). As one of the four state-owned commercial banks, ABC is an important component of the financial system in rural China. After the reform of establishing the corporate and share holding systems of ABC in Jan2009, in terms of ―realizing commercialization in the face of the ‗Three Rural Issues‘‖, ABC has specially founded the financial division of ―Three Rural Issues‖ and gradually served as the financial artery. In the first place, ABC has innovated the management mode of financial division and explored new ways for large commercial banks to serve agriculture. After putting forward the thought of reform, namely, ―line management, unit operation, responsibility delegation, independent accounting, positive incentive and effective constraint‖, ABC has successively commenced pilot programs of the financial division of the ―Three Rural Issues‖ in seven sub4

Financial Bond Raising Prospectus of ADBC in 2009 (http://www. adbc.cn/1about/ detail. asp? channeled = 100250&page=2&id=5085)

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branches including Gansu, Sichuan, Funjian, Guangxi, Zhejiang, Shandong and Chongqing, and founded management board of the sub-branch divisions in the senior management of head office. It has announced a succession of rules concerning credit and risk management of rural finance, such as basic instructions of credit business, framework policy of business risks, credit rating regulation of clients, credit authorization, credit line and collateral regulation, all in terms of the ―Three Rural Issues‖. In the second place, it has strengthened the credit support for agriculture, farmers and the rural areas. The aggregate input of agriculture-related loans in 2008 is 766.7 billion Yuan(RMB), and the outstanding loan is as high as 933 billion Yuan(RMB), including loans to 800,000 rural households worth 99.8 billion Yuan(RMB) and loans to more than 30,000 5 rural enterprises and organizations with outstanding volume of 630.4 billion Yuan(RMB) . In the first half of 2009, ABC has altogether put in 378.9 billion Yuan(RMB) agriculture-related loans, taking up 26% of total loans of the bank; the outstanding of agriculture-related loans has reached 1.36 trillion Yuan(RMB) up to the end of April, with an increment of 88.1 billion Yuan(RMB) compared with the beginning of the year and a proportion of 40% in the increment of the bank loans as a whole, which has initially reverse the tide of low profitability 6 in agriculture-related loans . In the third place, ABC has urged the research on the financial products regarding agriculture, farmers and the rural areas. Since the reform of the share-holding system, ABC has introduced a large quantity of innovative products and integrated service solutions for customers like the leading enterprises of agricultural industrialization, construction projects of rural infrastructure and featured resources, developed simple and standardized micro-credit loans for large growers, cultivators and individually-owned businesses, exploited real estate mortgage, chattel financing, equipment leasing and factoring for small-and-medium-sized enterprises (SMEs) in the rural areas, and designed ―Huinong‖ Card, a credit cards benefiting farmers with functions of wage distribution, remittance, micro-credit, deposit and consumption. Besides, ABC has gone further into the county investment banking service, supplying county government with finance consultancy and agriculture-related businesses with listing advice, downgrading the threshold for entry and raising property income of farmers. It has enormously enhanced the service function of rural financial products through a series of product innovations. In the fourth place, ABC has complemented the risk management system of business concerning the ―Three Rural Issues‖. First of all, it has taken up vertical management and independent operation to handle risks to adjust to the authority delegation and long management chain; in the next place, it has been engaged in the work of creating credit file database of agricultural clients and prioritized the clients of good credit on the loan list and cut red tapes for them; thirdly, it has carried out a positive incentive mechanism to primary banks, which made clear the risk tolerance of businesses, stipulated reasonable due diligence and exemption provisions for risk loss within the normal range, mitigated and exempted responsibility for those fulfilling due diligence, to motivate the primary banks in rural financial service. 5

ABC Continuously Going Upward in Business Performance and Getting Ready for Listing, Shanghai Securities News, April 28, 2009 6 ABC Emphasizing on County Networks (http://finance.qq.com/a/20080729/001884.htm)


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ABC‘s attempt to offer service to agriculture, farmers and the rural areas has not only provided it with new profit growth point in the service for ―New Countryside Construction‖, but also opened up new profit space and shown us a new way of moving away from competitive convergence to rural-urban linkage development, cultivating differentiated competitive advantage and exploring another broad market in counties and the countryside. More importantly, it has come up with a reference as to how the large commercial banks could offer service to agricultural sector.

Column 3-1. ABC Launching „Huinong‟ Card Based on the service platform of Golden Spike Debit Card, ―Huinong‖ Card is a comprehensive bank card targeting at all rural households after ABC‘s reform of the share holding system and the announcement of its ―Three Rural Issues‖ policy. After the one-year pilot project in seven provinces, ABC has set up the division of the ―Three Rural Issues‖ in 2008, and officially launched the card. In addition to all the functions of the debit card, ―Huinong‖ Card is endowed with many other functions, such as social security, micro-credit and financial subsidies. Through the card, ABC has co-operated with Rural Pension Insurance and New Type of Rural Cooperative Medical Care System aimed to aid farmers in paying premiums and drawing pensions. The card has been used as an ID card for farmers to participate cooperative medical care system, helping them in paying medical expenses, correction fees and reimbursing medical expenses. The implement of the card has cut down the premium collection costs and payment costs of insurance benefits, facilitating farmers as well as improving the government management efficiency on the information of insurance participants. Furthermore, via the card, ABC has taken the agent release of financial subsidies, directly handing out the subsidy payments to the accounts according to the list of financial subsidy of the government, which has diminished of the cost of distributing financial subsidy to a large extent. Different from other rural micro-credits, the card has made continuous usage of credit possible for rural households. Once acquiring credit, the farmers are authorized to conduct business within the credit line, such as lending, usage and repaying of small loans, in the bank branches or automatic teller machine (ATM) with the card, which has realized the idea of ―crediting at a time, continuous usage, loaning and repaying whenever possible‖ and remarkably increased the efficiency of loan usage. The card has set up the sub-account for the lending of small loans, and the general preferential loans would be respectively distributed into card account and sub-account according to the agreed-on proportion. The fund in sub-account is limited to be used in the designated merchants only within the province or to repay the general preferential loans. The stipulation has guaranteed that the loans be primarily used in agricultural production to guard against credit risks and ensure the security of funds. Source: the website of ABC.

III. Rural Credit Cooperatives (RRCs) Deepening the Reform of Property Right System to Offer Service to Agriculture, Farmers and the Rural Areas The second round of the reform of the property right system in RCCs has been officially initiated in Feb 2008 at the Regulatory Work Meeting of Small-and-medium-sized Financial Institutions in the Rural Area of China. The meeting has stated that the reform is supposed to focus on the transformation of property rights and direct towards shareholding system. With

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the substantial support of the country, conquering many disadvantages, such as the instable financial and economic environment home and abroad and the ponderous historical burdens, the reform has been steadily pushing forward and breaking new ground in many aspects, like the reforms in the shareholding system, provincial rural credit union(PRCU), and crossregional operation of rural cooperative financial institutions. Firstly, the reform of the shareholding system has made smooth progress. Through the reform of property rights in RCCs, there have been setting up 27 rural commercial banks and 174 rural cooperative banks in China until Jun2009, which justifies the high speed of development of rural finance. (See Figure 3-3)7

Source: China Monetary Policy Implementation Report (Quarter1, 2008 - Quarter2, 2009), the People‘s Bank of China. Figure 3-3. The Reform of Shareholding System in RRCs since 2008.

In Figure 3-3, the reform in RCCs has not been stagnated by international financial crisis, but maintained a relatively high speed. Despite the slowdown since 2009, it is going upward as a whole and the process of reform has been going on successfully. Secondly, the reform of PRCU has been carried out on a favorable condition. As the first rural commercial bank restructured from PRCU, Chongqing Rural Commercial Bank has started business in June 2008. It has generated revenue as much as 8.856 billion Yuan(RMB) in the same year, increasing by 2.392 billion Yuan(RMB) year-on-year, generated preprovision profit 2.83 billion Yuan(RMB), growing by 1.17 billion Yuan(RMB) and 70.5% 8 over the previous year. The founding of Chongqing Rural Commercial Bank has realized transformations on management modes, switching from decentralized to unified operation, from indirect to direct intervention among juridical persons, which is in favor of the agglomeration effects of resource integration and management advantages and further 7

Source: China Monetary Policy Report, 2008Q1-2009Q2. 8 Source: PRCU Going from Reform to Transformation of Functions ， 21st Century Business Herald （ http://www.21cbh.com/）.


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enhancing the core competitiveness. Thanks to the reform and development, the property relations of Chongqing Rural Credit Cooperative have come to be clearer, the financial condition and asset quality significantly improved, internal management effectively strengthened, corporate governance basically sound and service function evidently reinforced, which initially formed the sustainable long-term mechanism. In December of the same year, according to the principle of ―diversified equity‖, the Rural Commercial Bank of Ningxia Hui Nationality Autonomous Region has completed reform into the shareholding system and established the Yellow River Rural Commercial Bank. The model of Rural Commercial Bank of Ningxia Hui Nationality Autonomous Region is to take capital as link to control the subordinate RCCs, which has retained the independence of sub-branches and modified the ambiguously defined property rights in county RRCs to some extent, advancing the reform of PRCU. Thirdly, the cross-regional operation has been enforced in rural financial cooperatives. In Dec2008, marked as the preface of cross-regional operation of rural financial cooperatives, Changshu and Zhangjiagang Rural Commercial Banks of Jiangsu province have respectively opened Haimen and Tongzhou sub-branches in Nantong. The cross-regional operation and equity consolidation would broaden the channels of capital reflow into the rural areas, heating up the competition in rural financial market and promote the sound development of rural finance. Fourthly, the asset quality of RRCs has been relatively bettered. In terms of the Loan Classification System, NPL outstanding and the ratio of China‘s RCCs are 320.3 billion Yuan(RMB) and 7.2% respectively, decreasing by 23.8 billion Yuan(RMB) and 0.7% compared with the end of 2008.

Source: Annual Report of China Banking Regulatory Commission 2008, China Banking Regulatory Commission; China Monetary Policy Implementation Report (Quarter4, 2008), the People‘s Bank of China. Figure 3-4. NPL of RRCs since 2008Q2.

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From Figure 3-4, the NPL ratio of RCCs tends to plummet, while the NPL outstanding has displayed the tendency of rebounding since the second half of 2008. The continuous dropping of NPL ratio is largely ascribed to central bank‘s cashing a great quantity of special notes to RRCs to strip bad assets and improve the asset quality; meanwhile, the rebounding NPL outstanding indicates the shock from the international financial crisis. In a word, the overall asset quality of RCCs has been improved. In 2008, the net profit after tax (NPAT) of 9 rural financial institutions has amounted to 39.59 billion Yuan(RMB), in which that of RCCs is 21.91 billion Yuan(RMB), rural commercial banks 7.32 billion Yuan(RMB) and rural cooperative banks 10.36 billion Yuan(RMB). The management has been further 10 modified as well. The round of reform is another significant attempt for Chinese finance to resolve the ―Three Rural Issues‖, in which two distinct differences have asserted themselves. Firstly, the emphasis of reform in property rights has gone from three modes, i.e. the systems of shareholding, joint-stock cooperative and cooperative to the ultimate demutualization; secondly, the management mode of PRCU founded in the first round of reform has become the target of 11 the second round. By and large, the anti-risk capability and service function of RCCs having been enhanced and the business vitality of RCCs has been further stimulated, which made a great difference in realizing the sound and healthy development of RCCs, wholly improving rural financial service and advancing the solution of the ―Three Rural Issues‖ and the ―New Countryside Construction‖.

IV. Postal Savings Bank Achieving in Capital Reflow to the Rural Areas Established in 2007, the Postal Savings Bank of China (PSBC) is a financial institution of asset and liability established on the basis of postal service network of China Post and in succession to the postal financial services of the former State Post Bureau and China Post. The postal savings banking has gained ground and improved the service function for agriculture, farmers and the rural areas since 2008. Firstly, PSBC offered wholesale funds to rural financial institutions. PSBC have conducted financial transactions in capital market and rural financial institutions to indirectly restitute funds to the countryside and support ―New Countryside Construction‖ through the funding channels of rural financial institutions. At the end of Dec2008, the outstanding of funds for agriculture maintenance was 66.942 billion Yuan(RMB), taking up 4.23% of the autonomous asset balance of PSBC, in which the negotiated deposit on supporting agriculture was 19.23 billion Yuan(RMB) and the balance of subscribing bonds of ADBC amounted to 12 40.925 billion Yuan(RMB). As for syndicated loan, by virtue of good asset sales and management capability of other financial institutions, PSBC has channeled a large volume of 9

Rural financial institutions include RCCs, rural commercial banks and rural cooperative banks restructured from RCCs. 10 Source: Annual Report of CBRC 2008 and China Monetary Policy Report 2008Q4. 11 RCCs have been restructured into rural commercial banks or rural cooperative banks, yet the name of ―RCCs‖ is still in use for the sake of correspondence in the context. 12 Kou Jian-ping. Li Ming, 2009. Capitalizing on Advantages and Giving Excellent Service to Farmers: An Interview with Tao Li-ming, the President of PSBC. C-thinking 4.


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postal savings funds into the fields of key projects of the ―Three Rural Issues‖, rural infrastructural constructions and comprehensive rural development by the means of participating in syndicated loan, indirectly leading capital flow back to the rural areas. Secondly, PSBC has used micro-credit as a point of departure to upgrade rural credit service. In Jun2007, PSBC has commenced the pilot program of micro-credit. All the provincial and municipal branches have launched micro-credit business until Jan2009, with 1911 county sub-branches participating as well. As to business volume, PSBC has cumulatively issued 37.7 billion Yuan(RMB) small loan by Jan2009, with loan amount in the 13 rural areas accounting for 70%. In order to satisfy the need of individually-owned businesses, small business owners and operators, PSBC has initiated a great deal of retail asset businesses, such as loan secured by certificates of deposit (CDs), personal business loan, self-help housing loan and second-hand housing mortgage to enrich rural credit products. Thirdly, PSBC has improved the serviceability of primary banks to supply all-round services to rural citizens. PSBC have been making efforts and achievements on strengthening service of primary network since 2008. Regarding deposit-taking, the savings balance of county networks of China‘s postal savings has come to 491.153 billion Yuan(RMB) by the end of 2008, making up 23.61% of the total deposits; the balance in rural networks was 840.499 billion Yuan(RMB), 40.41% of the total; concerning remittance, PSBC has set up the nation-wide networking including 350,000 outlets, greatly facilitating the deposit and withdrawal of farmer workers, individually-owned businesses, visitors and tourists; respecting various agency businesses, relying on the rural networks, PSBC has acted as the agent of collecting power charge, telephone fee and TV subscription, with a total of 8.5 14 billion Yuan(RMB) in 2008. Moreover, PSBC has also aided in issuing food subsidies, funds of returning farmland to forest and family-planning grants, and even provided rural insurance service for farmers in need but without access to insurance service. The founding of PSBC has put a full stop for its history of ―deposit-only‖, to benefit the rural capital reflow and alleviate the imbalance between supply and demand, to consummate the service of rural and urban finance and encourage effective competition in rural financial market, to give CBRC a hand in supervising postal savings, forestalling and diversifying away postal financial risks, to further strengthen the financial support of postal funds for agriculture, increase satisfaction and capacity of rural financial service and accelerate the deepening of rural finance.

V. New-type Rural Financial Institutions Attaining Rapid Development Since 2008, CBRC, the Ministry of Public Finance and the People‘s Bank of China have launched a series of measures and policies to confirm and ensure the legitimacy of New-type Rural Financial Institutions, give permission to the access of international and private capital into the rural financial market, and broaden the channels of capital reflow to the countryside in the way of substituting reward for subsidy, directed subsidies, and reducing deposit-reserve 13 PSBC Nurturing Rural Area to Serve Farmers. Nongbo website, March 16, 2009. 14 Kou Jian-ping. Li Ming. Capitalizing on Advantages and Giving Excellent Service to Farmers: An Interview

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ratio in order to maintain sustainability of new rural financial institutions and to cope with the international financial crisis.

1. Village Bank Developing Rapidly For CBRC has loosened the restriction on market access to rural banking, village banks, as a new rural financial institution, have achieved fast development. Depending on the existing financial institutions and flexible mechanisms, village bank has caught most attention in all types of new rural financial institutions. It has taken positive effects in changing the under-supply and deficient competition in the rural financial market since the first pilot program. Column 3-2. The First Village Bank in Shanghai Founded New achievement has been made in the reform of Shanghai rural financial institutions. On Feb19, 2009, the first village bank of Shanghai, Yangtze River Village Bank, started official operation in Chongming, with registered capital of 100 million Yuan(RMB). As the principal founder, Shanghai Rural Commercial Bank has put up capital of 51million Yuan(RMB), other five founders including Chongming asset management co. of Shanghai. The bank has agenda in ―offering service to county, countryside and SMEs‖, stimulating the formation of financial service with diversified investment, various products, with wide coverage, flexible control and effective service in Chongming, raising capability and efficiency of financial service and settling the difficulty in obtaining loans for farmers and SMEs. It would play an active role in increasing farmers‘ income, adjusting the industrial structure of agriculture and backing up the ―New Countryside Construction‖ in Chongming. As the major initiator, Shanghai Rural Commercial Bank has endowed the village bank with management model, technology platform, business process, product development and recruitment through its own mature operation system and risk control and assisted the village bank in corporate governance, operation, development and risk prevention. Source： The First Village Bank of Shanghai Launched, Shanghai Financial News, Feb20, 2009.

The capital source of village bank is mostly diversified, and the Chinese banks are initiated by one bank and joined by many corporations in most cases, while the foreignowned banks remain independently-owned. The second half of 2008 has witnessed a number of village banks in the rural areas set up by ABC, Bank of Communications, Bank of Beijing, China Minsheng Bank and Bank of Nanjing. With regards to the foreign-funded banks, HSBC has opened the first village bank in Suizhou, Hubei in Dec2007 followed by others in Dazu Chongqing, Yongan Fujian, Miyun Beijing, and Enping Guangdong; Standard Chartered Bank set up its first village bank in Inner Mongolia in 2009 as well. The work arrangement of New Type Rural Financial Institutions from 2009 to 2011 issued by CBRC in 2009 has publicized the plan of establishing 1027 village banks all over the nation from 2009 to 2011. The action has appealed more to private capital and boosted development in rural finance. Despite difficulty in fund-raising and risk control for village bank, it has gradually turned into a profitable and effective model in rural finance to invigorate the rural financial market.


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2. Finance Company Expanding Steadily There are two types of finance company in China at present. Under the supervision of the Department of Industry and Commerce and excluded from financial institution, the first one is small-credit company ltd. or plc. set up by natural person, enterprise as legal person, and other social organization without public deposit. It is not classified into rural financial institutions until the issuance of CBRC‘s document allowing small-credit company‘s transformation into village bank. As non-banking financial institution and New-type Rural Financial Institution, the other one is finance company making loans to county farmers, agriculture and the rural areas which is set up by domestic commercial bank or rural cooperative bank with the permission of CBRC according to relevant laws and regulations. Under the active impetus of local government, small-credit and finance companies have gained steady development after CBRC loosening the threshold of access to rural financial market. The nation-wide micro-credit companies have come into being and started operation up to June 2009, and seven finance companies have been founded as well. Through different innovations, the two types of institutions have exerted active impact on spurring county and rural financial market and opened up a new path to handle the capital pressure concerning the ―Three Rural Issues‖. Firstly, the two types of institutions have added and widened channels of capital flow back to the countryside, made up for the disadvantages of rural financial service and found a new method to fulfill the demand of farmers and small businesses for capital, which is of great importance to the development of rural economy, the increasing of farmers‘ income and pushing forward ―New Countryside Construction‖. Secondly, by creating new method of loan and cutting off lending procedures, the institutions have put an end to the difficulty in making loans for some farm households. Thirdly, with the service chain of different levels and types, the institutions have cooperated with local commercial banks, village banks and RCCs to increase rural credit. Fourthly, the institutions have constrained the private lending rate and compressed the market of private lending by virtue of the demonstration effect of interest rate fixing. As a loan organization to serve farmers, agriculture and the rural areas, finance company has progressively become an effective way of fund-raising for farmers and small businesses in the rural areas, dealing with the difficulty in financing, complementing rural financial system of various levels and actively promoting county economy and agricultural development. 3. Rural Financial Credit Union (RFCU) Maintaining a Good Momentum CBRC has relaxed the restriction on the entry of financial institutions in the rural areas in 2007, and provided services of deposit, withdrawal and settlement to farmers and small businesses who voluntarily participated in the Financial Credit Union. The present RFCU in China can be divided into three types as to degree of formality. The first type is approved by CBRC and registered at the Department of Industry and Commerce, with 11unions by the end of June 2009; the second one registered but not approved, with more than 30 by the end of June 2009; and the third one is the Mutual Aid Association of Development Fund in Poverty-stricken Village initiated by the State Council Leading Group

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Office of Poverty Alleviation and Development, neither registered nor approved , established 15 in 140 poverty-stricken villages in 28 counties, 14 provinces of China now. As for the rural areas as a whole, the establishment of RFCU has contributed to the development of diversified economies, yet due to the self-closed nature, the deposit and loan are confined among members, which would attract local farmers and small businesses to join in only for acquiring loans. In this sense, compared with RCC, RFCU is at a disadvantaged position on deposit-taking, which combined with the floor of interest rate leads to capital shortage. Therefore, the growth of RFCU cannot work out without the support of governments at all levels, besides pushing upward the floor of interest rate, enhancing savings absorption and working together with other banking institutions. The authority is supposed to relieve its tax burden since RFCU is a share-holding corporation founded by acquaintances in poverty-stricken area to eliminate poverty.

VI. Agricultural Insurance Continuously Going Upward Since 2008, based on the precious experience of pilot program, the Ministry of Pubic Finance and China Insurance Regulatory Commission (CIRS) have taken several steps in enlarging the coverage of agricultural insurance and the range of premium subsidy and implementing the issuance of premium to build up long-term mechanism of agricultural security. The agricultural insurance has gone along well. Firstly, the business scope of agricultural insurance has escalated rapidly and gradually come into function. In the first half of 2009, the former premium income of insurance of China‘s agricultural insurance has reached 7.003 billion Yuan(RMB), increasing by 59.81%, in which that of policy-oriented agricultural insurance is 6.714 billion Yuan(RMB), accounting for 95.87% of the former premium income of agricultural insurance; there have been 61.52 million insured rural households, growing by 49.2% year-on-year; the credit protection has been as high as 143.7 billion Yuan(RMB), up by 89.9% year-on-year; the indemnity to farm households arrived at 3.407 billion Yuan(RMB), increasing by 63.09% year-on-year, in which that of farming was 1.388 billion Yuan(RMB), up by 23.51% year-onyear, that of breeding industry was 2.019 billion Yuan(RMB), up by 10.923 billion Yuan(RMB) year-on-year. In the first half of 2009, the indemnity of agricultural insurance to farm households totaled 3.407 billion Yuan(RMB), growing by 63.09% year-on-year, mitigating the possibility for farmers to go back to poverty due to disaster to some extent and 16 ensuring the agricultural production in the disaster area. Secondly, the coverage and service of agricultural insurance have been expanded. First of all, the operation network of agricultural insurance has preliminarily come into being. With 20 agricultural insurance companies in China up to the end of June 2009, the business network of agricultural insurance made up of nation-wide insurance companies and professional insurance companies has taken shape gradually. In the second place, the 15 Hao Yu-bin, 2009. On the Development of the Rural Financial Credit Union of China (Chinese) [J]. Theoretical Exploration, 2. 16 The website of CIRS: The Agricultural Insurance Maintaining Good Momentum of Development in the First Half of the Year (http://www.circ.gov.cn/tabid/106/InfoID/107057/frtid/3871/Default.aspx）.


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responsibility scope of insurance has been magnified. In terms of farming, the companies have incorporated drought, insect pest and plant diseases into the insurance liability; as for breeding, all the animal diseases (plagues), natural disasters, accidents and government culling insurance liability have been covered. In the third place, the research on new insurances has been carried out. In 2009, the types of insurance receiving national financial support to premium subsidy have newly incorporated the insurances of pig farming and forest, with all 9 policy-oriented agricultural insurances; there have been more than 160 types of insurance all over China until June 2009, covering every aspect of the ―Three Rural 17 Issues‖.

Column 3-3. Hainan Province Commencing A New Pilot of „Linkage of

Bank and Insurance‟ As a part of the rural financial system, rural insurance is of great importance in financial support to agriculture, farmers and the rural areas. In the long run, there has been no reasonable risk-sharing mechanism in the countryside, which largely limits the growth of rural credit, collateral and futures, even the sound development of rural economy. On the strength of public finance of government, it is a new path to develop both rural insurance and credit by exploring the combination of them. As the pilot province of mutual insurance subsidy, Hainan has established itself as a model of the ―Linkage of Bank and Insurance‖. Since May 2009, Hainan has launched a new wave of rural insurance pilots, created the model of paying premium subsidies with financial funds and made some achievements, in which the financial department of the government would hand out 10% - 80% subsidy to insured farmers and agricultural or fishing enterprises. Hainan has planed to institute the Mutual Aid Association of Agricultural Insurance since 2009, selected 1 or 2 counties as pilots to probe into the models of ―coinsurance management‖ and ―mutual aid among farmers and farm households‖, based on agriculture trade associations, leading enterprises of industrialization and cooperative organizations with universal arrangement of start-up and operation funds by provincial financial department to reinforce the self-accumulation and antirisk capability of rural insurance. In the meantime, Hainan has put emphasis on the research of agricultural insurance to stimulate the linkage of bank and insurance. By the means of ―loan on the condition of insuring and pledged policy‖, Hainan has connected insurance with credit business and formed a positive interaction of ―farm households taking insurance to be insured, and banking making loans to promote farmers‘ willingness for insurance‖, expanding the insurance business as well as promoting the development of credit. The method of combining rural insurance and credit, joining with the public finance of government, and uniting different parts of rural finance as a whole is capable of pushing forward the industrialization of agriculture, stimulating agricultural production and consumption and guaranteeing the credit of rural financial market to resolve the ―Three Rural Issues‖. Source: 4 Measures of Hainan to Improve Rural Insurance, Hainan Journal, Feb. 10, 2009. The People's Government of Hainan Province： The Pilot Program of Agricultural Insurance of Hainan Province in 2009, the People's Government Office of Hainan Province(2009) No.92. 17

The website of CIRS: The Agricultural Insurance Maintaining Good Momentum of Development in the First Half of the Year（http://www.circ.gov.cn/tabid/106/InfoID/107057/frtid/3871/Default.aspx）.

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China‘s agricultural insurance has overcome double negative factors, the international financial crisis and Wenchuan Earthquake, with tremendous support of the government. The scope of agricultural insurance has kept growing, service domains widening, pilot programs starting in succession, which has assumed an active role in improving disaster and loss prevention and post-disaster recovery capacity, completing social protection system, ensuring rural stability and serving the ―New Countryside Construction‖ and the ―Construction of Harmonious Society‖.

SECTION 3: MAIN ISSUES IN RURAL FINANCIAL REFORM AND DEVELOPMENT AT PRESENT Recently, China‘s reform in rural finance has made remarkable advancement, but we have to admit that there are still many new issues and contradictions as the tests and uncertainties for the development of rural finance, in particular under the profound impact of the international financial crisis.

I. Loan Risks concerning the “Three Rural Issues” Having Risen Up To handle the international financial crisis, the credit scale kept inflating at a high speed. In the first half of 2009, there added 7.72 trillion Yuan(RMB) local and foreign currency loans, increasing by 32.8% year-on-year and tremendously outpacing the growth of local and 18 foreign currency deposit. The small-and-medium-sized financial institutions, represented by RCCs, have taken up an increasingly bigger proportion in incremental loans, especially since March 2009. The rapid expansion of credit scale indicated more liquidity consumed, the well-off level of which could be possibly changed due to the radical asset allocation. It is no less than a gamble with small odds in the case of unclear economic situation. At the same time, the loan risks in the rural areas have slightly ascended. Firstly, NPL has locally rebounded, demonstrated in 7 provinces and cities including Sichuan, Hunan, Zhejiang, Hebei, Gansu, Shanxi and Shanghai; for the new rural financial institutions with shareholding system, we have also witnessed the rebounding of NPL ratio in rural commercial banks in Wujiang, Changshu and Kunshan. Secondly, the total structure of NPL in rural financial institutions has deteriorated to some extent (See Figure 3-5). From Figure 3-5, in the 593.9 billion Yuan(RMB) NPL, the proportion of sub-category, doubtful, and loss loans are respectively 28.7%, 51.5% and 19.8%. Compared with 2007, the 19 ratio of doubtful and loss loans have increased by 2.3% and 0.5% respectively, while NPL has tended to decline, and the loan risks increased slightly. 18 CBRC: 7 Characteristics of the Incremental Loans of Banking Institutions in the First Half of the Year （ http://www.gov.cn/gzdt/2009-08/09/content_1387243.htm）The Portal Site of Central People's Government of People's Republic of China. 19 Source: Hope and Fear: The Performances of Small-and-medium-sized Rural Financial Institutions in 2008, 21st Century Business Herald （http://www.21cbh.com/HTML/2009-2-25/HTML_14VYD 5XJI6 QU. html）


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Figure 3-5. The Structure of NPL of Rural Financial Institutions in 2008.

II. Rural Credit Lacking in Effective Collateral So far, the rural credit guarantee primarily consists of group lending of farm households and collateralized loan. The group lending of farm households has improved the rural credit environment, decreased the risk and partially handled the difficulty for farmers in making loans. However, we cannot ignore the limitations: firstly, there are cumbersome procedures and high thresholds; secondly, as a result of the joint liability of group lending, most farmers would not take part in the lending group unless they are in need of loans, which renders the members into both borrower and guarantor and diminishes the efficacy of the guarantee, even brings about wrangles and debt repudiations among members; thirdly, owing to the marginalization of the weak group, the rich households with great financial strength and little default risks are usually picked up rather than the poor ones, and the pecking order has obviously asserted itself here. In addition, the large amount and long term of the collateral loan can partly meet the demand of some farm households and rural businesses for large loans. Owing to the rural area lacking in effective collateral, the spread of collateral is at a very low speed, and the existing innovations of secured loans, such as forest-property mortgage and mortgage of usufruct of land contract, are at the stage of pilot and far from being popularized.

III. The System of Agricultural Policy Finance Being Incomplete The development of China‘s agricultural policy-oriented finance lags behind that of agriculture, and the financial functions have not been brought into full play. The limitations have asserted themselves again in the financial crisis. Firstly, the business scale of policyoriented finance is too limited to fulfill the demand; secondly, the boundary between policyoriented and commercial finance is blurred since both ABC and RCCs have undertook some

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policy-type businesses; thirdly, there is not legislation regarding policy-oriented financial institutions, nor efficient regulation on the business scope, operation rules or penalties for violation, which confines the healthy growth of policy-oriented finance; fourthly, the mechanisms of risk prevention and control are not sound. Under the stress of financial crisis, financial risks have increased and the efficiency of policy-oriented finance would be seriously weakened by a quantity of issues like incomplete internal control mechanism, deficiency in risk forecast system, weak post-loan management and simplified solution to NPL.

IV. China Suffering the Absence of Agricultural Commercial Insurance There has been a tendency for natural disasters to increase in recent years. According to the statistics, there have been 41.29 million hectares of affected crops on average from 2004 to 2008, in which the disaster- affected areas are 21.65 million hectares, taking up 53% of the 20 affected areas and 14% of the sown areas. Natural disasters have adversely affected the development of agriculture and crippled the competitiveness of agricultural products in the international market. Nowadays, the global economy has apparently decelerated due to the international financial crisis, which has called for further improvement on the quality of agricultural products and more caution in the aversion of operation risk. Nevertheless, China‘s agricultural insurance, commercial insurance in particular, is seriously underdeveloped and far from coping with the international financial crisis and developing agricultural industrialization even though the great leap-forward development in the late two years has been realized with the support of the central finance, in which the former premium income of agricultural policy-type insurance is 6.714 billion Yuan(RMB), taking up 95.87% of the former premium income of agricultural insurance, yet agricultural commercial 21 insurance only accounting for 4.13%.

V. China Being Deficient in the Channels for Private Capital to Flow Back Impinged by the financial crisis, a large volume of big cultivators and rural SMEs are in the dilemma of broken funding chains because the loose monetary policy has not alleviated the deficiency of capital in essence. The formal financial institutions are reluctant to lend to the disadvantaged groups with low anti-risk capability who thus are forced to turn to the nonformal finance. Despite the opening-up of China‘s rural financial market in 2006, the degree is relatively small and the private capital can only go into rural funding cycle through finance company and new rural financial institution. As for the non-formal financial institutions, like private lending, pooled loan and mutual fund, they are still under strict regulation. A large quantity of capital is not able to flow back to the countryside, while the farmers and businesses have nowhere to make loans. Here comes a bizarre result: on one hand, the idle 20

China Investment Consulting, ltd.: Investment analysis and Forecast of China‘s Agricultural Insurance Market from 2009 to 2012 21 The website of CIRS: The Agricultural Insurance Maintaining Good Momentum of Development in the First Half of the Year （http://www.circ.gov.cn/tabid/106/InfoID/107057/frtid/3871/Default.aspx）


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private funds find no path to be invested; on the other hand, many businesses have huge demand for but no access to capital. It has resulted in the low efficiency of capital allocation and posed a hurdle for the sound development of agriculture, farmers and the rural areas.

SECTION 4: RECOMMENDATIONS ON FURTHER PROMOTING THE FINANCIAL SERVICE CONCERNING THE “THREE RURAL ISSUES” Though China has accomplished stabilized economic recovery, the international financial crisis has still had impact on our economy. We must make scientific prediction and research and take active precautions to enhance and deepen the policy support for the financial service concerning the ―Three Rural Issues‖.

I. More Support for Agriculture, Farmers and the Rural Areas The international financial crisis has brought about huge impacts on the economic and financial system of China. Its indirect and implicit influence on the rural economy and finance has gradually unveiled itself compared with that on the city. The international demand for main agricultural products is shrinking, price dropping off, and the export of some products have been hindered. The deceleration of domestic economy as a result of the international financial crisis and the weakening domestic demand have generated more pressure on the falling prices of agricultural products. The productivity of agricultural production is declining, while the difficulty of stabilizing agricultural development and farmers‘ income increment is increasing. Hence, the government ought to make a full plan on the comprehensive impact of the crisis on urban and rural areas. Firstly, it must enhance the support for agriculture to resolve the financial problems concerning people‘s welfare and satisfy the basic demand of farmers; secondly, it should upgrade the financial support for agricultural industrialization to protect farmers‘ willingness to produce, stabilize agricultural production, increase farmers‘ income and maintain the peace of rural area.

II. Accelerating the Establishment of Compensation Mechanisms of Financial Service regarding the “Three Rural Issues” The rural financial market is characterized by segmentation and high risk, and the financial institutions in pursuit of profit maximization are reluctant to issue agriculture-related loans owing to the lacking of correspondent compensation mechanisms. The phenomenon is more apparent under the circumstance of the financial crisis. Therefore, we are supposed to speed up in the establishment of compensation mechanism of commercial financial service in terms of the ―Three Rural Issues‖. Firstly, the financial service for the ―Three Rural Issues‖ should be entitled with the generalized preference system. For example, we can hand out the proportional financial subsidies to relevant financial institutions according to the aggregate agriculture-related loans; for the commercial financial institutions making loans more than a certain ratio in total amount, they are given preference on taxation; and we could empower

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the rural financial institutions in the self-regulation of interest rate and permit them to absorb deposit and make loans in a wider range of interest rates. Secondly, the policy support framework of agricultural insurance is supposed to be completed. On the basis of completing the system of agricultural insurance and for the sake of sharing risks of commercial finance, we should probe into founding the system of agricultural policy-oriented insurance, including financial subsidies for catastrophe, the agricultural re-insurance system and the institution of third party vouching.

III. Completing the Rural Credit Model and Vouching Business Model For the demand diversity has been the feature of rural finance, the supply of it is supposed to be well oriented. In the first place, we should develop new credit models suitable for the characteristics of rural economy as well as moving on popularizing the small-credit and group lending, such as the models of ―company + farm household‖, ―company + intermediary + farm household‖, and ―company + professional market + farm household‖. In this sense, the models can take advantage of radiation and pulling effects of agricultural industrialization, promote the high-quality, high-efficiency agriculture with unique characteristics. In the second place, we could make innovations in vouching methods and add more effective collaterals. The research and promotion of new pledges, such as forestproperty mortgage, CD, pledge of accounts receivable, chattel mortgage and agricultural product mortgage, would increase the satisfaction of rural financial service.

IV. Taking Full Advantage of Private Capital to Push forward the Development of New Rural Financial Institutions We ought to step up the pilot program and promotion of new rural financial institutions, such as village bank, small-credit company and RFCU. It is of necessity to nurture and develop new rural financial institutions: firstly, to alleviate the undersupply of financial service in rural area; secondly, to raise the coverage of rural financial service; thirdly, to enhance the competition of rural financial market; and lastly, to foster the willingness of different parties to take part in the nurturing and development of such institutions. Governments at all levels and various types of capital have appealed to the regulators for their strong desires of establishing new rural financial institution, developing rural financial business, improving rural financial service and mitigating the difficulty of funding SMEs. Consequently, it is urgent and necessary to foster new rural financial institutions and make use of finance to support the construction of socialist new countryside and the development of SMEs. In the founding of new rural financial institutions, the government and regulators are supposed to fully mobilize private capital and gradually diversify the property rights of rural financial institutions.


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V. Building up the Motivation System of Capital Reflow to Rural Area with Different Approaches The capital outflow has long been the bottleneck of the development of agriculture, farmers and the rural areas. It becomes more severe since the financial crisis. The construction of effective mechanism for capital reflow to the rural areas is a key step of assisting and protecting agriculture, farmers and the rural area. We should focus on the following three aspects. Firstly, we are supposed to construct the mechanisms of financial input for capital reflow to the rural areas, increasing not only the aggregate of financial support to agriculture but also its ratio in the total expenditures, forming the steady mechanisms of national support for agriculture and giving more input to the rural areas. Secondly, we can build up the leverage incentives for capital reflow to the rural areas. The combination of taxation, interest rate and deposit-reserve ratio would encourage commercial financial institutions to operate in the rural financial market. We could also formulate more preference on deposit-reserve ratio for the rural financial institutions with higher percentage of agriculture-related loans and enforce more flexible policy on interest rate to raise the relending line. Thirdly, we are supposed to optimize the allocation of rural financial resources by the means of innovation and reform. Through the reform and restructuring of ADBC, ABC and PSBC, we can endow rural financial service with wider coverage, stronger anti-risk capacity and higher service quality, to further complete the financial environment in counties and lead more financial resources into the rural areas. Translator: Li Hui (SUFE) English Version Editors: Xiao Rong (SUFE), Du Wenxin (Harvard)

REFERENCES [1] [2] [3] [4] [5] [6] [7] [8] [9]

International Monetary Fund, 2009. Global Financial Stability Report [R]. Beijing: China Financial Publishing House. Rural Financial Services Research Group of the People's Bank of China, 2008. China's Rural Financial Services Report 2008 [R]. Beijing: China Financial Publishing House. Rural Finance Academy of China,2008. China‟s Rural Financial Reform and Development of Three Decades[R]. Beijing: China Financial Publishing House. Han Jun, et al., 2009. Survey on China‟s Rural Finance [M]. Shanghai: Shanghai Yuandong Publishing House. Li Shu-sheng, He Guang-wen, 2008. Study of Financial Innovations in Rural China [M]. Beijing: China Financial Publishing House. Xiong De-ping,2009. Study on Coordinated Development of Rural Finance and Rural Economy [M]. Beijing: Social Sciences Academic Press. Zhang Xiao-shang, He An-nai, 2007. Financial Transformation and Innovation in the Rural Area [M]. Beijing: Social Sciences Academic Press. Jiang Ding-zhi, 2008. Reform and Development in Rural Finance for Three Decades[J]. China Finance, 23. Zang Jing-fan, 2009. The Reform and Development of Rural Finance [J]. Rural Credit Cooperative of China, 7.

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[10] Gao Sheng-ping, Liu Ping, 2009. On the Credit Collateral in Rural Financial System: Predicament and Outlet [J]. Journal of Financial Research 2. [11] Gong Jing, Liu Hong-yan, 2009. An Investigation on China‘s Rural Financial Innovation after Sub-prime Crisis[J]. Rural Economy 7. [12] Guo Wu-yan, 2009. On the impact of Financial Crisis on China‘s Rural Financial Repression: A Reference to Deepening Rural Finance [J]. Rural Economy 5.




IMPROVING RURAL FINANCE UNDER THE INDUSTRIAL STRUCTURE CHANGE Zhang Tong * The author of the chapter , ―Confronting agriculture, rural area and farmers—the dilemma and reform of rural financial services (D & R),‖ points out that under the current circumstance of worldwide financial crisis, China Agriculture Bank creates new rural financial products and increases the credit loans to farmers due to the policy for aiding agriculture, rural area and farmers; Rural Commercial Bank, village banks, and small quantity loan companies develops gradually and the number of those banks for proving financial services increases progressively. The author also points out that because of incompletion of rural credit system and because of the lack of the collateral and the lack of rural commercial insurance, the lending risk increases. Therefore, the author suggests that China should accelerate building up the mechanism of recompense for those rural financial institutions, complete rural credit loan and vouching system, fully utilize nongovernmental capital, and construct incentive policy for attracting rural capital to reflow, then increasing the aid of rural financial system to Chinese agriculture, rural area and farmers. The author of ―D &R‖ describes the current situation of Chinese rural financial system and gives us some rational suggestions on future development of this system. The description and suggestions are important and valuable for studying Chinese rural finance. As the reviewer of ―D & R‖, I deem that the Chinese rural financial system should transform from structural system to functional system in order to resolve the imbalance of supply and demand of rural capital and then provide better services for the development of rural area and for the construction of agriculture. Chinese rural financial system and policy should meet the need of Chinese long term development, which is related to the change of production structure by the scalization and * Zhang Tong, Ph. D in Agriculture Economics at Oklahoma State University, U. S. A, Associate Professor at Research Institute of Economics and Management, Southwestern University of Finance and Economics.

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industrialization of agriculture, the construction of new rural area under the balance of urban and rural development, and the food security for such a large population. Chinese rural financial system should provide multi-level services to satisfy the different needs of rural areas. Chinese government needs to clarify the service range of rural policytype banks and complete the services of those rural policy-type banks, in order to support the services of rural commercial banks for rural areas, to complete rural credit system, resolve the problems about protecting farmers‘ welfare induced by bankruptcy of those farmers. Chinese government also needs to complete the relative laws to ensure the legitimacy of nongovernment financial institutions, such as agriculture funding, to develop Chinese agriculture wealthily and stably. The adjustment of production structure induced by the development of rural area alters the rural demand of capital. At present, capital supplied by formal rural financial institutions is much less than the capital demand of smaller farmers and medium and small rural Enterprises. During the 30 years since Reform and Opening up, the weight of Primary industry‘s GDP decreases from 28.2% in 1978 to 11.3% in 2008. The weight of Secondary Industry‘s GDP increases from 47.9% to 48.6%. The weight of Tertiary Industry‘s GDP increases from 23.9% to 40.1%. Within the Primary Industry, weight of agriculture‘s GDP decrease from 80% to 50.4%, the weight of livestock‘s GDP increases from 15% to 30%, and the weight of Fishery‘s GDP increases from 1.6% to 9.1%. Meanwhile, accompanying the economy development and the improvement of the urbanization, rural population decreases from 82.08% in 1978 to 55.06% in 2007. Moreover, the number of cities in China increases from 132 to 655. During the process of urbanization, millions of rural people enter cities to find jobs, or immigrate into cities. During the economy construction of developing countries, people have to confront some issues such as adjustment of agricultural production structure, labor forces shirting from rural to urban areas, and urbanization. Currently, the extent of industry concentration of Chinese Agro-processing is very low. Especially in recent 10 years, foreign multinational firms aim at China, the country with the largest population and agriculture production. Those foreign multinational firms merge the leading enterprises, joint venture with Chinese companies, or construct their offices in China, for the purpose of entering Chinese agricultural production market and occupying a large amount of market share. Therefore, how to make sure the food security and protect local agricultural production, how to assist aquaculture and livestock and farming of Economical Crops, how to help small and medium rural enterprises to grow up and large rural enterprises to realize modernization, and how to serve rural people to urban industrial workers are the long term issues and focal points of Chinese government. The main demanders of rural finance are farmers, rural enterprises, and local governments. Their corresponding demands are living expenses, capital for production requirements, and capital for construction of public infrastructures respectively. From a structural point of view, current Chinese rural financial supply system is composed with policy-oriented financial institutions, commercial financial companies, and

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cooperative financial organizations. Different financial institutions satisfy different functions for different comities‘ demands. However, most farmers and small and medium rural enterprises lack collateral and then are excluded by services of State-owned financial institutions. So, those farmers and rural enterprises search Non-formal financial services, and their lending behaviors make private lending rates higher and higher. To solve the problem China Agriculture Bank exploits ―Huinong‖ card, one kind of credit cards for farmers, which partly recuperate the lack of credit loans for farmers. But rural credit loans are shot of large amount of funds. Thus, China Banking Regulatory Commission lowers the access standards for opening new rural financial institutions, encourages various types of capital to establish multi-objective and multi-level rural financial institutions, such as village banks, small loan companies, and Jointly Warranty organizations. It is estimated that in future 15 years funding gap for new rural construction is around 1.4 trillion to 4.3 trillion RMBs. To solve the problem of lack of capital for poor farmers, in some African countries such as Kenya and Eritrea, and in some Asian countries such as Bangladesh and India, Bangladesh rural Jointly Warranty model or India SHG-Bank Linkage model is very popular and provides capital supports to farmers, which cannot be obtained from other commercial financial systems. Since 1994, when Jointly Warranty loan model is introduced to Chinese rural areas, this model does not work very well, and default rates are very high. Moreover, this model is based on the joint liability of members to solve the lack of credit loans, and it is commonly related to small amount loans and only suitable for very poor rural areas, where the formal financial institutions do not set up their branches. Form the developing experiences of most countries in the world, we can find that most countries‘ governments apply policy-oriented financial methods to correct the failure of rural financial markets or to reach the targets of industrial distribution. Those countries‘ governments offer direct subsidies for agriculture producing, fund policy-oriented rural financial institutions, make favorable policies such as tax relief to encourage commercial financial institutions and investment companies to provide loans for agriculture, set up vouch agencies, and build agriculture production Insurance System to avoid the losses induced by disasters and the volatility of production prices. For example, at the beginning of 1960‘s European Community (EC) starts The Common Agricultural Policy, which prescribes that EC provide funds to subsidy farmers for selling their agriculture productions, and then promote European modern large-scale agriculture business. As large agriculture production export country, the U.S.A. has more valuable experiences for China to learn. American government provides support to agriculture development through investment and credit loan. In terms of investment, federal and local governments directly invest in the agricultural projects for public welfare through establishing budgets and borrowing debts to improve the construction of agriculture infrastructure. Meanwhile, federal and local governments relive some amount of taxes or provide some financial aids for profitable private projects and the investment in agriculture infrastructure. The long term and large amount of investment by American government gradually causes the developed and sound agriculture infrastructure. American government establishes Commodity Credit

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Company, Small Business Administration, Rural Electrification Board, and Farmers Household Agency, four different kinds of policy-oriented rural financial institutions. Lending rates for agriculture projects commonly offered by policy-oriented rural financial institutions are one third to one half lower than the lending rates for industrial loans. Commercial banks whose more than 25% of total loans are agriculture loans can obtain tax relief and interest rate subsidies for their agriculture loans. American well-built agriculture insurance system plays an important role in dispersing bank risks. Federal programs also help initial farmers to buy commercial farms to realize large-scale production. America and Europe generally provide policy-related subsidies for agriculture, which cut down the prices of agriculture products that are exported to China, further decrease our country‘s prices of agriculture products, lower the profits of Chinese farmers, and eventually reduce farmers‘ production willingness. Therefore, the subsidies for agriculture services by commercial financial institutions are not sufficient to ensure agriculture production stability. We also need to provide policy-related subsidies directly to farmers and reinforce the construction of agriculture infrastructure. We should learn the lesson on our soybean industry, and ensure the market share for local agriculture products in order to avoid the monopoly of foreign-funded food enterprises in China and to avoid jeopardizing our food security. In conclusion, under the circumstance of industrialization and internationalization of agriculture, Chinese rural financial system not only needs to complete its structure, but also needs to strengthen its functions for the purpose of fulfilling the requirements of better servicing multi-level new rural construction and Modern Agricultural Development.

REFERENCE [1]

[2]

[3]

[4]

[5]

Satyasai ，K.J.S. “Rural Credit Delivery in India: Structural Constraints and Some Corrective Measures.‖ Agricultural Economics Research Review, Vol. 21 (Conference Number) 2008 pp 387-394. George，O. “Is Micro-Finance Achieving Its Goal Among Smallholder Farmers in Africa? Empirical Evidence from Kenya Using Propensity Score Matching.‖XXV11 International Conference of Agricultural Economists, 16-22 August 2009, Beijing, China. Bahta ,Y.T., and Groenewald ,J.A. ―Rural Credit for Resource-Poor Entrepreneurs: Lessons from the Eritrean Experience.‖Poster paper prepared for presentation at the International Association of Agricultural Economist Conference, Gold Coast, Australia, August 12-18, 2006. United States Department of Agriculture. “Is More Credit the Best Way to Assist Beginning Low-Equity Farmers? ” Agriculture Information Bulletin, No. 724-04 August 1996。 Matthew A. Diersen, Editor.―Financing Agriculture and Rural America: Issues of Policy, Structure and Technical Change.‖ Proceedings of the NC-221 Committee Annual Meeting Denver, Colorado. October 7-8, 2002.


ISBN: 978-1-61668-486-0 © 2010 Nova Science Publishers, Inc..

Chapter 4

TEN MAJOR INDUSTRIES STIMULUS PLAN: NEW STRATEGIES FOR STRUCTURAL ADJUSTMENT Han Jing*, Xu Yan, Sun Peng, and Feng Rui Since the end of 2008, an international financial crisis and economic recession have struck the whole world. In order to prevent China‘s economy from fast sliding, the State Council unveiled a package program, including ten major industries stimulus plan (the stimulus plan henceforth) to ensure economic growth. The stimulus plan involves logistics as well as nine key industries such as the textile industry, the steel industry, the automobile industry, the shipbuilding industry, the equipment manufacturing industry, the electronic information industry, the light industry, the petrol chemical industry, as well as the nonferrous metal industry, and more than 60 implementation rules have been established, which enlarges domestic consumption, stabilizes the production and operation of enterprises, and quickens the development of industrial technology. All in all, the implementation of the stimulus plan has given rise to some visible achievements.

SECTION 1: THE CONTEXT OF THE STIMULUS PLAN At the beginning of 2009, the international financial crisis started to affect China‘s economy more profoundly and resulted in the shrink of market demand, difficulties in export industries due to difficulties in market sales, an increase in the number of the enterprises that suspended or partially suspended production, and an increase in unprofitable firms and the amount of losses, which as a whole led to a serious situation. In accordance with the deployment of the State Council, the State Development and Reform Commission and the Ministry of Industry and Information Technology together with other related departments of the State Council compiled the adjustment and stimulus plan of the ten key industries including the textile industry, the steel industry, the automobile industry, the shipbuilding * Dr. Han Jing is associate professor at the Institute of Economics and Resource Management at Beijing Normal University, who earned her PhD degree at the Shool of economics ,Nankai University. Email: [email protected]

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industry, the equipment manufacturing industry, the electronic information, the light industry, the petrol chemical industry, the nonferrous metal industry and logistics, and they viewed the plan as the countermeasures against the international financial crisis and important strategies to maintain economic growth, enlarge domestic demand and adjust structures, which would last three years from 2009 to 2011. As for china‘s economy, the issue of the stimulus plan is both a self-rescuing action under unprecedentedly severe external economic environment ever since the reform and opening-up and a transforming strategy to explore development spaces in the new era.

I. The Stimulus Plan is Aiming at Relieving the Shocks from the International Financial Crisis In November 2008, China‘s export growth rate fell from 19.2% in October to -2.2% and import growth rate from 15.7% to -17.9%. The fallback of export directly slowed down the growth rate of industries. The value added of the scaled industrial enterprises in China increased at the rate of 5.4% over the same period of the previous year, falling back by 11.9% over the same period of the previous year, and 2.8% over that of October. The production of pig iron, crude steel and rolled steel decreased by 16.2%、12.4% and 11% respectively. The production of automobiles amounted to 714 thousand, decreasing by 15.9%. The slide in the growth rate of industry resulted in the slide in generated electrical energy, which decreased by 9.6% and was the largest monthly decrease 1 . In the first quarter of 2009, the generated electrical energy of Chinese scaled electric power plants decreased by 2.0% over the same period of the previous year and social power consumption by 4%, among which industrial power decreased by 8.4%. The value added of Chinese scaled industries increased by 5.1% over that of the same period of previous year, much lower than that of 16.4% of the first quarter in 2008. GDP increased only 6.1% over that of the same period of previous year, much lower than the growth rate of same period of last year, that of the year of 2008 and that of the fourth quarter of 2008. Total export-import volume decreased by 24.9%, among which the export and the import volumes decreased by 19.7% and 30.9% respectively, the increasing range dropped by 41.1% and 59.5% respectively over that of the same period of last year. As long as the downturn of economic growth is not changed, it would give rise to severe economic and social problems, considering that China is a large developing country. The slide of China‘s economic growth is out of expectation and the industries need revitalization. As indicated by experts, revitalizing industries aims to achieve the goal of ―Maintaining Eight Percentage‖. If the economic growth rate is lower than 8%, unemployment problems would be aggravated and cause some social problems as well. 2 It is in such severe economic conditions that the nation released the major ten industries stimulus plan. 1

Zhu Guodong, 01-16-2009. Battle of Maintaining the Growth Rate of 8% Fired, Stimulus Plan of the Ten Key industries Discharged [N]. China Securities Journal. 2 Cao, Jianhai, 03-11-2009. A Roadmap for China‘s Industry Revitalization: Short-term Growth and Long-term Structure Adjustment, Economic Information Daily [N]. Economic Information Daily. The viewpoints in this book are quoted from Cao‘s essay and originally delivered by Yang Yiyong, the superintendent of Institution of Economic and Social Development of National Development & Reform Commission.

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Viewing the ten selected industries, it can be inferred that the nation has been deliberate in making choices. Firstly, the ten key industries play important roles in the economy. Firstly, take economic aggregate as an example: in 2007, industrial value added of the nine key industries3 takes up nearly 80% of total industrial value added and one third of GDP. In fact, the nine key industries play an irreplaceable role in national industry, finance, social employment and the livelihood of the people. Secondly, the nine key industries make great contribution to the state revenue. In 2007, total revenue in China amounted to 4.56 trillion Yuan(RMB), in which that of the scaled enterprises of the nine key industries amounted to 1.7 trillion Yuan(RMB), taking up 37.4% or so. Thirdly, stimulus plan of the nine key industries would promote social employment. Even with migrant workers out of consideration, employees of the nine key industries in towns and cities amount to 36.156 million, taking up 30% of total employment in urban China. Fourthly, the stimulus of the nine key industries is in favor of the solution to the issues concerning agriculture, countryside and farmers. Large amount of output value in such sub-industries of the light industry as food, paper making, furniture, household appliances, leather and household chemicals industry are generated from deep processing of agricultural products, which involve a 300-million-peasant market and take in nearly 60 million migrant workers in cities. The light industry alone can absorb 20 million migrant workers. In addition, medium and small enterprises per se are part of the nine key industries. And it is obvious that the stimulus of the nine key industries will revitalize related medium and small enterprises. Fifthly, the logistics industry is the compound service industry integrating the transportation industry, the storage industry, the freight forwarding industry and the information industry. It is an important component of national economy involving a large range of fields, creating a large amount of employment and playing an important role in expanding consumption. The value added of logistics industry takes up 16.5% of that of the whole service industry and 6.6% of GDP4. It can be said safely that if the stimulus plan of the ten key industries could be implemented smoothly as expected, China‘s economy would realize the goal of ―Maintaining Eight Percentage‖ and quickly recover from the impact of the international financial crisis. The roadmap of the stimulus plan is displayed in table 4-1.

II. The Stimulus Plan Will Boost China‟s Economy Constantly Through 30 years of hardships and fast development, China has become one of the great powers in terms of industrial scale and economic strength. In recent years, China‘s economy has kept growing at roughly a double-digit speed; such high growth rate conceals some limitations of the internal structure of China‘s economy, such as the high dependence of economic growth on external environment, low end of the majority of products evaluated in the international industrial division system, the dependence of core technology and sophisticated technique of certain industrial on other countries, and the insufficient 3

As the nine industries are in the industrial sector while logistics is productive service industry, providing service for the previous nine industries, thus they are analyzed separately. 4 National Development and Reform Commission. Background Information of the Stimulus Plan of Key Industries. [EB/OL]. (2009-02-27). http://www.china.com.cn/news/2009-02/27/content_17343584.htm

Table 4-1. Roadmap of the Stimulus Plan Industry

Steel Industry

Automobile Industry

Equipment Manufacturing Industry

Textile Industry

Issuing Schedule and Main Contents

Major Impact Although the stimulus plan has little impact on the situation Issued on January 14, the stimulus plan advocates the of the decline of overseas market demand, its measures of implementation of flexible export tax rebate policy, elimination of backwards capacity and joint reorganization stimulation of export of high-end products, would postpone the industrial periodic sliding. In the long elimination of backwards capacity and support for term, large preponderant steel enterprises will take the merger and acquisition within the industry. absolute lead in steel industry. Issued on January 14, the stimulus plan stipulates that The stimulus plan focuses on structural adjustments with vehicle purchase tax of passenger car with the attempt to promote the optimization and upgrading of displacement less than 1.6 liter be reduced to 5%, the automobile industry structures. Specifically, on the one amount of large automobile enterprises be reduced hand, it accelerates the joint reorganization of enterprises, from 14% to 10% and that 10 billion Yuan(RMB) be and on the other hand, it improves independent innovation invested in technological reform and development of and competitiveness of enterprises with new energy new energy vehicles of the industry. automobile as the breakthrough point. Issued on February 4, the stimulus plan supports the joint reorganization of key enterprises. It is aiming at Joint reorganization will enable the related enterprises to developing large groups which are capable of general expand its power through the integration of industrial project contracting, system integration of chains. In addition, the demand for increasing the purchase international trade and financing. It also encourages ratio of domestically made equipment will expand the the preferential purchasing of domestically made market share of large key enterprises. production facility in case of large projects. Increase in export rebate rate will contribute to the ease of enterprise stresses. However in the context of shrinking Issued on February 4, the stimulus plan increases global demand, it is difficult for the stimulus plan to expand export rebate rate of textile garment from 14% to export directly. Besides, the implementation of credit 15% and enhances the support for loans and support is doubtful and investment amount of special funds assurance. is unclear. Thus, in the short term, the stimulus plan is hard to improve the ability of enterprises to make profits.

Table 4-1. (Continued) Industry

Shipbuilding Industry

Electronic Information Industry

Petrol Chemical Industry

Light Industry


Major Impact The orders in Chinese shipbuilding industry are mainly Issued on February 12, the stimulus plan accelerates about bulk carrier, which takes up 70%. The stimulus plan the elimination of backwards capacity and is in favor of the expansion of domestic demand for encourages buyer credit under export both released watercraft and adjustment of capacities and structures. by financial institution and by large watercraft Since global orders in hand for oil tanker have already enterprises, extending the present fiscal and financial contained the newly increased demand resulting from the support for domestically consumed ocean-going elimination of single-hull oil tanker, the stimulus plan will vessel to the year of 2012. not make a great impact on an international scale. Issued on February 12, the stimulus plan attaches The stimulus plan is beneficial for communication device great importance to the projects including upgrading industry (3G and broad band), electronic industry, colored the integrated circuit, 3G mobile communication TV industry and software industry. In addition, it will industry, popularization of digital television, promote the growth of demand for domestic outsourcing advancement of computer and next-generation services and domestic basic software enterprises. internet. The stimulus plan is issued in an attempt to adjust and Issued on February 19, the stimulus plan brings in 20 control the total amount and industrial layout and to key construction projects in process and 20 new accelerate technological upgrading. According to the construction projects, the general goal of which is to stimulus plan, sub-industries such as oil refining, achieve industrial value-added of 1.75 trillion agrochemical and pesticide and new chemical materials will Yuan(RMB) until 2011. get strong supports. Issued on February 19, the stimulus plan aims to expand the consumption of rural and urban markets Light industry totally involves around 45 large and small and to accelerate technological reforms of such trades. ―Home-Appliances-Going-to-the-Countryside‖ industries as paper making, household appliance and policy will surely expand the demand for major appliances. plastic.

Table 4-1. (Continued) Industry


Nonferrous Metal Industry

Issued on February 25, the stimulus plan aims to adjust taxes appropriately, promote merger and acquisition, implement national reserve system and develop 3 to 5 comprehensive nonferrous metal enterprise group with great competitive powers.

Major Impact National reserve system plays an important role in the torsion of the predicament of some domestic key nonferrous metal enterprises with high inventory. Thus, the tension of market underselling would be eased and the price of metal would be sustained to some extent.

Issued on February 25, the stimulus plan focuses on the support for agricultural and village logistics and The stimulus plan will relieve the shocks on logistics Logistics Industry logistics for bulk production goods and consumer industry brought about by the international financial crisis. goods Source: Collated from ―Adjustment and Stimulus Plan of Industries [EB/OL]. (04-02-2009). http://www.gov.cn/zwgk/2009-04/02/content_1276054.htm‖

Ten Major Industries Stimulus Plan: New Strategies for Structural…

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development of the economy itself. The international financial crisis unveiled the deep structural problems in the development of China‘s economy. Even without the international financial crisis, it‘s obvious that the extensive developmental mode is not sustainable for China‘s economy. The international financial crisis enables China to reflect upon the developing road in the previous years after a 30-year high speed of growth of China‘s economy. With the stimulus plan, it becomes possible that the industries would gain long run competitive advantages through merger and acquisition and post-merger integration of enterprises within the ten key industries and the formation of certain leading roles of the ten key industries applying such methods.1

1. The Stimulus Plan Will Ensure the Promotion of Domestic Demand and a Steady and Sustained Increase of Economy In the international financial crisis, European and American economies have experienced great recession, which resulted in the severe environment of China‘s foreign trade. In the case of weakened external demand, it is without doubt that we should stimulate the vast domestic market of the 1.3 billion of Chinese population to cope with the international financial crisis and better the economic situation. Thus, undoubtedly, the stimulus plan issued by the State Council will be the direct drive for the promotion of domestic demand; for example, Amendment Ⅰ in the stimulus plan of Light Industry is to expand the consumption of city and countryside area; the opening chapter of that of Textile Industry and Steel Industry is to plan domestic and foreign markets in entirity, to enlarge domestic demand and to pull domestic consumption. And as to Automobile Industry which catches much attention, the stimulus plan points out the need to implement consumption policy actively and stabilize and enlarge the demand in order to accelerate the adjustment and stimulus of the industry. 2. The Stimulus Plan Will Promote Merge and Reorganization and Improve International Competitiveness of Chinese Enterprises More than half of the ten key industries refer to the issue of merger and acquisition in their plans. For example, the stimulus plan of Steel Industry makes clear the intention to act as the leading role in all industries in the interest of promoting joint reorganization among enterprises, creating and developing large and ultra-large steel group with international competitiveness, optimizing industrial layout, and elevating concentration ratio. In fact, before China entered WTO, there were experts who spared no effort to suggest the merger and acquisition in certain domestic industries against the shock from gargantuan multinational corporations. The reform of China‘s economy lasted only 30 years so far and the overall construction of market economy system only experienced a ten-year-or-so period. Chinese enterprises growing up under such circumstances are lacking in international operation experience, core technology and competitiveness compared to international enterprises alike. In addition, China has a vast territory, resulting in the scattering of many small companies of the same industry in all parts of country. Thus, considering the long-term development of the whole nation, the stimulus plan encourages merger and acquisition for the purpose of elevating international competitiveness of Chinese enterprises. 1

Yuan Yuan, 03-05-2009. The Revitalization of the Ten Key Industries Brightens Chine‘s Economy [N]. 21st Century Business Herald

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Column 4-1. Distributing Map of the Provincial Primacy in Annual Value-

added of 9 Key Industries in 2008

Source: Sorted out and drawn according to related sources from China Statistical Yearbooks (2008).

Column 4.2. Why Is Real Estate Industry Excluded in the Ten Major

Industries Stimulus Plan?

Before the issue of the stimulus plan of Logistics, Cheng Siwei, the former vice chairperson of the Standing Committee, disclosed that real estate industry would substitute for energy industry and be counted one of the ten core industries, but it didn‘t come true. Liu Tienan, the Associate Director of State Development and Reform Commission, explained that the final selection of logistics is made on the basis of the characteristics of logistics for that it is an important branch of service industry and is closely related to the other nine key industries. Logistics is the important link of the nine key industries and between the industries and domestic and foreign markets. At the same time, the adjustment and stimulus of logistics as a service industry on the one hand meets the needs of logistics itself and on the other hand has a positive impact on the elevation of the competitiveness of the other nine key industries. Thus, the ten key industries are organically linked integrity because of logistics which brings the possibility of forming combinations in the adjustment and stimulus of industries. Comparatively, although real estate industry is also an important pillar industry in China, its contribution as a link is not remarkable. Source: From “Explanation by the NBRC: Why is Real Estate Industry Excluded in the Stimulus Plan”, http://news.xinhuanet.com/fortune/2009-02/27/content_10909094.htm


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SECTION 2: MAIN CONTENTS OF THE STIMULUS PLAN2 I. Raw Material Industry 1. The Stimulus Plan of Steel Industry The output of crude steel in 2008 was 500 million tons, taking up 38% of the global production. The apparent domestic consumption amounted to 453 million tons and direct export, 60 million tons, accounting for 15% of the world steel trade volume. However, the problems resulting from the extensive development of steel industry in the past years now have become obvious, including the glut of capacity caused by blind investment, weakness in creativity, irrationality in industrial layout, low industrial concentration ratio, weakness in control of resources and disorder of circulation. Since the second half of 2008, with the expansion and extension of international financial crisis, China‘s steel industry is confronted with severe shocks and unprecedented challenges as for its rapidly sliding demand, dramatically falling price, difficulty in business operations and deficit of the whole industry. The Stimulus Plan of Steel Industry is aiming at preventing steel industry from continuous sliding momentum and keeping the overall stability in 2009. And in 2011, the steel industry would hopefully change its extensive development modes and improve its technological level and creativity, which contributes to the elevation of overall competitiveness and enhancement of its role as a pillar industry and leads to the track of sound progress. The stimulus plan is designed to make the following achievements: (1) maintain the stability of domestic market and improve the export environment; (2) strictly control the total quantity of steel and accelerate the elimination of the unqualified; (3) expedite the reorganization of the enterprises and increase the concentration ratio of the industry; (4) intensify reforms of technology and promote the technological improvements; (5) optimize the layout of the steel industry and maintain a harmonious development; (6) adjust steel assortment and improve product quality; (7) keep the stability of imported iron ore resources and put the market in good order; (8) exploit domestic and foreign resources and ensure the safety of the industry. Policy measures include the adjustment of tariff rate of certain products, the implementation of fair trade policy, an increase in the investment in technology, perfection of the mechanism which enables the outdated production to withdraw and reorganizational policy of enterprises, amendment of steel industry policy, uplift of steel standard for construction engineering, realization of harmonious development with other related industries, implementation of financing policy with guarantee and curtailment and ―tobe-global‖ strategy, establishment of disclosure system of industrial information and the exertion of industrial association. 2. The Stimulus Plan of Petrol Chemical Industry Petrol chemical industry has developed at a high growth rate with its industrial scale enlarged and general strength improved. Industrial value added grew at an average annual increase of 20%, pulling up the growth of GDP at 1% or so. However, there are problems concerning the development of petrol chemical industry: low degree of intensive development 2

This part in compiled according to the related sources from Stimulus Plan of Industrial Industries. [EB/OL]. (0402-2009).http://www.gov.cn/zwgk/2009-04/02/content_1276054.htm

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and decentralization of industrial layout; lack of innovation, which results in the dependence of the production technique and high-end products and large complete technique and equipment on import; irrationality of product mix with more mid- and low-end products; restrictions of resources and environment, which causes the contradiction between industrial development and environment protection; increasing demand of agricultural means of production, deficiency in capacity of low-cost products, and imperfection of market regulation and control system; and blind exploitation of coal chemical regardless of resources and environment and resource conversion efficiency. Since the second half of 2008, petrol chemical industry suffered from severe shocks from the international financial crisis, with the domestic market shrinking, production declining, inventory of enterprises increasing, price decreasing, and economic benefits of the industry declining. All in all, the production and operation of the industry is confronted with serious difficulties. The goal of the Stimulus Plan of Petrol Chemical Industry is to maintain the stable and fast development of the industry. In 2009, a stable operation is the major concern and hopefully after three years‘ adjustment and revitalization, in 2011, the industrial structure will become reasonable, development modes transferred and general strength of the industry advanced. The major missions the stimulus plan include: (1) maintain the stable operation of the industry; (2) improve the indemnifying ability toward agricultural means of production; (3) demonstrate the coal chemical industry steadily; (4) implement significant projects; (5) plan the layout of significant projects as a whole; (6) promote the improvement of technology; (7) accelerate the elimination of the backwards capacity; (8) enhance environment protection; (9) support the joint reorganization of enterprises; (10) improve the indemnifying ability toward resources; (11) improve the management level of enterprises. Policy measures include the optimization of chemical fertilizer reserve mechanism, fulfillment of oil reserve, enhancement of credit policy support, optimization of product oil pricing mechanism, enlargement of investment in technological upgrading, support to exploitation of overseas resources, implementation of fair tax policy, promotion of merger and acquisition of enterprises, optimization of industrial development policy and reinforcement of anti-dumping anti-smuggling activities according to law.

3. The Stimulus Plan of Nonferrous Metal Industry At the beginning of 21st century, China‘s nonferrous metal industry has developed fast with apparent achievements in the advancement of technology, improvement of the quality of varieties, elimination of backwards capacity and exploitation of overseas resources. Besides, the production and consumption scale is constantly enlarged, which makes China the largest nation in production and consumption of nonferrous metal. Since the second half of 2008, with more influence of the international financial crisis on the real economy, China‘s nonferrous metal industry has been overwhelmed by shocks with its product price plummeting, production declining, domestic consumption slumping, cash-flow of enterprises tightening and whole industry experiencing losses. In addition, the deep problems of China‘s nonferrous metal industry become evident, including the glut of productivity of some products, the irrationality of industrial layout, low degree of industrial intensification and indemnifying ability toward resources, lack of innovation, and low level of recycling ability. The Stimulus Plan of Nonferrous Metal Industry is aiming at the goals of keeping the overall stability of industry and leading it to the track of sound progress in 2011, optimizing the industrial structure, changing its development modes, improving technological


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innovations and laying the foundation for the sustainable development of nonferrous metal industry. The stimulus plan is designed to make the following achievements: (1) maintain the stability of domestic market and improve the export environment; (2) strictly control the total quantity and accelerate the elimination of the backwards capacity; (3) intensify reforms of technology and promote the technological improvement; (4) expedite the reorganization of the enterprises and adjust the layout of the industry; (5) exploit domestic and foreign resources and improve the indemnifying ability toward resources; (6) develop a recycling economy and improve the recycling ability; (7) reinforce management and safety supervision of the enterprises and cultivate talented people. Policy measures include the optimization of export tax policy, establishment of national reserve system, enlargement of investment in technological upgrading, creation of pilot project for direct power-purchase, optimization of reorganizational policy of enterprises, encouragement of ―to-be-global‖ strategies, amendment of industrial policy, proper resource allocation, implementation of financing policy with guarantee and curtailment, implementation of accountability system in energy conservation and emission reduction and elimination of the outdated capacities, establishment of communication and disclosure system of industrial information and the exertion of industrial association (chamber of commerce).

II. Equipment Manufacturing Industry 1. The Stimulus Plan of Automobile Industry Automobile industry has developed at a high growth rate with the formation of the production and assembling system for multi-variety and all series of finished automobile and intermediate products, rise of industrial concentration ratio and technological level of products, which makes China the largest nation in producing automobiles. However, the problems of irrational industrial structure, low technological level, weak innovation and deficient consumption policy have become overwhelming in addition to the restrictions from resources, environment protection and urban transport. Since the second half of 2008, as the influence of the international financial crisis deepened and the international automobile markets dramatically shrank, China‘s automobile industry is overwhelmed by shocks which result in the negative growth of production and marketing of the whole industry, declination of the economic benefits of core enterprises, weakness of self-owned brand in competition, and the severe situation facing China‘s automobile industry. The goal of the stimulus plan of Automobile Industry is to maintain the stable and fast increase in production and marketing of the industry, improve the environment of automobile consumption, optimize the structure of market demand, make progress in merger and acquisition, enlarge the market proportion of indigenous brands, form the scale of production and marketing of electric vehicles, improve R&D level of finished automobile, and become independent in the technology of designing and producing key components. The stimulus plan is designed to make the following achievements: (1) cultivate automobile market; (2) promote the reorganization of automobile industry; (3) support the independent innovation of enterprises; (4) intensify reforms of technology; (5) implement the strategies concerning new energy vehicles; (6) implement the strategies concerning indigenous brands; (7) implement the strategies concerning export of automobiles; (8) develop modern automobile service industry. Policy measures include: (1) cut down purchase tax of passenger vehicle; (2)

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implement the policy of ―Automobiles-Going-to-the-Countryside‖; (3) accelerate the rejection and replacement of old automobiles; (4) cancel the irrational restriction on automobile purchase; (5) regulate automobile consumption credit; (6) regulate and promote second-hand automobile market; (7) accelerate the construction of urban transportation system; (8) perfect the reorganization policy of automobile industry; (9) enlarge the investment in technological improvement and reconstruction; (10) encourage the consumption of energy-saving automobiles and new energy automobiles; (11) perfect and implement Automobile Industry Development policy.

2. The Stimulus Plan of Shipbuilding Industry Since 2003, China‘s shipbuilding industry has maintained fast development, with its industrial scale enlarged, production of watercrafts increased. In addition, the completions of shipbuilding, order quantity both newly received and held in hand have been in the front ranks of the world for many continuous years. However, some problems of shipbuilding industry become apparent, including the lack of independent innovation, extensive development modes, low-level overlapping investment, extreme surplus of productivity, sluggish development of corollary equipment used in watercrafts and equipment used in ocean engineering. Since the second half of 2008, the impact of the international financial crisis and dramatic sliding of the international shipping market have brought about great pressure on watercraft market with purchase orders for new watercraft declining rapidly, financing problems emerging and risks of performance of the contracts of delivering ships increasing, which as a whole leaves China‘s shipbuilding industry in the face of severe situation. The Stimulus Plan of Shipbuilding Industry is aiming at the goals of maintaining the stable and fast development of the industry, enlarging the market share, enhancing abilities to provide the auxiliary items, making progress in adjustments of structure, uplifting the R&D level and improving the development quality. The major missions the stimulus plan include: (1) stabilize the production of watercraft enterprises; (2) enlarge the demand of watercraft market; (3) improve equipment of ocean engineering; (4) support the merger and acquisition of enterprises, (5) improve independent innovation; (6) enhance the reforms of technology; (7) develop ship repairing service; (8) develop international market; (9) enhance the management of watercraft enterprises. Policy measures include enhancement of the financing support for production and operation, increase in the release of buyer's credit in the export of watercraft, encouragement in the purchase of abandoned watercraft, expansion of domestic and international market demand, elimination of old watercrafts and single hulls, strict control on newly developed capacity, perfection in merger and acquisition strategies, and more investment in R&D and technological reforms. 3. The Stimulus Plan of Equipment Manufacturing Industry China has become a powerful country in equipment manufacturing industry but the industry is still confronted with problems such as weakness in independent innovation, underdevelopment of basic manufacturing, low-level duplication of similar projects and difficulty in promoting independent innovation product. At the same time, influenced by the international financial crisis, domestic and markets shrinks dramatically, together with the slowing down of fast developing momentum of the industry, difficulty in production and


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operation of enterprises, declination of economic benefits and challenges toward sustainable development. The goal of the Stimulus Plan of Equipment Manufacturing Industry is to maintain the stable development of the industry, enlarge the market share, make breakthrough in manufacturing major equipments, advance the basic corollary standard, optimize organizational structure and change the developing modes. The stimulus plan is designed to make the following achievements: (1) revitalize equipment manufacturing industry relying on the major projects of the ten fields, including electric power generation with high efficiency and cleanliness, power transmission and transformation of extra-high voltage, mining of coal and metal minerals, pipage of natural gas and storage and transportation of liquefied gas, high-speed railway, urban rail transportation, agriculture and rural area, infrastructure, ecological environment and the livelihood of the people and major science and technology project; (2) realize the automation of equipment with the support of the nine major industries, including steel industry, automobile industry, petrol chemical industry, shipbuilding industry, light industry, textile industry, nonferrous metal industry, electronic information industry and national defense and war industry; (3) advance the manufacturing standard of the four major matching products, including heavy casting and forging, basic components, processing assistive devices and specialty resources and lay a solid foundation for the development of the industry; (4) accelerate the implement of key work (including firstly, accelerate the adjustment of industrial organization and structure; secondly, improve independent innovation; thirdly, uplift the level of specialized production; fourthly, optimize product standard system; fifthly, exploit overseas resources and market; sixthly, develop modern manufacturing service industry and finally, enhance the management of enterprises and the development of talented people) and reform of industrial development modes. Policy measures include: (1) bring the VAT Reform Policy into effect; (2) enhance devices purchasing management of invested projects; (3) encourage the use of the first domestically made equipment; (4) intensify reforms of technology and promote the technological improvement; (5) support the export of equipment; (6) adjust preferential tax policies; (7) accelerate the merger and acquisition of enterprises; (8) implement the policy of subsidizing energy saving product and the purchase of agricultural equipment; (9) establish of the disclosure system of industrial information; (10) support the development of product inspection and certification authority.

III. Consumer Goods Industry 1. The Stimulus Plan of Light Industry In 2008, the value added of light industry was 2.6235 trillion Yuan(RMB), taking up 8.7% of GDP with more than 100 varieties of products ranking the first place in the whole world, including household appliance, leather, plastic, food, furniture and hardware products. However, light industry is still confronted with some serious problems, including, weakness of independent innovation, irrationality of industrial structure, arduousness in energy saving and consumption reduction and quality problems of products. Since second half of 2008, the shocks from the international financial crisis have given rise to the unbalance of domestic and foreign markets, overstocks of products, difficulty in financing, production and operation. All in all, light industry is facing a severe situation.

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The Stimulus Plan of Light Industry is aiming at the goals and tasks of maintaining the stable increase of production, making progress in independent innovation, optimizing industrial structure, reducing the emission of contaminations, eliminating the outdated capacities and enhancing quality and safety. Policy measures include: (1) increase the subsidized varieties for ―Home-Appliances-Going-to-the-Countryside‖ policy; (2) uplift the export rebate rate of some light industry products; (3) adjust the catalogue of processing trade; (4) deal with the problem concerning purchase and reservation of agricultural products; (5) intensify reforms of technology and promote technological improvement; (6) enhance the financial support; (7) support medium and small enterprises; (8) give industrial policy instructions; (9) encourage merger and acquisition and eliminate the backwards capacity; (10) exert the power of industrial association (chamber of commerce).

2. The Stimulus Plan of Textile Industry China has become a powerful country in the production of textile and garments. However, some problems concerning textile industry has risen, such as, weakness of independent innovation, irrationality of industrial layout, arduousness in energy saving and emission reducing and blindness in capacity expansion. Since the second half of 2008, the international financial crisis has brought about serious problems including the disequilibrium of demand and supply, difficulty in enterprise operation and increase in the loss of enterprises and declination of employment offered, which as a whole leaves China in the unprecedented predicament ever. The goal of the Stimulus Plan of Textile Industry is to maintain the stable and fast growth of the industry, optimize industrial structure, improve independent innovation, technological and equipment level and quality of product varieties, adjust industrial layout, make breakthrough in the development of indigenous brands and eliminate the backwards capacity, which as a whole will hopefully lead China onto the track of a superpower country in textile industry. The stimulus plan is designed to make the following achievements: (1) stabilize domestic and foreign markets; (2) improve independent innovation; (3) accelerate the reforms of technology; (4) eliminate the backwards capacity; (5) optimize geographical distribution; (6) perfect public service system; (7) accelerate the development of indigenous brands; (8) improve the competitiveness of enterprises. Policy measures include: (1) keep increasing the export rebate rate of textile products; (2) enhance the purchase of cotton and steam filature; (3) intensify reforms of technology and promote the technological improvement; (4) enlarge domestic consumption; (5) encourage merger and acquisition of enterprises; (6) enhance the financial support towards textile industry; (7) reduce the burden of textile enterprises; (8) support medium and small enterprises; (9) give industrial policy instructions; (10) Exert the power of industrial association (chamber of commerce).

IV. Electronic Manufacturing Industry Since the implementation of the reform and opening up policy, China‘s electronic information industry has maintained continuously fast development and China has become the largest base for manufacturing electronic information products. However, with the impact of the international financial crisis, since the second half of 2008, electronic information industry has been facing a serious situation with the export of electronic information products


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declining, growth rate of sales revenue dramatically falling, operation problems emerging in the key enterprises, and the exploitation of foreign capital declining. Some deep problems of the industry have risen and countermeasures have to be carried out in order to accelerate the adjustment of industrial structure, optimization of industry, enhancement of technological innovation and most importantly, to promote the stable and continuous development of electronic information industry. The Stimulus Plan of Electronic Information Industry is aiming at promoting the growth, maintaining the stability, adjusting the structure, and changing the development modes of the industry. Over the next three years, electronic information industry should make the following achievements with the support of other nine key industries: maintenance of stable growth of the key industries, breakthrough in the strategically core industries and new growth resulting from new application, including: (1) the stable growth in computer, electronic components and audio and visual products; (2) breakthrough in the technology of core industries such as integrated circuit, display device, and software; (3) cultivation of new growth areas in communication apparatus, information service and application of information technology. Policy measures include: (1) expand domestic demand; (2) increase national investment; (3) enhance policy support; (4) improve investment and financing environment; (5) support the merge and organization of strong enterprise; (6) exploit foreign market; (7) develop independent innovation.

V. Logistics Industry In 2008, the total value of social logistics goods in China amounts to 899 trillion Yuan(RMB), increasing by 4.2 times as against Year 2000, with an annual growth rate of 23%. The industry achieves value added of 20 trillion Yuan(RMB), increasing by 1.9 times as compared with that of 2000, with an annual growth rate of 14%. But the overall level of logistics industry is still underdeveloped and there arises some serious problems: (1) operating efficiency of social logistics is far from being satisfactory; (2) both socialized logistics demand and specialized logistics supply are insufficient; (3) logistics industry is still lacking in infrastructure construction with a more rationally distributed, smoothly linked, and comprehensive convenient transportation systems to be desired; (4) local blockade and industrial monopoly cause obstacles against resources integration and integrated operation, which results in the irregular logistics market; (5) logistics technology, personnel training and logistics standard can‘t meet current needs and logistics service is still weak in systematization and intensification. Since the second half of 2008, influenced by the international financial crisis, logistics industry are confronted with the following problems: shrinking of market demand, declination of profits as well as transportation price and warehousing charges, difficulty of the operation of some medium and small-size logistics enterprises, which endangered the traditional logistics enterprises which only provide simple services such as transportation and storage. The Stimulus Plan of Logistics Industry is designed to achieve the following goals: (1) relieve the severe situation of logistics operation problem and maintain the stable development of the industry in 2009; (2) until 2011, develop a passel of large-scaled and comprehensive logistics enterprise groups which have international competitiveness and modern logistics service system with rational layout, advanced technology, energy and

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environment conservation ability, convenience, efficiency and safety. Hopefully the service ability and socialization and specialization of logistics industry would be improved, the proportion of third party logistics increased and logistics scale enlarged. The growth rate of logistics industry increases by 10% each year and the ratio of the total cost of social logistics against GDP would be lower than the present level. The major missions of the stimulus plan include: (1) enlarge the logistics market demand; (2) promote the socialization and specialization of logistics; (3) accelerate the merger and acquisition of logistics enterprises; (4) promote the development of logistics in key fields; (5) accelerate the development of international logistics and bonded logistics; (6) optimize the regional layout of logistics development; (7) enhance the link and coordination of logistics infrastructure construction; (8) improve logistics information standard; (9) perfect logistics standardization system; (10) enhance the development and application of new logistics technology. The major projects are as follows: (1) multimodal transport and transferring facility project; (2) logistics park project; (3) urban delivery project; (4) Bulk commodity and rural project; (5) joint development project of manufacturing industry and logistics industry; (6) project of logistics standard and promotion of technology; (7) logistics information platform project; (8) project for tackling key problems in logistics technology; and (9) emergency logistics projects. Policy measures include the enhancement of organization and coordination, reform of logistics management system, optimization of logistics laws and policies, formulation and implementation of subject planning, multiple-channel increase in investment in logistics, optimization of logistics statistical indicator system, promotion of opening up and international cooperation of domestic logistics, acceleration of personnel training, and the exertion of the power of industrial association.

Column 4-3. The “Most” of Ten Major Industrial Stimulus Plans

3

Light Industry: Most Beneficial for the Stock Market The Stimulus Plan of Light Industry benefits more than 40 sub-industries including household appliances, leather and food, etc. Thus, the stimulus plan is referred to as the most beneficial plan for the stock market. The emphasis of the stimulus plan is placed on supporting white goods while increasing the subsidized varieties of “Home-AppliancesGoing-to-the-Countryside” policy and the amount of each variety that every family is allowed to purchase from one to two.

Automobile Industry: Most Yearning for Self-owned Brands According to the stimulus plan of Automobile Industry, domestic market share of future self-owned brand of passenger car will hopefully rise up to 40% or more, in which 30% will be taken up by self-owned brand cars. In addition, the stimulus plan encourages the export of self-owned vehicles, the amount of which will take up 10% of total sales volume.

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The ―Most‖ in Ten Major Industries Stimulus Plans Issued by the State Council: Light Industry is the Most Beneficial for the Stock Market [N]. International Finance News. 02-26-2006


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Shipbuilding Industry: Most Concerned about Purchase Order Shipbuilding industry is marked by the long cycle of producing one single watercraft and its high cost, which makes the punctual performance of the purchase order very important. In the context of the financial crisis, established orders are frenquently withdrawn with less new orders signed. In accordance with the stimulus plan, the focus at present is to ensure the orders are performed on time and relieve operation risk through implementation of active credit guarantee measures.

Nonferrous Metal Industry: Rapidest in the Elevation of Rebate Rate Export will become one of the most important strategies in the stimulus plan of Nonferrous Metal Industry. The government makes some relaxation of restrictions on the import and export of some metal products in tax adjustments. The stimulus plan further increases average export rebate rate of some products such as high-precision copper pipes from 5% to 13%, and that of other home-made highly processed products which are able to substitute for those imported from aboard could be raised to 17%.

Equipment Manufacturing Industry: Beneficial for the Largest Range of Upper and Lower Stream of Industrial Chain Equipment manufacturing industry is an industry with a long upper and lower stream of industrial chain. The stimulus plan for the first time places basic components in a very important position. It can be predicted that government would issue more practical measures concerning financial support, tax preferences for purchasing home equipment, R&D financial support, and merger and acquisition to promote the development of the whole industrial chain.

Light Industry: Most Caring for the Livelihood of People No other industries like light industry would have so long an industrial chain covering wide range of materials and products from cotton to plus material to clothing. And no other industries would provide the employment of more than 20 million positions except for light industry. It is obvious that employment security is the major task to ease the influence of the international financial crisis.

Logistics Industry: Luckiest in the Stimulus Plan Logistics industry is the last to be listed in the stimulus plan, the process of which is dramatic with ups and downs. Even once, there was news saying that real estate industry would be chosen in the stimulus plan. As China’s logistics industry is in its infancy, it is very lucky for it to be listed in the stimulus plan at the last moment. The reason might be that the government wouldn’t allow too many shocks on the newly established fragile logistics system.

Electronic Information Industry: Most Effective to Get Instant Results The Stimulus Plan of Electronic Information Industry stipulates the exemption of sales tax of software companies and increase in the export rebate rate of 25 varieties of key electronic products including colored tubes and glass envelope up to 17%. The plan also refers to the expansion of domestic demand, promotion of 3G mobile communication networks, and the investment scale of more than 600 billion Yuan(RMB). These measures

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would decrease the cost of enterprises and offer instant results as to promoting the achievements of companies.

Petrol Chemical Industry: Most Concerned about Structural Adjustments The problems accumulated in the rising period of petrol chemical industry have begun to emerge, including the extreme surplus of capacity and out-of-order competition. On one hand, the capacity of primary chemical products is superfluous and dramatically dependent on export. On the other hand, the development of high-end fine chemical products is very weak and dependent on import. Thus, the stimulus plan focuses on structural adjustment of the industry, planning the developing trend of the whole industry from a macro perspective.

Steel Industry: Most Concerned about Reorganization It is put forward in the stimulus plan of Steel Industry that steel industry should take the leading role of large groups, promote the joint reorganization of enterprises and develop large and ultra-large steel groups with international competitiveness. Specifically, until 2011, there should be several large groups with capacity of more than 50 million tons and international competitiveness such as Baosteel Group, Anben Iron and Steel Group and Wuhan Steel Group.

SECTION 3: IMPLEMENTATION EFFECTS OF THE STIMULUS PLAN The stimulus plan has been implemented for almost half a year. The effects are evident. The policy effect of promoting economic stability and rapid development is gradually visualized; downturn trend in industry growth rate is restrained; recovery of enterprises‘ stable development tends is to become clear, and industry integrated operations tend to be sound.

I. Accelerative Recovery in Raw Material Industry Raw Material Industry accelerates recovery as the fixed asset investment increases vigorously. From January to July of 2009, value added in raw material industry increased by 7.8% over that of the same period of last year, with an increase of 3.1% from January to February, and value added in March, April, May, June, July increases by 8.8%, 7%, 8.9%, 11%, 13% respectively.4 Recovery in production of metallurgy and nonferrous metal industry speeds up and the operation takes a favorable turn. From January to July of 2009, value added in metallurgy and nonferrous metal industry increased by 4.2% and 7.9% respectively over that of the same period of last year, with an increase of 14% and 11.5% in July. The output of crude steel of this period is 317 million tons, with an increase of 2.9% over that of the same period of last year, among which in July it reached 50.68 million tons with about 90% capacity restored. In 4

The Ministry of Industry and Information Technology. Industry Economic Operation in the First Half Year of 2009—Part One: Material Industry [EB/OL].(07-23-2009). http://www.miit.gov.cn/ n11293472/ n11293832/ n11293907/ n11368223/12472674.html


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July, the output of ten kinds of nonferrous metal increased by 2% over that of the same period of last year, which changed the situation of eight successive months‘ downturn in the growth rate of output from last November to this June. Also in July, the daily average output of electrolytic copper and electrolytic aluminum respectively increased by 17.8% and 29.5%. The domestic market prices of major products pick up in vibration trend; the performance of metallurgy and nonferrous metal industry has been improved. In the first half year of 2009, the total profit of 89 key large and medium enterprises amounted to 2.62 billion Yuan(RMB) with a profit of 6.64 billion Yuan(RMB) in June. They have gained profit in five successive months. Scaled nonferrous metal enterprises of 22 provinces earned gross profit of 13.9 billion Yuan(RMB), with a profit of 5 billion in June.5 Petroleum supply is steady on the whole, and chemical industry upturns strongly. From January to July of 2009, China‘s output of crude oil was 93.49 million tons, which decreased by 1% below that of the same period of last year, and the volume of imported crude oil in this period held the line with that of the same period of last year. The volume of crude oil processing was 175 million tons, with an increase of 1.5% above that of the same period of last year, 6% above that of the first quarter. In June, the output of crude oil was 15.71 million tons, with a decrease of 1.8% below that of the same period of last year; the volume of crude oil processing was 31.92 million tons, with an increase of 6%. In July, the growth rate of value added in chemical industry was 9.4%, with an increase of 14.7%; the increasing range increased by 0.1% above that of the same period of last year, with an increase of 3.5% above that of June, which is the highest increasing range since the second half year of last year. The output of soda ash and caustic soda in July rose by 6.5% and 13.2% respectively over the same period of last year, with an increase of 5.2 and 7.3 percentage points above that of June, which has maintained growth for two successive months. The output of ethylene has turned to increase by 2% from a decline of 3.3% in June. Owing to the policies to support and benefit agriculture, the rural areas and farmers, the growth of chemical fertilizer and pesticide production has been steady, with an increase of 10.4% and 9.2% in output in previous seven months.

II. Favorable Growth Situation in Equipment Manufacturing Industry Equipment manufacturing industry appears to be in favorable growth situation, due to investment and policy supports. From January to July of 2009, value added in equipment manufacturing industry increased by 10.1% over that of the same period of last year, with an increase of 15.9% in July, maintaining double-digit growth rate in three successive months. 6 The production and sales volume in automobile industry hit new records continuously and the increasing trend in agricultural machinery industry is good. Under the policies of half purchase tax for those passenger cars with displacement below 1.6L, ―Automobiles-Going-to5

The Ministry of Industry and Information Technology. Chinese Steel Industry Operation Features in the First Half Year of 2009[EB/OL].(07-29-2009). http://www.miit.gov.cn/n11293472/n11293832/n11293907/n11368223/12481621.html 6 The Ministry of Industry and Information Technology. Industry Economic Operation—Part Two (July 2009): Equipment Manufacturing Industry [EB/OL].(08-27-2009). http://www.miit.gov.cn/n11293472/n11293832/n11293907/n11368223/12537204.html

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the-Countryside‖, ―Automobile trade-in‖, etc. from January to July of 2009, the output of automobile was 7.1 million, and the sales volume of automobile was 7.18 million, increasing by 20.2% and 23.4% respectively over that of the same period of last year (statistics by Automobile Association). The volume of automobile production and sales has exceeded 1 million for five successive months, among which the amount of those automobiles with displacement above 1.6 L increased by 39.8% over that of the same period of last year. The performance has been improved to some extent. In the first half year, 19 key auto enterprises gained gross profit of 42.2 billion, with a decrease of 1.4% and the decreasing range shrank 8.6 percentage points compared to that of the period from January to May. The policy of ―Automobile-Going-to-the Countryside‖ triggers off farmers‘ initiative for purchasing agriculture machines which further promotes enterprises‘ production. Until the end of July, the central government has subsidized 9.04 billion Yuan(RMB) and 2.06 million agriculture machines, among which there are 194.7 thousand large and medium tractors, 104.3 thousand other machines like rice transplanting machines, corn harvesting machines, cereal harvesting machines (statistics by the Ministry of Agriculture). In the former seven months, the output of large and medium tractors is 228.1 thousand with an increase of 29.6% over the same period of last year, while the growth rates of production of crop harvesting machines and field work machines are 23.6% and 37.3% respectively.7 The situation of general equipments production has turned for the better; the increasing trend in special equipments production maintains steady. From January to July of 2009, value added in general equipment manufacturing industry increased by 7.7% over that of the same period of last year, among which the growth rate in July rose again to 11.3%; value added in special equipment manufacture industry increased by 12.1%, and it has kept a growth rate of more than 12% in the second quarter and July. For extensive construction of domestic engineering projects, domestic demand of construction machinery soars obviously. During the former seven months, the output of lifting equipments, conveying machinery, compaction machines, and concrete/brick machinery respectively increased by 9.9%, 12%, 9.5%, and 30.6% over that of the same period of last year; the production situation of forklifts, diggers, loaders fell into downturn due to the export slump; the output of special equipments for cement, refining and chemicals, grain, feed, printing increased by 15%—31.9% over that of the same period of last year. Machine tool industry has accelerated its development towards being high-tech and large scale. From January to July of 2009, the output of metal-cutting machine tools and metalforming machines decreased by 18.6% and 13.5% respectively, among which in July the output of metal cutting machine tools decreased by 10.6%, and the output of metal-forming machines increased by 11.3% compared to the same period of last year. The demand of general-purpose machine tools, low-grade machine tools shrank sharply; nevertheless the demand of large-sized, heavy and top-grade numerical control machines has been steady on the whole. Based on the statistics by China Machine Tool Industry Association about 179 key enterprises concerned, in the first half year, the numerical control rate of metal working machine tools reached 53.7%, with an increase of 7.7% over that of the same period of last year; the unit price of metal cutting machines rose by 36.7%; and the unit price of numerical 7 The Ministry of Industry and Information Technology. Analysis on the Operation of Chinese Automobile Industry in the First Half Year of 2009 [EB/OL].(08-05-2009). http://www.miit.gov.cn/n11293472/n11293832/n11293907/n11368223/12497380.html


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control machines ascended 46.7% over that of the same period of last year. Recent investigation statistics of more than 130 enterprises by the association have shown that more than one third enterprises are preparing large-sized and heavy tools production. Shipbuilding industry keeps a rapid growth rate, and the situation of newly received orders is improved. According to the statistics by China International Shipbuilding Industry Association, from January to July of 2009, the completed volume of Chinese ship manufacturing was 18.78 million DWT, with an increase of 78% over that of the same period of last year. In the former seven months, the number of new undertaking ship orders was 7.87 million DWT, with a decrease of 78% over that of the same period of last year; the order situation has got better since June, among which in July the number of new undertaken orders was 1.99 million DWT. Until the end of July, the number of ship orders handed by watercraft enterprises is 192.35 million DWT, with a decrease of 6% below the beginning of the year. According to incomplete figures, China has canceled 75 ship orders and 3.88 million DWT.

III. Steady Operation in Consumer Goods Industry Dependent on domestic demand, consumer goods industry is in the state of steady operations. From January to July of 2009, in main consumer goods trades, value added in light and scaled textile enterprises increased by 9.6% and 8.5% respectively over that of the same period of last year.8 Food production keeps a rapid growth rate, and the increasing trend of fitness equipments and electric bicycles industry is sound. From January to July of 2009, the growth rates of value added in farm and sideline food processing, food manufacture, beverage production are respectively 16.5%, 11.9%, and 12.9%. Among main products, the growth rates of refined edible oil production, meat, and freezing aquatic food production were respectively 25%, 36.5%, 34.8%; the growth rates of candy, quick-frozen rice vermicelli food, and can production ranged from 10.9% to 13.8%, and the growth rates of alcoholic drink and soft drink production were respectively 8.2% and19.2%. In the former seven months, the growth rates of indoor training fitness equipments and electric bicycles production were respectively 23.2% and13.5%, and in July the growth rates of them were 65% and 27.6% respectively. Recovery in paper production accelerates, and export situation is in a favorable upturn. From January to July of 2009, value added in paper production and paper products trades increased by 6.5% over that of the same period of last year, among which in June and July the growth rate upturned to 10.9% and 9.4% respectively. On the other hand, according to the statistics by customs, from January to July of 2009, the export volume of paper and paper products decreased by 13.3% below that of the same period of last year, nevertheless the export volumes of June and July increased by 11.5% and 16.4% respectively, which changed the situation of continuous decline in export volume for former five months. Home appliances production has been promoted more obviously by gradual implementation of the policy of ―Home-appliances-Going-to-the-Countryside‖. From January to July of 2009, the accumulated sales volume of the policy was 13.88 million, with turnover 8 The Ministry of Industry and Information Technology. Chinese Industry Economic Operation in the First half Year of 2009—Part Three: Consumer Goods Industry [EB/OL].(2009-08-27). http://www.miit.gov.cn/n11293472/n11293832/n11293907/n11368223/12537201.html

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of 25.1 billion, among which there were 7.68 million refrigerators, 1.16 million air conditioners, respectively taking the proportion of 62.9% and 24.6% of the turnover. In July, 4.27 million home appliances going to the countryside were sold, and the turnover was 8.8 billion, among which there were 2.56 million refrigerators and 928 thousand air conditioners. Under the policy of home appliance going to the countryside, the situation of home appliances production turns for the better, with an increase of 32.7% in the output of home refrigerators and an increase of 9.8% in the output of room air conditioner over that of the same period of last year. In the background of export slump, the overall situation of home appliance production is in downturn. Textiles, clothing production is in smooth operation and the growth rate of chemical fiber production accelerates. From January to July of 2009, value added in textile industry, clothing, shoes and hats manufacturing industry increased by 7. 2% and 10.8% respectively over that of the same period of last year, among which in July the growth rates were 8.6% and 11.3% respectively; value added in chemical fiber industry increased by 5.7% over that of the same period of last year, among which in July the growth rate was 18.4%. From the perspective of main products output, from January to July, the output of yarn, cloth, clothes increased by 10%, 1.1% and 4.8% respectively over that of the same period of last year, with the increasing range falling back to 0.8, 5.6 and 1.4 percentage points respectively, among which in July the growth rates were 13.4%, 4.1% and 8.9% respectively that are higher than those of last July; the growth rate of chemical fiber production was 11.8%, with an increase of 7 percentage points over that of the same period of last year, among which the growth rate in July was 22.6%. Boost of export rebate rate has smoothened the decline trend of textile and clothes export. Export value of the former seven months decreased by 11.3%, with a declining range of 11.3% which was lower than the average of Chinese foreign trade export.

IV. Restrain of the Downward Trend in Electronic Manufacturing Industry Owing to the policy of ―Home-Appliances-Going-to-the-Countryside‖, and the boost in export rebate rate that encourages consumption, stabilizes export and 3G construction, the downward trend in production has been restrained. From January to July of 2009, value added in electronic manufacturing industry above the designated size increased by 0.8% over that of the same period of last year, which reversed the downward trend of the first half year. The growth rates in May, June, and July turned up to be 4.3%, 6.5% and5.3% respectively. The decreasing range of delivery value of exports shrank from 15.5% in the first quarter to 7.1%, 5.8% and 6.2%.9 Domestic market drives the upturn of electronic manufacturing industry. From January to July of 2009, output value of domestic market in electronic manufacturing industry increased by 12.0%, among which the growth rate of the second quarter was 19.6% with an increasing range of 2 percentage points more than that of May and June. The policies of ―HomeAppliances-Going-to-the-Countryside‖ and ―Substituting-the-Old-for-New‖ stimulated town 9 The Ministry of Industry and Information Technology. Chinese Industry Economic Operation—Part Four (July 2009): Electronic Manufacturing Industry [EB/OL].(08-27-2009). http://www.miit.gov.cn/n11293472/n11293832/n11293907/n11368223/12537198.html


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and country market expenditure. From January to July, the accumulated sales volumes of color TV sets, computers, and mobile phones were 2.33 million, 249 thousand, 546 thousand, and the turnovers of them were 2.945 billion Yuan (RMB), 831 million Yuan (RMB), and 296 million Yuan (RMB) respectively, among which in July 488 thousand color TV sets, 139 thousand computers, 120 thousand mobile phones subject to the policy of ―HomeAppliances-Going-to-the-Countryside‖ were sold. The production in communication and network equipment industry has accelerated due to 3G construction and new business expansion. From January to July of 2009, the sales volumes of domestic market in communication equipment and computer network equipment industry increased by 10%, and 19.4% respectively. The output of main communication products increased rapidly, with an increase of 51.7% in optical cable production over that of the same period of last year in the former seven months; the output of basic station communication channels of mobile communication and program control exchanges increased by 159.1%, 3.3% respectively. The output of microcomputers was 88.49 million with an increase of 14.6% over that of the same period of last year, among which the quantity of computers was 74.26 million with an increase of 31.3% over that of the same period of last year. Color TV industry has been gradually revived in the background of product mix readjustment. From January to July of 2009, the output of Chinese color TV was 50.18 million with an increase of 2% over that of the same period of last year, among which the output of LCD-TV increased by 77.1% that increases its proportion to the total output of color TV from 25.7% to 44.7%, and among which the output of CRT color TV decreased by 32.6% that descended its proportion to the total output of color TV from 46.2% to 30.5%. The export has turned for the better. According to the statistics by customs, from January to July, the accumulated export volume of color TV was 24.83 million with a decrease of 6.6% below that of the same period of last year, among which the accumulated export volume of color TV in June and July increased by 4.1% and 16.8% respectively over that of the same period of last year, which changed the continuous decline situation of monthly export volume in former five months.

V. Upturn in Logistics Industry against the Downward Trend Updated statistics by National Statistics Institute shows that from January to June of 2009, Chinese freight volume totaled up to 12.935 billion tons, with an increase of 2.5% over that of the same period of last year; freight turnover amounted to 5602.256 billion T/KM, with an increase of 4.3% over that of the same period of last year; the volume of passenger transport added up to 14.767 billion with an increase of 3.7% over that of the same period of last year; passenger turnover volume amounted to 1210 billion P/K, with an increase of 4.5% over that of the same period of last year; the volume of scaled freight handled harbors in the coastal areas was 2.257 billion tons, with an increase of 1.9% over that of the same period of

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last year. The Statistics above amounts to the conclusion that logistics industry has upturned against the international financial crisis.10 The situation of the previous months shows that industrial economic operation has overcome the shock of the international financial crisis through the hardest period. Vigor of smooth upturn has congregated increasingly, and the operation condition has turned for the better on the whole.

Column 4-4: China‟s Sales Volume of Automobile: Infinite Potentiality China‘s sales volume of automobile has stepped into a rapid development stage since the automobile industry adjustment and reinvigorating plan was implemented. The sales volume of January of 2009 held the line with that of January of 2007 and2008, nevertheless, the sales volume of February of 2009 increased sharply compared to that of the same period of last year and it has maintained high records since March. The statistics of 2007 and 2008 displays that there will be a sales plateau in three months in automobile industry, whereas no sales plateau appears in the sales volume of 2009 but always high records, which illuminates that owing to the stimulus of industry reinvigorating plan, automobile industry has overcome the shadow of the international financial crisis, and has achieved wider development space, as illustrated in Figure 4-1. Source: Analysis on the Operation of the Automobile Industry in China from January to July, 2009. 2009-08-05，http://www.miit.gov.cn/n11293472/n11293832/n11293907/n11368223/12497380.html.

Figure 4-1. China‘s Monthly Automobile Sales volume from January to July of 2009 (Unit: ten thousand).

10

National Statistics Institute of the People's Republic of China. Social Transport Volume. [EB/OL].(06-30-2009). http://www.stats.gov.cn/was40/gjtjj_outline.jsp


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SECTION 4: IMPROVEMENT IN THE DIRECTION OF THE STIMULUS PLAN In the medium and long term, top ten industries adjustment and reinvigorating plan is endowed with strong perceptiveness which has essential function in guiding independent innovations, industries upgrading, and adjustments of product structure and industrial organizational structure. Nevertheless, the promulgated rules for implementation request some amendments.

I. More Attention for Economic Growth Mode Transformation in Implementation of the Stimulus Plan In recent years, Chinese economic growth depends on investment and export heavily, which is an unsustainable economic growth mode. Presently China‘s super-strengthening fiscal stimulus plan and investment-driven policy cannot be sustained, which denotes that real economic reinvigoration relies on economic growth mode transformation and economic structure adjustments. The economic growth mode transformation and economic structure adjustments have long-term and deep influence on industrial branches‘ development, and to some extent, they will change the existing pattern of industry trades. At present, there exists comparative deficiency in the study of economic growth mode transformation and economic structure adjustments, which desire for detailed and further analysis to support adjustment and improvement of specifications in the process of implementation of the reinvigorating plan.

II. More Exertion of Market Mechanism Functions in the Implementation of the Stimulus Plan 4000 billion Yuan(RMB) investment and planning have aroused local government‘s initiative, but in the meanwhile it can also give rise to corruption and low efficiency and crowd out private investments. As the economy recovers, it needs to consider changing shortterm approaches for counteracting the crisis to long-term strategies emphasizing improvements of the market mechanism. The policy of disseminating and promoting the knowledge of technology, culture and sanitation to people in the rural areas has positive effect on the expansion of the rural market, while this kind of indirect subsidies may also cause negative influence. For this problem, it can be shifted to direct subsidies which mitigate government‘s control, and extend the scope of consumers‘ choices.

III. Avoiding Overcorrection in the Implementation of the Stimulus Plan for Promoting Industry Upgrading and Product Structure Adjustments Insufficient consideration of structural adjustments in industry reinvigorating plan may suffocate structural adjustments that has been already taken. Considering the example of

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some industries in top ten industries like the steel and the textile industry, since there already exists increasing overcapacities caused by the export slump, the industry reinvigoration cannot be realized just by investment, which is likely to induce more serious overcapacity. Besides, promoting reshuffling of the enterprises is included in many plans as a significant form of industry upgrading. For instance, it is emphasized that great enterprises should play a leading role in accelerating industry reorganization in the automobiles, steel, petrifaction, and equipment manufacturing industry reinvigorating plans, which indicates that large stateowned enterprises will benefit more from those plans, while medium and small enterprises will be squeezed out and suppressed, leading to a new round of ―public sectors advancing and private sectors retreating‖. Besides, when distributing relevant funds for supporting independent research and development and technology remolding, it should avoid the phenomenon that major state-owned enterprises and local governments use bribes to lobby the central government, and make sure to effectively use the limited funds on what should be used. All of these illuminate that China should take consideration of the above details in the reinvigorating plan in order to exert its positive effect on industry upgrading and structural adjustments.

IV. Close Watch on Environment Protection in the Implementation of the Stimulus Plan Most of top ten global industries referred in the reinvigorating plan belong to nonenvironmental industry which might bring great damage to and influence on the environment. However, there are some environmental protection contents in the industry reinvigorating plans: technology reform and upgrading and elimination of backward production facilities in steel industry; plan of inputting 10 billion Yuan(RMB) special fund for technical innovation, technology remolding, and new energy vehicles development in three years; proposition about the establishment of exit mechanism, promotion of energy saving and consumption reduction, and environment protection in light industry. It is crucial to understand how to put environmental protection measures into effect. Furthermore, the main standard of elimination of backward production facilities in petrifaction, steel, shipbuilding industry is based on the equipment scale, which will force small enterprises to invest in comparatively large scale of equipments to avoid elimination, and further aggravates overcapacity. Therefore it is suggested that the standard of elimination of backward production facilities should be based on technical and economic indexes such as environmental protection and energy expenditure, but not based on the scale of enterprises and equipments, which avoids single standard of elimination. Translator: Zeng Junxiu (SUFE) English Version Editors: Xiao Rong (SUFE), Xu Lilei (MIT)


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REFERENCES [1]

China‘s Government Affairs Prosperity Monitoring Center, March 2009. Ten Major Industries Stimulus Plan Will Bring Blowout to Industrial Policy (Chinese) [J]. Information for Leadership and Decision, 9. [2] Zou Deping, 2009. Unscramble China‘s Revitalization Plan of Ten Key Industries (Chinese) [J]. Shan Xi Statistics and Society, 2. [3] Zhu Guodong, January 2009. Battle of Maintaining the Growth Rate of 8% Fired, Stimulus Plan of the Ten Key industries Discharged[N]. China Securities Journal. [4] Wang Yiming, 2009. Macro-control: Integration Between Short-term Policy and Midterm Adjustment Strategies (Chinese) [J]. Macroeconomic Management, 3. [5] Cao Jianhai, March 11, 2009. A Roadmap for China‘s industry revitalization: Shortterm Growth and Long-term Structure Adjustment (Chinese). Economic Information Daily. [6] Yuan Yuan, March 2009. The Revitalization of the Ten Key Industries Brightens Chine‘s Economy (Chinese)[N]. 21st Century Business Herald. [7] Ministry of Industry and Information Technology Operation Monitoring Coordination Bureau, Institute of Industrial Economics of Chinese Academy of Social Sciences, August 2009. 2009 Summer Report of Chinese Industry Economic Operation [R]. [8] Zeng Kanhua, 2009. Tax Policy Promotes Ten Key Industries‘ Revitalization (Chinese) [J]. China Taxation, 4. [9] Critical Count of Ten Key Global Industry Revitalization Plan [J]. China Audit, No.9, 2009. [10] Xu Xiaoqing, 2009. Logistics as a Bridge Connecting Nine Key Industries: the Tenth Industry Revitalization Plan Belongs to Logistics Transportation (Chinese) [J]. New Logistics, 3.




TEN INDUSTRIES STIMULUS PLAN CALLS FOR SMART IMPLEMENTATION: A VIEW BASED ON LESSONS OF INDUSTRIAL POLICY Zhang Jin * Born at a time when financial crisis hit China‘s economy hard, the 10 major industries stimulus plan (the stimulus plan henceforth) seems to have done its part on ensuring economic growth as China, along with the rest of the world, climbs out of the crisis. Yet, economic stimulus is just part of its mission, the long term objective is to improve the 10 industries‘ long-run competitiveness, and for that purpose, the mission may have just started. In fact, from the beginning, the stimulus plan is not so much a short-term stimulus package to the economy as an opportunity of revitalization to the 10 industries themselves. The reason is simple, the crisis China faced was an abrupt drop of overseas demand when the financial crisis hit the rest of the world, and that is the reason the Chinese government has acted in a timely manner to initiate the 4 trillion stimulus package. Nevertheless, the 10 industries stimulus plan fundamentally deals with ensuring and improving supply, and does not address the issues of boosting demand directly (except for automobile industry and light industry). At a closer look, measures aimed at structural optimization assume the most important role in this massive industries stimulus plan. Such measures fall into the following categories: First, support the development of indigenous brands, and help them achieve leadership in the respective industries; second, expand the investment of advanced technological equipment, eliminate backwards capacity; third, push for merger and acquisition among firms, improve leading firms‘ international competitiveness (Cao, 2009). These measures have been motivated by such issues as very low concentration, lack of competitiveness, and lack of technological innovations. Undoutedly the solutions of these problems are of great importance to the long term development of these industries. * Zhang Jin, Ph.D. in Agricultural Economics, Texas A&M University， Associate Professor, Research Institute of Economics and Management, Southwestern University of Finance and Economics.

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While the stimulus plan has been driven by very promising objectives, its implementation may not be so straightforward as it appears to be. A successful implementation would take a delicate balance between the ends and the means. In the stimulus plan, an important policy is to push for merger and acquisition, so as to produce bigger and stronger firms. This is a move that could have significant consequences and how to do it is worth thorough investigation. Focus on the major automobile industry, according to the automobile stimulus plan, major consolidation are to be made, ―through merger and acquisition, form 2 or 3 automobile groups with a production and sales scale over 2 millions, 4 or 5 automobile groups with scale over 1 million, and the numbers of auto firms occupying over 90 percent of the market should drop from the current 14 to less than 10.‖ The goal of this consolidation policy may not be hard to achieve given a rapidly growing Chinese automobile market and the power of Chinese government, however, whether we should implement it in particular cases and if so, how, may actually be another different issue. Three questions may help us better capture the relationship between the means, consolidation, and the ends, the interest of industry and the public welfare. First, does ―bigger‖ really mean ―better‖? It is true that many of top auto companies such as Toyota and Volkswagen claim top production and sales scale, but it is also true that big firms such as General Motors can fail. At the same time, many smaller firms are actually quite competitive and survive well when the crisis hits. Second, like any industry, auto industry in China has its particular path to follow. Currently, China‘s auto market and industry are both in a stage of fast expansion and growth, if the pace of industry concentration is sped up artificially, how can we be sure the industry as a whole is not harmed? At a given stage, for a firm, too big a scale may stretch a firm‘s management capability and actually harms its growth; For an industry, too high a concentration will harm fair competition, product and technology innvoation, and in the end, the industry‘s health can be hurt; third, a more realistic question is, even if consolidation is necessary for China‘s auto industry, how do we ensure merger and acquistions will be carried out with reasonable chance of success? Merger and acquistions are nothing new in China including auto industry, and those among sate-owned enterprises, but not many have been successful so far. In this matter, we really should be cautious enough. History of China‘s industrial policy offers some valuable lessons and we may strike a better balance between our policy and its intended purpose. Again, auto industry turns out to a good example. By the end of 2008, China‘s auto market reached the record high of 9.38 millions, 6.76 millions of them being cars, 26% of them by indigenous brands. In a firm perspective, the top 10 sedan firms are: FAW-VW, Shanghai-Ford, Shanghai-GM, FAWToyota, Dongfeng-Nissan, Chery, Guangzhou-Honda, Beijing-Hyundai, Geely, and ChangAn-Ford. Obviously, the market is dominated by joint ventures between a few stateown firms and overseas makers, except that Chery and Geely are the only two indigenous brands. Ironically, these two precious indigenous brands may not be on this top 10 list due to the industrial policy of China. Back 10 years ago, when these firms were first born, auto industrial policy of China actually forbid entry of these new firms into auto industry. Chery and Geely, and a few others, mostly private, entered this state-owne-enterprise dominated sector only after breaking serious barriers and luckily developed into today‘s status. These are the firms that broke the policy barrier successfully, what about those firms who did not make it? Not hard to imagine that if our auto industrial policy back then was carried out as it was designed to be, Chery, Geely, and other BYD, Great Wall, Lifan, and even more, would never have been born, then today China‘s auto industry would be totoally occupied by joint

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ventures, and there is no exsitance of any significant indigenous brands. Of course, that would never be the purpose of the 1994 Auto Industrial Policy of China. International experience also provides a good lesson to industry stimulus plan. Compared to other industralized countries, the development of major industries of Japan in the postwar period, especially 1950s and 60s, are closer to the case of China and therefore may provide a better reference. In the 1950s and 60s, the major industries of Japan were still in their early stage of development, the problems such as small scale, price competition, over-investement, excessive capacity, and lack of technology innovations, were widely observed in Japanese industrial organizations. In order to promote a fast elevation of Japanese industrial structure, the Ministry of International Trade and Industry once pushed for the ―special stimulus law‖ with an aim at advancing consolidation as well as ―more reasonable competition‖. The law actually aborted as it contracted the antitrust law in Japan and failed to gain the support from industry and the opposition parties. Also during this period, out of an intention to elevate Japanese auto industry, the Ministry of Internatioal Trade and Industry in the early 1960s had intended to reorganize existing auto makers into a few groups and forbid the entry of other firms into auto industry. This plan, however, never materialized due to lack of support from industry. Soichiro Honda, the founder of Honda, even thought that Honda could be more successful were not it for the barrier from the Ministry of International Trade and Industry (Jia, 2004). The above lessons simply tell that the making and implementation of industrial policy by government should use more caution. If a policy intervention is improper, either it aborts due to lack of support from industry, or even worse, the overall development of the particular industry and the public welfare, are harmed. In the case of China, more caution should be applied becasue state-owned enterprises make up a significant portion of the 10 key industries, and consequently the government can be more powerful when it comes to the implementation of an industrial policy. In conclusion, our industry stimulus plan, in terms of detail and implementation, should be flexible and smart. Flexibility here means that while the birth of the stimulus plan is essentially about doing something to help, in certain cases, doing less actually means doing more and being more helpful. Doing less has little to do with the government‘s ability to push a policy, instead, it means that too much intervention may lead to less ideal effect. Especially, when it comes to merger and acquisition policy, the government needs to decide how much to involve. The government can suggest or even encourage, where appropriate, consolidatino among firms, nevertheless, the firms themselves should be the ones to decide whether to merge and with whom. Once firms involved are willing to carry out an merger & acquisition, the government may step in to remove potential barriers and provide supports if needed. This may be a more suitable practice in an market economy environment. On the other hand, government industrial policy does have an important role to play in the development of major industries. Policy measures of this kind have been incorporated in the stimulus plan, and they should be given priority in the following implementation process. Regarding the role of government industrial policy, Komiya and others (1988) studied the industrial policy of Japan, and their comment on the Japanese government‘s role is two fold. On the one side, they believe some direct intervention by government, especially those directed at advancing consolidation or correcting the so called ―improper competition‖ were neither popular nor effective; on the other side, some supportive industrial policies, including financial investment, low interest rate loan, special tax measures, contributed positively to the

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development of industries. In fact, the 10 industries stimulus plan have incorporated many such measures, including the export tax rebate policies for the steel and texitile industries, the reduction of purchase tax for auto industry, increased credit support to ship buyers and extension of existing financial support policies for oceangoing vessels for the shipbuilding industry, export tax rebate and national reserve system for nonferrous metal industry, etc. In addition, the issue of new energy is gaining increasing attention in today‘s China as well as the world. In the stimulus plan, RMB 10 billions are allocated to support the development of new energy vehicles. To China‘s auto industry, new energy vehicle means not a new type of product that can support its continued existence in the future, it also means an opportunity to catch up with the rest of world in international competition. The development of new energy vehicles depends more than new vehicle technology, the development of road infrastructure is also indispensable. For advancement on both frontiers, much can be done by the government, or precisely, some of them can be done only by the government. Auto industry aside, the elimination of bcakwards capacities in steel and shipbuilding industries, the application of new technologies in electronics and information industries, all are important measures to the improvement of industrial technical standards. All these policy measures should be given priorities in our 10 major industries stimulus plan and be done well.

REFERENCES Cao, J., March 11, 2009, A roadmap for China‘s industry revitalization: Short-term growth and long-term structure adjustment, Economic Information Daily. Jia, X. 2004, An objective view on Japan‘s automobile industry policy, China Industry Information Net. Komiya, R., M. Okuno, and K. Suzumura, 1988, Industrial Policy of Japan, Academic Press. Shirouzu，N., March 23, 2009, China Uses Green Cars To Bolster Auto Sector, The Wall Street Journal. Wu, Y. , 2009-2-27, 10 major industries to become China's economic engines, People‘s Daily.

In In: China's New Deal: Economic Development under... ISBN: 978-1-61668-486-0 Editors: Xiaoxi Li and Biliang Hu. © 2010 Nova Science Publishers, Inc.

Chapter 5

REAL ESTATE: NEW CHANGES IN THE INTERNATIONAL FINANCIAL CRISIS Zhang Qi*, Wang Hao, Li Hongyi and Zhang Ai Real estate, which was related closely with the economic and financial development, was not only the fuse and ignition point of the Sub-prime crisis in the United States, but also reinforced the financial crisis expansion. It could be described as that this financial crisis was caused by real estate, which was conversely expanded and enlarged by the financial derivatives of the sub-crime crisis, thus further deepening the depth and breadth of this crisis. Hence, it is essential to analyze the changes in real estate industry when interpreting the influence of the international financial crisis. Since 2008, China's real estate has been fluctuating up and down influenced by the international financial crisis. In the first half of 2008, following the economic downturn in 2007, the volumes of real estate development and investment were slowly declined by months. In the second half year, the real estate market was deteriorating deeply and there was a negative market growth rate compared with the first half of 2008. However in 2009, the real estate market was gradually warmed up. Since then, the trading volume and transaction prices have been gradually restored to the level of that before the financial crisis.

SECTION 1: THE FINANCIAL CRISIS AND CHINESE REAL ESTATE INDUSTRY Before the global financial crisis generated by the U.S. sub-prime crisis, Chinese real estate industry develops very fast, the real estate market is extremely active, and real estate finance credit grows rapidly. Moreover, the real estate industry has become a pillar industry of the national economy. Chinese real estate industry had played a very positive role to recover national economy from 1997 Asian Financial Crisis, as a driving force for economic * Dr. Zhang Qi is professor at the Institute of Economics and Resource Management at Beijing Normal University, who earned his PhD degree from the Graduate School of the Chinese Academy of Social Sciences. Email: [email protected].

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growth, expanding domestic demand and stimulating social investment. Rather than the causes of the US financial crisis, real estate has become an important tool for Chinese government to control its economy responding to the Asian Financial Crisis and the current world financial crisis. From the beginning of 2008, the goal of macro-control was to prevent the overheating and excessive growth of economy confronting the international financial crisis. At the same period, China underwent the rare snow disaster and the earthquake hazard. Accordingly, Chinese real estate industry was undergoing a tough test in the twists and turns.

I. Investment in the Real Estate Industry Fluctuates Since 2008, Chinese real estate industry has come into the trough of its development circle upon the influences of the Chinese government constrains and the financial crisis. As for the real estate investment, Chinese real estate investment reached 3058 billion Yuan(RMB) in 2008, raising 530 billion Yuan(RMB) compared with the year of 2007; which is 20.9% growth rate on year-by-year basis. Compared with the 30.2% increasing rate in 1 2007, the growth rate has dropped by nearly 10 percentage points . Also, it shows that Chinese real estate investment was in a contraction state in 2008. But the growth rate is much higher than that of fixed assets investment at the same period in the first half year. From the third quarter, total investment growth in real estate and urban aggregate fixed-asset investment moved in the same direction again (See table 5-1). Table 5-1. the Comparison of the Growth Rate of Investment between Real Estate and Fixed Assets over the Same Period from Jan. to Dec. of 2008 in China Year 2008

The 1st Quarter The 2nd Quarter The 3rd Quarter The 4th Quarter The Whole Year

Total Urban Investment in Fixed Assets Billion Growth Yuan Rate on a Year-onyear Basis 1831.7 25.9% 4011.9 27.5% 4143.6 28.8% 4824.1 32.3% 14816.7 26.1%

Total Investment in Real Estate Billion Growth Yuan Rate on a Year-onyear basis 468.8 32.27% 850.8 34.14% 807.4 16.55% 931 9.9% 3058 20.9%

Source: Yearly and quarterly data, the web site of the National Statistics Bureau, http://www.stats.gov.cn/tjsj/jidusj/

The changes of the data in the table above indicate that the fluctuation on urban fixed assets investment was mainly influenced by the fluctuation on real estate investment. The 1

Source: The People's Republic of China 2008 National Economic and Social Development Statistical Communiqué, ―People's Daily‖, Feb. 26th 2009.

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investment enthusiasm has been restrained by significant downturn in real estate development and investment, the gradually shrinking trading volume and the lower bank restrictions on credit, making the real estate markets come into recession. While in the second half year, in order to deal with the financial crisis and market depression, the government expanded the central bank‘s investment scale, which the increasing loan were mainly focused on accelerating the people's livelihood projects, infrastructure, ecological environment construction and post-disaster reconstruction, etc. The real estate market is largely dependent on market forces to achieve its self-adjustment and self-improvement. Although with the steady growth of China's fixed asset investment and sales-growth accelerated in the domestic market, the economic growth was still slowing down in 2008, real estate investment dropped sharply, inflation worsened and foreign trade continued to decline, hence China's economy has shrunk evidently. This phenomenon was both related with a series of austerity policies to curb rising prices and the tremendous influence on Chinese export-oriented economy caused by the financial crisis. The substantial long-term decline in international trade has seriously affected the economic growth and added additional enormous burden to China's employment, as well as the relative chain-industries (such as real estate, automobile, etc.).

II. The Growth Rate of Real Estate Prices Started to Slow Down In 2008, China's consumer prices continued to increase, while the growth of commodity residence prices are slowing down. During this period, the consumption price index raised 5.9% from the year of 2007; residence consumption price index was 111.0 which had been increased 6.2 percent than that in 2007, which made inflation worsen. Of those, the newlyconstructed house price rose up by 7.1%, the second-hand residence price rose up by 6.2% 2 and the residence-rent price increased by 1.4% . Moreover, the residence housing price was still roaring up from the real estate price point of view in 2008, 70 cities showed 6.5% up but it appeared to be a downward trend. From Jan. to Nov., the house price was still rising but the growth rate kept declining. The absolute price showed evident falling in December. The increasing scale of the selling price in that 70 cities had been the negative growth from Jan. to Dec. compared to that from Jan. to Feb (see Figure 5-1). Therefore, we can see that in 2008 China's real estate market declining prices are partly due to the buyers‘ pessimistic expectations on the real estate market which were caused by the financial crisis, and they became more emotionally ―watching‖. On the other hand, since September 2007, the central bank of China (CBC) began to strengthen the management of individuals‘ ―second apartment‖ home loans, thereof inhibiting the real estate market speculation and investment behavior to some extent.

2

Source: The People's Republic of China 2008 National Economic and Social Development Statistics

Bulletin, People's Daily, February 26, 2009

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Figure5-1. The Growth Rate of Housing Price of Year-on-year Rise in China's 70 Large and Medium 3 Cities .

III. NEWLY-STARTED AREA AND COMPLETION AREA DECLINE MONTHLY, AND LAND-PURCHASE AND DEVELOPMENT AREA HAS GRADUALLY DECLINED The financial crisis has affected China's real estate development and investment scale, and further reduced the indicators, such as the scale of newly-started and completion area. In 2008, the growth of newly-started housing area and the completion area also has dropped significantly in china. Till the end of December 2008, the national newly-started housing area were totaled 798.89 million square meters, with an increasing rate of 1.4% compared with that of 2007. The growth rate has been reducing monthly from 24.9% in January to 1.4% in December (see Table 5-2), indicating that growth rate of the supply of real estate has reduced in a short-term. Also it should be noted that the real estate market is closely related to the land market and is fluctuated up and down with land price change. In 2008, the national land purchase area is 370 million square meters, the year-on-year basis growth has decreased to 7.6% from Jan. to Jun.. The growth rate of Jan. and Feb was 35.8%, and from Jan. to Dec. was -8.6%. While the land purchase expenditure has increased by 10.9%, with a land exploitation area of 260 million square meters. The year-on-year basis growth rate of land development area was 5.6% of Jan.-Dec, and this rate was 21.3% from Jan. to Feb. Meanwhile, the purchased-butundeveloped area has been up to 110 million square meters for the whole year, and the would-be exploitation area has nearly been up to 440 million square meters with the year-onyear basis growth rate of 6.5%. Compared to the land-purchasing rush and on-going emerging 3

Source: Website of the China National Bureau of Statistics, http://www.stats.gov.cn/tjsj/jidusj/


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―land king‖ in 2007, the national real estate land-purchasing and exploitation has been overall cooling down in 2008. Table 5-2. Newly-started Housing in 2008 (Unit: million square meters,%) 2008 On Year-on-year Newly-started basis growth（% House area ） 1-2 126.79 27.2 104.23 1-3 239.71 25.9 198.62 1-4 329.70 20.4 274.22 1-5 425.26 19.8 352.66 1-6 534.73 19.1 443.09 1-7 605.10 15.1 501.71 1-8 670.49 13.1 555.67 1-9 735.21 10.2 608.40 1-10 787.72 7.3 651.13 1-11 842.90 5.4 695.38 1-12 975.74 2.3 798.89 Source: 2008 China Statistical Annual, China Statistics Press, January 2008. Month

On Year-on-year basis growth（%） 24.9 24.8 20.2 18.7 18.0 14.6 12.6 9.6 6.9 5.0 1.4

IV. The Sales of Commercial Property Reduced Significantly, and Vacant Area Increased In 2008 the real estate transaction was not satisfying apart from the large decline in the real estate investment by the influence of the international and domestic macro-economic situation. The selling price and selling area of commercial property decreased sharply. The 4 National Real Estate Prosperity Index posted by the National Bureau of Statistics fell to 98.46 from 106.59 of the beginning of the year (see fig 5-2). The area of sales declined steeply in 2008 with a figure of only 620 million square meters, from the figure of -4.2% of January-February downward to -19.7% from January to December, showing a substantial downward trend of 16.7% decrease throughout the whole year compared with 2007 which was the 1st decline in housing market. Among them, there are 560 million square meters of commercial housing, going down 20.3%, the first decline of the housing market. In addition, the gap between the completed apartment and the forward delivery house is not evident though the sales of both declined considerably.

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National Real Estate Prosperity Index is consisted of 6 indices of the investment of real estate development, funding source, land development area, area under construction, vacant area of commodity housing and the average price of commodity housing. And the critical point of the index is 100, above which is the prosperity space and below which the recession space.

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Column 5-1: The „Real Estate Tycoon‟ into „Pig Magnate‟ In the past decades, the real estate became increasingly dependent on banks support because of its huge demanding of funds, credit loans and other financial products. It can be said that affluent cash flow is the key point of the survival and development of real estate companies. However, under the influence of the international financial crisis of 2008, many banks have tightened money supply and credit. Under this background, many companies have transformed in order to develop, and the former ―real estate tycoon‖ has transformed into ―pig magnate‖ In Nanjing. From early of 2008, the property market has appeared a turning point. In Nanjing, a developer has invested more than 0.2 billion Yuan(RMB) in the pig breeding industry therefore became the first ―pig magnate‖. Since then a group of developers have followed up making dozens of developers in the pig breeding. From the ―real estate tycoon‖ into ―pig magnate‖, the ―self-help‖ behavior of the developers has been the wonders in the property market. On the 24th July, the relevant reporter called the Nanjing Agriculture and Forestry Bureau of Animal Husbandry. A staff member told the reporter that the developers developed in the pig-raising industry as a career, which has never happened before. ―It appeared in recent years.‖ The pig-raising developers have at least ten millions of funds, having more efficiency than the agricultural enterprises. A real estate company got profits of more than 30 million Yuan through five years development in real estate. July 28, the reporter found Cao Weifeng, the supervisor of the first developer Fortum Real Estate now engaging in pig farming in Nanjing. He said that the company cooperated with the Southern Agricultural University at the end of 2007 and invested 20 million Yuan(RMB) in Fengxian county in Xuzhou city to build a standard pig farms which are 200 Mu(Chinese unit) land. In this year the company invested 200 million Yuan(RMB) in building a pig farm of 1000 Mu and will invest more than 20 million to construct an ecological farming training based in Gaochun. ―The pig farming land is a special approval of the local government and is leased for a period time, usually of 20 years. The goal of this year is to raise 150,000 pigs‖, he said. And talking about the reasons to engage in the pig farming, this line has a very good development potential and expectation. With the same situation as Fortum, Jiangsu Jindongcheng Real Estate Group which was engaged solely in the real estate development now thinking to build a pig farm cooperated with the communities of Hengxi in Jiangsu. ―Now we are making the planning. Since there are enough funds, why not look for other investment opportunities?‖ said a staff member. The information gathered by the reporter showed that the ―pig magnates‖ are mostly enterprises of sole project. Its strong speculation can make a share from the profitable real estate. But in the current market environment, they have to face many difficulties in getting lands, getting loans, developing and selling. Comparatively, pig faming investment does better than real estate. (Source: Xinhua Daily, August 6, 2008).


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Figure 5-2. National Real Estate Prosperity Index (from January to December of 2008) .

And, accompanying with the decline of sales price and sales area of the commercial property, the vacant area has been increased significantly. According to the National Bureau of Statistics data, the national commercial vacant area was up to 164 million square meters since the end of the December of 2008, up to 21.8% of January—December from -3.9% of January—March, with an increase of 25.7 percentage points. Among them, the growth of vacant area of commercial property growed rapidly up to 91 million square meters with an increase of 42.8%, hitting the highest historical record since 2003. But the related indicators 6 of the vacant area of commercial property has declined monthly , downward to 100.4 on December 2008, with 10.8 percentage points lower compared with the same period of last year (see Figure 5-3).

7

Figure 5-3. the Index of Vacant Area of Commodity Housing .

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Source: the web site of the National Bureau of Statistics throughout the yearly and quarterly data tables, http://www.stats.gov.cn/tjsj/jidusj/ 6 The higher index of commodity housing vacant area indicates the less vacant area. 7 Source: the web site of the National Bureau of Statistics, the yearly and quarterly data tables, http://www.stats.gov.cn/tjsj/jidusj/

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V. The Downward of Real Estate Brings a Chain Reaction and the related industries show a sign of recession The financial crisis has a considerable influence on China's real estate development, which has therefore brought the knock-on effect to other industries. One impact is on the financial industry. The real estate market is closely related to the financial industry, and the real estate‘s slowing down is bound to affect the credit and real estate mortgage loans which are the main channels of cash flow. According to the real estate industry statistics, the domestic loans on real estate development were 725.7 billion Yuan (RMB) in the year of 2008, which declined to 3.4% from January to December and 36.9% from January to February. The growth rate was only 0.5% higher than that of 2004. From the second quarter, the downward trend was accelerated. The growth rate of January-April declined 9.1 8 percentage points than that of January—March . At the same time, the greatest threat to the financial industry was credit loans risk. Because real estate prices declined, it will definitely bring greater risk in bank loans. And the real estate contraction in 2008 did pose a risk to the bank financial and credit loans. The decline also reflects that the banks will pay more attention to risk control. The other impact was on the related industries and investors confidence and their expectation. Different with other industries, the downturn of real estate will affect the related industries such as iron and steel, metallurgy, chemical industry, machinery manufacturing and so on. More importantly, the recession of real estate will motivate the pessimistic expectation. Since 2007, the U.S. sub-prime mortgage crisis and structural adjustment of China's macroeconomy affected people's daily lives and expectations, making clear trend on the market ―watching‖ and sharp decline in product transactions. The whole market was in a situation of depression. It should be said that the most important influence on the market caused by the world financial crisis was the impact of the confidence of the investor and consumer, making them generally had a pessimistic expectation on the economic development. According to the Western point of view of economics, market expectation is the key factor in affecting the future market direction. The U.S. sub-prime crisis was a serious impact on the real estate credit system, inducing such behavior that people dare not apply for loans to purchase the housing because of their concerns of the difficulties in the loan repayment. More importantly, it prompted the Chinese government to develop more prudent credit policies of housing from the point of social and economic stability in order to ensure that macro-economy will not be affected by the fluctuations of real estate. Therefore, both the consumers and the investors and the real estate enterprises were reluctant to move on in the complex effect of these factors because of the ―watching‖ atmosphere.

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Source: Chen Liuqin, 03-13-2009. The Development of China Real Estate in the Financial Crisis‖. Guangming Website, Guangming Observation.


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SECTION 2: THE REAL ESTATE POLICY ADJUSTMENTS RESPONDING TO THE FINANCIAL CRISIS The Chinese government continued to control the macro-economic situation from expanding investment and increasing consumption, stimulating demand and encouraging exports. The government recognized the tremendous correlation effects on investment and consumption as well as the related industries due to the introduction of the economic stimulus policies. Therefore, a prominent feature of this regulation and control was to restore the economy, starting from the recovery of the real estate and the expansion of trading volume. By lowering the interest rates, reducing taxes and lowering the threshold of the real estate development, to increase land supply and other measures can stimulate demand and supply thereby to stimulate the real estate industry so as to achieve the entire macro-economic recovery.

I. Reduce Mortgage Interest Rates It was mentioned above that the real estate industry is related to a number of industries and plays an important role in the national economy. It is important to maintain a healthy development of the real estate industry in order to stabilize the overall economy situation. If the real estate market kept down turning, the related industries could be affected. Therefore, the first move to restore the vitality of the real estate market was to stimulate the housing needs of residents by lowering down the mortgage interest rate. In October 2008, the Ministry of Public Finance and the People‘s Bank of China jointly issued measures to support the real estate industry, requiring financial institutions to reduce the mortgage lending rate to 0.7 time of the central bank benchmark interest rate. It was the first time that the proportion of down payment to purchase ordinary housing has come down to 20 %; and the local government was endowed the right to enact policies to encourage real estate transaction and tax relief. In December of the same year, the State Council introduced further measures to promote real estate development requiring that if the first apartment was lower than the local average level then the minimum interest rate of the second apartment be adjusted to 0.7 times the benchmark rate and the proportion of down-payment has dropped to 20% from 30% in the past; and to encourage financial institutions to step up credit support on housing construction for medium and small dwelling size and support the reputable developers in the process of merger and reorganization of re-financing needs. The central bank immediately lowered the five-year lending rate from 7.83% down to 5.94% with the introduction of this policy and the statutory reserve ratio from 17.5% to 15%. In addition, 9 personal public accumulation housing fund loan interest rate was reduced for the consumers of housing funds, with the five-year (or below-five-year) loan rate adjusted from the current

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Public accumulation fund for housing is the long-term housing savings deposit contributed by the government institutions, the state-owned enterprises, urban collective enterprises, foreign-invested enterprises, urban private enterprises and other urban enterprises and institutions as well as their employees. This is a reflection of the welfare of Chinese housing and a policy measure to solve the problem of housing for urban workers.

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4.32% to 4.05%, and above-five-year loan rate from adjusted from the current 4.86% to 4.59 %, decreasing 0.27 percentage point respectively. The changing of interest rate was commonly used by the government to regulate the supply and trading volume and regulate the demand. This measure sheds the burdens of the consumers to buy a house, stimulates the needs for housing and effectively reduces those burden who have long term loan.

II. A Variety of Tax Relief in Real Estate In China, the current taxes which need be paid in real estate transaction are the business tax, land value increment tax, individual income tax, deed tax and stamp duties. Among them, business tax aims at the sales party, which could be exempted from the business tax if only purchasing ordinary residential and living there more than two years, otherwise it should be levied 3%—5% of the balance between the sales and purchase price. The land value increment tax is also aimed at the sales party by 30%, 40%, 50%, 60% respectively according to different conditions. The individual income tax still targets at housing sellers, the sum is 20% of the balance according to housing sales price minus the original price & the other fees occurred in the process. Deed tax and stamp duty aim at home buyers, in which the rate is between 3%—5% and stamp duty is 0.05% of the total contract value. In addition, the other related administrative fees need to be paid in the real estate transaction process. In general, this is not conducive to the real estate transaction that there are a number of tax types in the entire transaction process. Therefore, since the second half of 2008, the government reduced the real estate mortgage rates and gradually adopted a tax rate reduction, tax exemption periodically and other measures in order to stimulate residential housing demand and promote real estate transactions. First of all, the Chinese government issued documents of stamp duty and land value-added tax free to stimulate the real estate companies to purchase land, make further development and strengthen market supply. Secondly, in order to reverse the pessimism of consumers and increase market demand, in October 2008, the Ministry of Public Finance and the People's Bank of China jointly issued measures to support the real estate industry stipulated that since November 1, 2008, the deed tax rate should be adjusted from 3%—5% to 1% for the first purchase of apartment under 90 square meters. Meanwhile, the Bank of China also lowered mortgage rates of first apartment-purchasing, the real interest rate was about 4.16% and was about 250 basis points than the average compared to that of August 2008. In addition, in order to promote the development of second-hand housing market, the State Council introduced measures that stipulated that the limit of business tax exempted has shorten to 2 years from the original 5 years with the collection of business tax to replace the sales income tax. Those tax reduction and exemption policies will facilitate to shed the burdens of the consumers to afford the housing, simplify the real estate transaction process and reduce the cost of sales and purchases of the transaction from both sides.


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III. Reduce the Capital Fund of the Real Estate Development In order to regulate and control the real estate market, both demand and supply sides are worth to be regulated. It is approached mainly by the investment of the development enterprises, construction and sales then to regulate the supply. Because in 2008 the ―watching‖ situation in the real estate market has greatly reduced the turnover, resulting in a sharp repayment pressure on lots of real estate development enterprises, which fell into the plight of a shortage of funds and many of which even postponed or suspend the construction. In addition, in 2009 there experienced a rapid ―inventory clearing‖, after that there appeared a shortage of supply in the real estate market of the completed housing and forward housing, which will not only relate directly to the domestic demand on the real estate but also influence the entire stability of real estate market. Therefore, it was the main content to regulate the supply and demand of the threshold of real estate investment and construction as well as to improve the enthusiasm of the enterprises to run the real estate projects. The focus of this supply regulation was placed on the project capital of the real estate investment. The project capital system was a capital guarantee system implemented in China since 1996 on a variety of business investment projects, including the infrastructure of stateowned units, technological innovation, real estate development projects and collective investment projects in order to guarantee the construction funds before the start of the project construction. In the past few years, in order to regulate the real estate market at that time due to the real estate rush and too many projects under construction, in September 2004 the Chinese government required that the equity of the development enterprises who applied for the loans should not be lower than 35% of the total investment, which is the threshold requirement of the real estate enterprises to invest projects. Under this regulation and control measurement, in order to strengthen the development capacity of the real estate enterprises and enhance the follow-up power to supply, the Chinese government decreased the minimal equity ratio to 20% in April 2009, which was the first deregulation since September 2004, suggesting that the pressure on capital has been reduced significantly for the real estate enterprises to invest in operation project and the new policy helped to improve the initiative of the real estate business investment, construction and sales of real estate and expanded the scale of market supply.

IV. The Introduction of the Matching Measures of Local Government The real estate market is regional. Its development status abounds a lot to various policy implementations at the project site. After launching a series macro-control policies by central government, the local governments introduced correspondingly a policies and measures to ensure the implementation of macroeconomic regulation and control from localities‘ own long-term interests. In Shanghai, the government stipulated that the limit of public accumulated fund loans should be raised up to 200,000 Yuan(RMB) for those who purchased their firs apartments with more than two people (including two people) involved in the loans, and the ceiling could be up to 600.000 Yuan(RMB) for two-bread-winner family. In Chongqing, firstly, the ordinary commodities apartments that were equal to or less than 90 square meters were exempted from deed tax. Secondly, second-hand housing transaction was levied consolidated

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tax at the rate of 1.1%. For the purchasing of second-hand ordinary housing, the relative tax could be levied with full fiscal subsidy. In Henan, those who used the public accumulated fund to make loans need only pay 20% for the down payment and the time limit was adjusted to a maximum of 30 years. For those who purchased in Henan province can apply for the public accumulated fund loans in other provinces. For those who purchased the economically affordable housing were exempted from deed tax of real estate transaction; and for ordinary commodity housing deed tax could be reduced according to a certain percentage. In Xi'an, the government will give the buyers the fiscal subsidies directly, ranking 1.5%, 1%, 0.5%. In addition, the urban infrastructure supporting fees which were charged from real estate enterprises were reduced by 35 Yuan(RMB) on every square meter. In Nanjing, any purchase of commodity housing less than 90 square meters were given the subsidies 1% of the total purchase value; and those less than 90—144 square meters were given the subsidies 10.5% of the total value. In addition, when the real estate enterprises were in a difficulty such as shortage of funds, the construction fees such as infrastructure, civil air defense construction could be held over. In Hangzhou, the public accumulated fund loans were further increased with a ceiling of 600,000 Yuan(RMB) from 500,000 Yuan(RMB) and a maximum age of 65 years for the male or 60 years for the female. Also, the related fees were suspended such as the registration.

V. Adjusting Scale of Land supply and Demand by Land Reserving The land transaction fee has always been the main source of revenue for the local government in China, making a net profit of more than 40% even 60% in some places apart from the costs of land acquisition, demolition, compensation and taxes. The downturn of China's real estate market in 2008 immensely restrained the desire of the developers to acquire land, then the prosperity of the primary land market fell with a rapid decline in the local revenue. In order to promote the real estate market recovery, to prosper the primary land market, to increase the revenue and ease the fiscal pressure, many local governments made efforts on developing the land bank and enhancing the land market supply. Since the half of 2008, the major cities in China started a new round to develop the land bank and to purchase, require and re-purchase all kinds of land on large scale to support the need of infrastructure construction. Among them, Beijing was very typical. According to the unified deployment to address the financial crisis in 2008, the government of Beijing intensified efforts in the land reserve and development in 2009, at the beginning of the year the carry-over was 8800 hectares with a new annual addition of 4700 hectares. Basically, the development of 3600 hectares were completed (of which the annual supply is1600 hectares), the year-end balance was 9900 hectares and land bank development funds were arranged at 100 billion. On one hand, this is a very important means to implement the land bank program and ensure the GDP growth up to 9% of economy of Beijing in 2009 against the background of the international financial crisis. On the other hand, it is the main way to carry out the major state projects and to promote the healthy development of Beijing real estate market as well as to provide the land for the livelihood projects such as price-limited housing, economically affordable housing, low-rented housing and urban infrastructure. In 2008 Shanghai also further increased the amount of the land development on the basis of land reserve of the recent years with the emphasis of government-subsidized houses. And in the same year, Shanghai (10 Municipal


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districts, excluding Zhabei, Putuo) planned to supply the land for residential use at a maximum of 4.9 square kilometers, and expected this would completely solve the housing problem of 60,000 urban low-income groups and would supply the land for commodity housing of 2.5—4 square kilometers at the same time.

SECTION 3: NEW CHANGES IN CHINA'S REAL ESTATE DEVELOPMENT Since 2008, the Chinese government has made a major policy adjustment in a timely manner, and passed a 4-trillion-Yuan (RMB) economic revitalization plan, both of which were closely related with the real estate industry. Therefore, it can be observed that the Chinese government has increased the intensity of economic stimulus. The 4-trillion-Yuan (RMB) economic revitalization plan has altogether ten items, which all interrelate in numerous ways with the real estate industry. To illustrate, the acceleration of the construction of housing project for low-income urban residents, the building of rural infrastructural facilities, the railway, highway, airport and other major infrastructure constructions. Some other items, like the improving of the ecological environment and the accelerating of independent innovation and structural adjustment, boost the domestic demands by increasing investment in fixed assets. Thus, the investment established intimate links with the real estate and land supply. In addition, the economical housing, the price-limit housing, and the lowrent housing needed for the housing project for low-income urban residents were integral parts of real estate development. From these, it can be foreseen easily that the 4-trillion-Yuan (RMB) economic revitalization plan will directly be beneficial to the real estate industry. As a result, in the beginning of 2009, not only the economy heated up, but also the real estate market varied a lot, which was mainly reflected in the rapid growth rate of supply recovery, actual delivery of development and investment, prosperity of land purchasing, area under development, sources of development funds and so on.

I. China‟s Real Estate Investment and Supply Begin to Recover and Rebound In 2009, along with the unveiling of the government‘s response policy to the financial crisis and determining of the confidence for bailout, the consumers‘ expectations were gradually improved. Driven by the massive governmental investment, the enterprises regained their vigor and vitality bit by bit. The market dealing and circulation re-flourished, and the quantity demand re-expanded. China‘s real estate industry came to a period of recovery. However, it must be pointed out that the recession and depression of the real estate industry this time lasted comparatively long, spreaded in a relatively wide range, and affected rather profoundly. For this reason, the recovery process of investment and supply will be difficult and slow. Moreover, the real estate products required a long construction period from the perception of the changes in the market to an increase in supply. Therefore, it took time to revive.

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First, the growth rate of China‟s real estate market development and investment accomplishment underwent a quick increase. During the first half of 2009, China‘s real estate development investment increased month by month, and appeared a continued upward trend. The statistics from the National Bureau of Statistics shows that from January to July in 2009, the development investment accounted to 1.772 trillion Yuan(RMB), increasing by 11.6% over the same period of last year, and the growth rate rised by 1.7%， compared with the period from January to June. Among them, investment on commercial residential buildings took up 1.2427 trillion Yuan (RMB), increasing by 8.2% over the same period of last year. And the growth rate was 0.9% up compared with the period from January to June, which accounted for 70.1% of the investment in the real estate development. This was not only connected with the macroeconomic control of the government, but also on the account of the rebuilding of the consumers‘ confidence, the re-expansion of the demands, the rebounding of the turnover and the bright prospects of the real estate developers. Second, the land purchasing activities began to boom. Along with the renaissance of the real estate market since February 2009, the land transaction market which has been in its downturn for many months started to heat up again. One reason is due to the market thrives; another is that the market inventory expired. The developers shifted their attention onto increasing the amount of land purchasing and hoisting the supply capacity during later period. (Table 5-3). Table 5-3. Nationwide Real Estate Enterprises’ Land Purchasing Area from January to July in 2009 (Unit: Hectare) Time Jan—Feb2009 Jan—Mar2009 Jan—Apr2009 Jan—May2009 Jan—Jun2009 Jan—Jul2009

Land purchasing area 2288 4742 7266 9875 13644 16309

Growth rate(year on year) -30% -40.1% -28.6% -28.6% -26.5% -25.8%

Sources: Yearly and quarterly data sheet, the web site of the National Bureau of Statistics, http://www.stats.gov.cn/tjsj/jidusj/

From table 3, since January 2009, the nationwide monthly land purchasing area has been undergoing a modest increase, demonstrating a monthly growth rate of more than 10%, among which, the percentage points were respectively 7.2%, 2.9% and 3.3% in March, April, and May. Moreover, the declining rate was lower over the same period of last year which indicated a constant monthly increase of land purchasing. In addition, as for the area of land developed, the absolute amount was higher compared with that of the latter half of Year 2008. Starting from December 2008 to March 2009, the area of land developed has been bigger than the land purchasing area all the while until April and May 2009, and the figure began to reverse. The total amount of land owned by development enterprises continuously keeping a modest increase that revealed a comparatively positive expectation to the market. Third, the real estate development funds increased at a quicker pace. After the positive measures have been taken by the government since the second half of 2008, the situation of China‘s real estate market showed a reversed trend. Under the purchasing demands and bank credit‘s supports, new sources of development funds increased month by


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month. According to statistics, in 2009 from January to July, the real estate development fund source has increased by 28.7% over the same period of last year, and it was 6.8% higher than the development investment in the corresponding period. Among them, the growth rate of newly-added fund sources was 16.1%, and the year-end balance increased by 6%. (Table 54). Table 5-4. Fund Sources for the Real Estate Development Enterprises from January to July in 2009（Unit: a hundred million RMB) Time

Fund sources

Jan—Feb2009 Jan—Mar2009 Jan—Apr2009 Jan—May2009 Jan—Jun2009 Jan—Jul2009

6046 10070 13512 17523 23703 28639

Growth rate(year on year) 6.9% 9.2% 12.4% 16.1% 23.6% 28.7%

Sources: Yearly and quarterly data, the web site of the National Bureau of Statistics, http://www.stats.gov.cn/tjsj/jidusj/

A substantial increase in funds for development, on one hand, accounted for the moderately loose monetary policy, the domestic loans‘ proportion in the real estate development funds sources gradually increases; on the other hand, subject to the increasing demands for house purchasing, the increase rates of deposit, advance payment and personal mortgage loan grow month by month. The statistics of the central bank shows that, by the end of June 2009, the balance of national commercial real estate loan was 6.21 trillion Yuan(RMB), increasing by 18.8% over the same period of last year. Among them, the balance of development loan was 2.35 trillion Yuan(RMB), increased by 20.5%; that of the 10 purchasing loan was 3.86 trillion Yuan(RMB), up 17.8%.

II. The Demands of China‟s Real Estate Industry Begins to Recover Although in the second half of 2008, the demands and consumption of China‘s real estate industry have undergone an economic contraction and market setback, which was an inevitable response to the worldwide financial crisis. People‘s sensitivity to market changes has been gradually increased. However, along with the continuous introduction of real estate policies, especially China‘s achievements that first picked up from the worldwide economic contraction, consumers began to change their future expectation. After a short term of convergence, the long-standing rigid demand started to re-concentrate and promptly release. The accumulation of land purchasing area is a solid example. In addition, the trading volume should be the main criterion for judging the prosperity of a market. The trading volume is not only influenced by the relation between supply and demand, but also closely related to market players‘ market expectations. The sharp 10

Sources: the People‘s Bank of China, August 5, 2009, Executive Report of China‘s Monetary Policy (the

2nd quarter of 2009).

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contraction of the trading volume in the real estate market, which emerged in late 2008 and early 2009, was precisely the result of the worldwide financial crisis, coupled with the government‘s macroeconomic control that lead to an under-confidence of the real estate market. Since the first half of 2009, the market expectation began to improve and the market confidence has been rebuilt. With the affect of inflation expectation, the wish to preserve and increase assets value has made some investors to enter the market, so the volume keeps some stable growth. Therefore, under the stimulus of house purchasing policy and the comparatively low house price, the rigid demand which has been backlogged for nearly two years breaks out and brings a rapid increase in the market transaction volume. By the end of 2008 and early 2009, the contraction of real estate transaction volume began in Shenzhen and spread to the whole country. The pessimistic air is a strong blow to the confidence of both buyers and developers which directly leads the real estate market towards its floor. But now, affected by the government‘s positive measures, some consumers have rebuilt their market expectation and at the same time, their consuming desires have been aroused. The consuming demand has been increased and that is why the pre-suppressed rigid demands could be quickly released.

III. China‟s Real Estate Price Begins to Rise Rapidly The changing price in the real estate market is an important indicator that shows the effects of Chinese government‘s financial and real estate policies. Namely, the real estate price fell and fluctuated at the bottom during the second half of 2008, and since April 2009, it began a new round of rising up. According to the statistics made by the National Development and Reform Commission and the National Bureau of Statistics, since March 2009, the sales price in 70 medium-sized cities has been running a four-month increase and the growth rate has continuously been enlarged. The average price of the whole country has hit its bottom and mildly risen up. Until June 2009, it finally skyrockets like the oil well‘s blowout. The statistics shows that the growth rate of the 70 medium-sized cities has reached 0.2% in June over the same period of last time, while 0.8% in July. During this current round of price-increasing, it appears a unique phenomenon, namely, the price of the second-hand houses has far surpassed the newly-built commercial houses, and the regional differences are significant. It is estimated that, ever since March 2009, the price growth rate of the secondhand houses was much higher than the newly-built houses, except for July, which made price parity. The scale of the two prices has been continuously widened. In June, the rate was even over 0.6%.（Table 5-5). It could be observed that since the first half of 2009, the total transaction volume of commodity housing throughout the country has increased by a large rate over the same period of last year, and so is the same with cycle increment ratio. This is mainly induced by the reverse of the relation between supply and demand. The central government and local authorities have made some policies and measures to promote the healthy development of the real estate industry. Along with the introduction of these methods, residents‘ consuming confidence has been greatly enhanced, and the demands have been released. However, due to the market downturn of the previous period, most real estate enterprises determine to lower the market supply and reduce the numbers of the projects. Thus, the interaction between the


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rapid expanding demand and lagging supply leads to a nationwide increase in market volume and housing price. It should be noted that, beside rigid demands entering the market in a great quantity, the investment demands, even the speculative demands have entered the popular real estate market influenced by the expectation change of the future inflation, and in the end, push up the prices. Bank credit treats personal housing mortgage loans relatively moderate, especially in some cities, and the accessing standard has been lowered for people who own more than one apartment. This act will effectively back up the entering of the investment and speculative demands into the market in a large quantity. The statistics show that during the first half of 2009, the personal housing mortgage loans have amounted to 292.9 billion Yuan (RMB), increasing by 63.1% over the same period last year. All these factors mentioned above continuously promote the demands of the property market, and thus, form an increase of transaction volume and housing prices. Table 5-5. Real Estate Sales Price Index of 70 Medium-sized Cities Real estate sales price index Month Year on year Mar2009 Apr2009 May2009 Jun2009 Jul2009

98.7 98.9 99.4 100.2 101.0

Link relative ratio 100.2 100.4 100.6 100.8 100.9

Newly-built houses price Second-hand houses index price index Year on year 98.1 98.3 98.7 99.4 100.3


Year on year 99.6 100.0 100.9 102.2 103.0


Sources: Yearly and quarterly data, the web site of the National Bureau of Statistics, http://www.stats.gov.cn/tjsj/jidusj/

SECTOR 4: PROSPECTS AND RECOMMENDATIONS FOR CHINA‟S REAL ESTATE INDUSTRY China‘s real estate industry is now in its picking-up phase. The future development depends upon not only the Chinese government‘s macro-economic growth and various reactions to the global financial crisis taken by other countries in the world, but also the degree of the fulfillment of China‘s real estate policies and the speed and direction of changes in price and market demands. In any case, the fact that China steps into the phase of economic recovery and revive ahead of other countries in the world is undeniable, and the future development of China‘s real estate industry entering another round of picking-up is quite optimistic. But the crucial point of promoting and affecting this process is to properly regulate the strength and opportunity. Thus, higher requirements are put forward for the state policy makers and managers.

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Column 5-2: From „Failed Estate Auction‟ to „Recurrence of Land King‟ Influenced by the global financial crisis in 2008, China‘s real estate market and land market gradually step into a phase of recession and depression. While the trading volume of real estate goes down, the phenomenon of ―failed estate auction‖ continuously occurs. According to the statistics, the country as a whole, in the first five months in 2008, there are 40 cases of failed estate auctions in major cities of China. In Xiamen, two occasions of concentrated transfer happened in the first half year. One was on February 9th, with all estate auctions failed; and the other was on April 10th, with four auctions failed. In Guangzhou, Nansha block failed in the auction in February; and among the three cases of land transfer in June, one of them failed, and one concluded a bargain after only one offer tender. In Fuzhou, two cases of land transfer failed in auction on May 12 th due to the insufficient enrollment; on May 19th, two cases failed for the same reason even under the readjustment of the governmental land policy from 90/70 to 90/50. Besides, along with the continuous occurrence of the ―failed estate auction‖, the central regions in major cities were out of market. In Beijing, No.15 Guangqu Road in Chaoyang District, which was known as the nearest golden region from CBD, failed in its auction. In Nanjing, No.4 land in the southern part of west-river district, which has formed a high-price area, reaching 1.77billion, failed in its auction in May. However, one year later, affected by the governmental macroeconomic policy in response to the financial crisis, investment in fix assets and land supply were increased greatly in all parts of China. In this circumstance, the ―failed estate auction‖ in 2008 never happened; in contrast, new land king came into stage. On June 30, 2009, No.15 land of Guangqumen in Beijing was won by Sinochem Franshion Properties Investment Management (Beijing) Ltd. at the price of 4.06 billion Yuan (RMB), becoming the newest ―Land King‖ this year in Beijing. As it has been called ―the last golden region near CBD‖, it attracted Vanke, Poly, SOHO China and other important developers in China, and presented us a fierce battle for land. In less than two minutes, driven up by the estate tycoons, the bidding for No.15 land of Guangqumen started from 2.112 billion Yuan (RMB) all the way to 3 billion Yuan (RMB). Therefore, the auctioneer had to reduce the bidding unit from 20 million Yuan(RMB) to 10 million Yuan(RMB). The competition at the auction scene was becoming increasingly fierce. Through a tense Muller, the price rose at the speed of one hundred million in every three minutes. No.18 Poly, No.10 SOHO China, No.15 Sino-Ocean Land, and No.28 Hui-Ming Estate refused to give in to each other. At 16:46, driven by the Sino-Ocean Land, the bidding increased from 3.27 billion directly to 3.3 billion Yuan (RMB). The audience burst into a uproar. Ten minutes later, when the price touched upon 3.67 billion, No.28 Hui-Ming estate quitted. At 17:00, Sino-Chem Franshion Properties, a dark horse, suddenly bid 3.69 billion. The competition was among No.18 Poly Estate, No.10 SOHO China and No3.Sinochem Franshion Properties. Until 17:10, SOHO China withdrew at 3.9 billion Yuan (RMB). Poly Estate and Franshion properties was all determined to win. And finally, Sinochem Franshion properties bid it at 4.06 billion. Beijing's new ―Land King‖ was born. After 35 minutes of fierce bidding, the No.15 land of Guangqumen was sold by 4.06 billion Yuan (RMB) which broke the highest price records for ―Land King‖ since the new auction policy implemented in Beijing. (Source: Beijing Times, July 10, 2009).


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I. The Real Estate Industry Will Step Into a New Round of Picking-up Like the macro economy, the real estate industry takes on cyclic variation. In the beginning of 2009, China‘s real estate industry gradually steps out of recession and depression and enters a new round of recovery and prosperity. The reasons are as follows: first, the role of policy control. Since the fourth quarter of 2008, the Chinese government has reversed the direction of the former regulation and has introduced a large number of positive policies which would favorably stabilize the real estate developers‘ confidence and strengthen the consumers‘ expectations. Currently, the market rebound is only a preliminary effect of policy‘s guidance. As the 4 trillion‘s investment being put into its place, the investment effect will get an intensive and centralizing release during the third quarter and the last quarter of 2009, or even the first quarter of 2010 onwards. Second, it is the role of industrial linkage. During the period from 2008 to 2009, the introduction of China‘s economic stimulus plan, especially the unveiling of the stimulus package for ten sectors, all start from the global financial crisis and focus on the long-term industrial development strategy. Therefore, each sector should apply the linkage effect which would set the real estate industry in a continuously active motion. Third, the economy is in a recovery period. With the revival of real estate industry shouldering the burden of expanding domestic demands, driving investment demands and revitalizing the economy, the government would not introduce any suppressive measures that are too harsh before the sign of economic stabilization shows up, that insured a rapid pace of sustainable development of the real estate industry in the next two years. Fourth, China‟s urbanization lies in an accelerating phase. And this is the lasting impetus for the development of the real estate industry. China is still in the large-scale urbanization process. By the end of 2008, the urbanization rate in China is only 45%, which still lies far behind the developed countries. The rapid development of urbanization process will continuously generate strong demands for the real estate market. These demands are mainly embodied in the following aspects: first, a large number of rural residents move to the urban areas that require new houses to live; second, the urban redevelopment projects make a great many relocating households to become the consumers of the real estate market; third, as residents‘ consuming and investing quality has been risen up, higher requirements for improving the housing needs are put forward. Therefore, in the longterm run, China‘s real estate market is in a favorable developing tendency. Thus, compared with those countries which have sluggish real estate markets influenced by the credit crisis, china‘s performance shows its distinguishing features that depression lags behind and economy recovers fast. From recession to revive, it took less than one year, which can be hardly seen in any other countries. To sum up, China‘s real estate market has already accomplished its adjustment and begun a new era of picking-up.

II. Future Prices Will Go for a Steady Picking-up The significant indicator of the picking-up phase in the real estate industry is the rise in both volume and price. And the reasons why the price is getting higher are as follows: first, the expectations for value-preserved purchasing and risk-preventing push the priceaccelerating process. Since 2008, many countries have implemented expansionary monetary policies and greatly increased the money supply in response to the global financial crisis, but

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only result in excess liquidity and visible inflation. Although currently, the inflation hasn‘t occurred in China, it should be point out that the best way of value-preserving is property. Under the circumstance of the expansion of inflation expectation, for the sake of mitigating risks, consumers who hold off will upgrade their purchasing desire and infuse new vigor to the real estate market. The consequence of these actions leads to a more rapid increase of the real estate price ever since May 2009. For instance, the rising speed of real estate price in the major cities in China, like Beijing, Shanghai and Shenzhen, even exceeds the fastest rising period between 2007 and 2008. New record of price has continuously been set out. Second, the stability of real estate policies will contribute to the steadiness of the rising of real estate price. From the beginning of 2009, China‘s economy experiences a quick recovery: investment and consumption revive; the rising speed even exceeds that of 2007 and 2008. However, the phenomenon does not indicate that China‘s economy has stepped into a rapid and stable growth channel. It‘s our crucial time of economic recovery and the major task at present is still eliminating the negative impacts that brought by the financial crisis. Therefore, for some time in the future, the Chinese government would still implement positive fiscal policy and monetary policy. Thus, the real estate policy would undergo minute changes. A moderate rise of price would be an irresistible trend.

III. The Proportion of Policy-oriented Housing Continues to Be Enlarged The financial crisis in 2008 not only brings about a slump of China‘s economy and real estate market, but also provides an opportunity for the government to adjust the market supply and demand to ease the social contradictions. In the ten measures of ―the revitalization plan to expand domestic demand and promote economic growth‖, which was set down during the economic conference of the State Council in November 2008, to accelerate the construction of housing project for low-income urban residents was put in the first place: supporting the construction of low-rent housing more effectively; accelerating the reconstruction of the shanty town; building permanent settlements for roving herdsmen; and expanding the reform of buildings in poor condition in rural areas. First, strengthen the implementation of policy-oriented houses. It is not only the major purpose and task of housing system reform in our country, but also an effective way for a healthy development of China‟s real estate industry. At the same time, it is the best channel to stabilize the people‟s livelihood, adjust the industry structure and promote the standardized development of the real estate market. In the 4-trillion-Yuan (RMB) economic revitalization plan, the policy-oriented houses account for nearly 10%. In addition to funds-support, the government also speeds up the adjustment for residential land supply structure, cuts the proportion of common commercial land supply and increases policy-related house‘s land supply. Second, policy-oriented houses would contribute to stabilize the housing prices. The Chinese government has determined to speed up economic growth, stimulated consumption and promoted economic development by the means of increasing investment. So the policy-oriented houses, as fixed assets, would be one of the major targets that are striving to develop. Along with the policy-oriented houses accounting more in China‘s housing structure, it can be foreseen that, the effects of stabilizing the housing prices would be more impressive.


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IV. The Regulation Rhythm and Intensity Should Be Paid More Attention to the Regulation for the Real Estate Market The successful experience of managing with the real estate market in response to the financial crisis shows that the stable development of real estate industry would be beneficial for expanding domestic demands, encountering impacts from overseas financial crisis and enhancing economic development potential. It is worth to mention that, after a rational callback of housing price in 2008, the price immediately turns up a violent rebounding in 2009. In avoidance of the 2007-style irrational fluctuation and real estate speculation, and limiting the growth rate of price to a reasonable range, the government‘s attitude towards the real estate industry is transforming from the ―comprehensive stimulus‖ to ―partially concerned risk‖. Therefore, in spite of the fast starting speed and the significant impetus effect for economic recovery, the regulating rhythm and intensity should be controlled properly. First, a rational development of real estate market is a must for the healthy development of macro economy. The current real estate market could be a driven power for the recovery of iron and steel industry, cement industry and other infrastructural industries. But, the over heat of real estate would also bring about new rounds of investment which in turns would upgrade energy shortages, transportation shortages and inflation pressure. In addition, there would be an overwhelming of the cost-saving and short-term profit developing mode which consumes much, pollutes much, and outputs little. Second, the emphasis of preventing financial risks lies in the control of real estate investment growth. Currently, China‘s banking system takes the real estate investment risks caused by excessive dependence on bank loans, over large scale of investment, and over fast investment growth. Therefore, to control the scale of real estate investment, to alleviate the stress for the financial system, and to maintain a proper speed of growth and moderate scale of investment have become crucial aspects among the approaches of preventing financial risks in the national economy‘s revitalizing phases. Third, the sustainable development of real estate industry requires rhythm. Maintaining an appropriate scale of investment and regulating a proper market and developing rhythm relate to China‘s economic operation, the reserved rational developing space for the real estate market as well as the sustainable development of real estate market. Finally, the social stability requires a moderate growth of real estate prices. The real estate market has emerged many principal contradictions at the present stage in China, and the continuous rapid growth in housing prices is bound to break through the psychological defending line of the general public, leading to a great number of social injustice and social problems. So, while approving the positive role that the real estate industry has played, various measures to limit the excessive growth of the housing prices are bound to be taken at the aim of calming the public and stabilizing the society. Translators: Wang Tianxue(SUFE) , Wang Cuiyun (SUFE) English Version Editors: Jiang Jiahui(SUFE), Chang Zheng (Harvard)

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Lin Lin, 2009. Four Major Properties of Real Estate Market Operation Manifested in the First Five Month (Chinese) [J]. China Investment, 7. Zhao Guohua, Zhang Xiangjun, 2009. Price Movement in China‘s Real Estate Market under Financial Crisis (Chinese) [J]. Management and Administration, 7. Zhang Hong, Ma Jinjun, Kong Pei, 2007. Real estate cycles based on dynamic econometrics model (Chinese) [J]. Journal of Tsinghua University (Science and Technology) 12. Kaiser R, 1997. The Long Cycle in Real Estate[J]. Journal of Real Estate Research, 14, 233- 257. Grenadier S.R., 1995. The Persistence of Real Estate Cycles. Journal of Real Estate Finance and Economics, 10, 95-119. Xiao Yuanzhen, Wei Yikan, Chen Min, 2009. On Structure and political environments of China‘s Real Estate Market in the period of adjustment (Chinese) [J]. China Housing Facilities, 8. John M. Craig, Chen Haiqui, 2009. Research on Real Estate Market, Bubble Economy and Asian Financial Crisis (Chinese) [J]. Management Observer, 2. Wang Lina, 2009. Increasingly Evident Signs of Adjustment in Real Estate Market (Chinese) [J]. Review of Economic Research, 6.


ISBN: 978-1-61668-486-0 © 2010 Nova Science Publishers, Inc


THE SUBPRIME CRISIS IN THE U.S. REAL ESTATE MARKET AND ITS IMPLICATIONS Yuan Yan * The chapter 5 described in detail and in depth the influence of financial crisis on China‘s economy. Provided that the policy and the measures taken by the Chinese government have been elaborated, it might be interesting to take a close look, from a different perspective, at the formation and development of the subprime crisis. We would like to explore its impact on the Asian and global economy in the hope that it might provide us with some insights. Lehman Brothers, a company with a history of 158 years, filed for bankruptcy protection on September 15, 2008, indicating the worsening of subprime markets and break of the financial crisis. It was the largest bankruptcy case at that time in terms of value involved. Why could the subprime crisis in the real estate market extended to the financial institutions? Why did it escalate to the financial crisis with such a speed and spread to the global market in a short time? How did the subprime crisis happen? What has changed in China and the world ever since? What we could learn from it? The following sections will try to answer these questions.

SUBPRIME MORTGAGE IN THE US The subprime mortgage refers to the mortgage loans to the borrowers who have lower income and whose credit ratings are imperfect. In strong contrast to traditional mortgage loans, the subprime mortgage has lower requirements on the borrowers‘ credit ratings and the ability to repay; therefore, it has much higher interest rates compared to the mortgage loan in general. In the United States, there are altogether three types of mortgage loans, namely, prime mortgage, alternative-A mortgage, and subprime mortgage. The standards of differentiating between prime mortgage and subprime mortgage are the credit ratings, debt to * Yuan Yan, Ph.D. in Agricultural Economics, Texas A&M University, Associate Professor, Research Institute of Economics and Management, Southwestern University of Finance and Economics.

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income (DTI) and loan to value (LTV). Generally speaking, a mortgage with DTI lower than 55% and LTV lower than 85% is a prime mortgage whereas a mortgage with DTI lower than 55% and LTV greater than 85% is categorized as a subprime loan. An alternative-A is in between prime and subprime mortgages, in which borrowers meet the requirements for prime mortgage but could not provide proof of income. The subprime mortgage is in a riskier range of loans. Once defaulted, delinquent or foreclosed, the issuing financial institutions may suffer a loss. Therefore, the subprime mortgage is an industry of higher risk and higher return. Ever since early 2007, the US subprime market has experienced a series of events listed as follows. The subprime crisis became apparent in February 2007. The financial institutions have seen loss due to increased number of defaults. In April, the New Century Finance filed for bankruptcy. The following month, the funds of Dillon Read bankrupted because of its failure in the investment of the subprime mortgages. In June, Bear Stearns & Co informed investors in two of its funds, the High-Grade Structured Credit Strategies Enhanced Leverage Fund and the High-Grade Structured Credit Fund that it was halting redemptions. Problems in subprime mortgage impeded the operation of private equity and the investors worried about the credit crunch and the loan situation for most investment banks around the globe. The crisis spread then to the stock market. The investors‘ worries made the stock and bond markets to become volatile. The central banks in various countries were compelled to intervene in the market in September. From August 9 till the end of the month, the central banks injected 544.6 trillion dollars into the market, 343.4 trillion dollars by the European Central Bank and 147.3 trillion from the US Fed and 40 trillion from the Central Bank of Japan. In mid September, the Northern Rock Bank in the Great Britain experienced the first bank run in the past 140 years in British history. The Department of Treasury announced a plan to voluntarily and temporarily freeze the mortgages of a limited number of mortgage debtors holding adjustable rate mortgages (ARM) in December. In the meantime, the central banks of U.S., Europe, Britain, Canada and Swiss announced their injection in the market to the short-term lending to ameliorate the credit crunch.

ROOTS OF THE SUBPRIME CRISIS The commentators attributed the break of the crisis to the low interest rate policy taken by the US Fed, the derailment of the financial derivatives from their real counterparts, the development of new financial instruments and the globalization. When the real estate market is booming, the financial institutions tend to lower down payments, and to relax the restrictions on qualifications and the proof of income and property of borrowers, thus provided buyers with an easy and convenient way of obtaining mortgage loans. The financial institutions sometimes even ignore fraud by borrowers; when borrowers have difficulties in down payment, banks encourage them to apply for a second loan to pay for it. Thus, a large number of low-income families with imperfect credit ratings entered the real estate market. As estimated, the mortgage loan skyrocketed to 110 trillion dollars in 1st half of 2007 from 10 trillion dollars in 2005, over tenfold in two years. Critics in Wall Street Journal has addressed the problem and argued it reflected the loss of creditability of the US banks and rating agencies.

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Financial innovations have brought an array of new financial derivatives, especially the securitization of mortgage loans. According to the Bank for International Settling, the species of derivatives in the world have risen to more than 1200 compared to only a few thirty years ago. By the end of June 2007, the total value of derivatives increased sharply to 51.6 trillion dollars. According to International Monetary Fund (IMF) Global Financial Stability Report, the value of the credit derivatives totaled 4000 trillion in 2003 and up to 26000 trillion in 2006. In the subprime market, banks used to keep the loans in the balance sheets but transferred to Collateralized Debt Obligations (CDO) in recent years and then sell them to investors. These investors create new derivatives secured with the CDOs, repack them and then sell them to other investors, so on and so forth. In recent years, 80% of the mortgage was sold through securitization and the value surged from 157.4 trillion dollars in 2004 to 549.3 trillion in 2006. This long debt link created during the process of derivatives leads the market risk to the risks of credit and liquidity and has brought instability in the financial market. The speeding-up of financial globalization makes it natural for countries to be more interdependent on each other. The development of the financial derivatives lowers the risks of one single financial institution; however, it makes a chain interlocking a number of financial institutions all over the world. Any link that breaks in the chain will trigger the Domino effect in the global market. When the subprime market is characterized with prosperity and high return, it attracted many financial institutions in Europe and Japan, especially hedge funds to participate. Since CDO not only earns a profit and diversifies risks but also is backed by the US government thus it is perceived to have a higher creditability; foreign investors could not wait to participate in the market. This also lays potential risks for the later spread of the subprime crisis to the whole world. Besides, the difference of interest rates between U.S. and Japan makes it profitable for investors to arbitrage. They may finance a loan in Japan with low interest rates and invest in the securities in the subprime markets in the US to obtain substantial gains. Under the circumstances, banks in Germany, France, Canada, Australia and Japan and other banks and funds in Asia were immersed in trouble in varying degrees due to the break of the subprime crisis. The collapse in the real estate market in the US and the related policy is thought to be an important factor for the crisis. After ―9-11‖, the Fed decreased the interest rate twelve times in a row, the lowest rate ever since 1960. On the other hand, borrows are allowed to used fixed and flexible interest rates to repay the loan in the subprime market. Buyers repay the loan with low, fixed interest rates in the first several years of the purchase and with flexible interest rates in the later years. In the previous five years before 2006, the subprime mortgage market developed at an amazing speed with low interest rate and has gained sustained prosperity. The low interest rates and high housing price promoted the purchase heat in the United States, which gave birth to the securitization of mortgage loans. These tools accommodated financial convenience and short-term inexpensive loans to buyers, leading to the less restrictive credit ratings and qualifications. From June 2004 to June 2006, the Fed started to move in the other direction. They raised interest rates 17 times consecutively, increasing it to 5.25% from 1%. In the meantime, the annual average growth rate of housing prices was 3.5%. These two factors deteriorated the situation rapidly in the real estate market. The buyers used to have net assets and got into deep debt then. Neither could they afford the interests and principle when due nor they could finance and obtain more loans from financial institutions. As a result, the default rate since 2006 has increased drastically in the subprime market. The borrowers could not repay the

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loan at the specified time, so banks took the houses but only to find the funds they could get were smaller than the sum of principle and interests and even the principle per se. Therefore, banks suffered huge losses, leading to higher volume of bad debts, which then caused the subprime crisis in turn.

IMPACTS ON CHINA AND WORLD ECONOMY Under the intervention of western governments, especially central banks, the subprime crisis was once softened. In addition, the financial industry has also taken measures to avoid the deepening of the crisis. It has influenced greatly and will continue to influence the financial markets and economy in the globe. The global financial markets were then characterized with higher volatility under the influence of the crisis. A number of real estate financial institutions and funds that are closely associated with subprime market got into trouble or even broke. Major financial institutions in the western countries suffered serious losses and their debts rose by large degrees. The financial industry lost 300 to 400 trillion dollars due to the crisis. Every aspects of the international financial market experienced upheaval, and none of the stock markets, bonds markets, foreign exchange markets and commodity markets escaped. This caused the tightening of the credit markets in western countries and made the market from bad to worse, which prolongs the recovery of the real estate market in the US. The subprime crisis slows the steps of the economic growth of the US and the world and it also has a great impact on China‘s economy, mainly exhibited in imports and exports sectors. China‘s exports in the 4th quarter of 2008 only increased by 4.3% compared to that of 2007 and imports decreased by 8.8%, the worst ever since 2002. The growth rate of China‘s trade with her major partners was all down, i.e., the US, the European Union, Japan and the Association of Southeast Asian Nations (ASEAN). The decline in exports of China slowed the economic growth and at the same time created high pressure in the labor markets. Further, the crisis increases risks in China‘s exchange rate markets and capital markets as well. The US implements loose monetary policy and soft dollar to reduce the adverse effects of the crisis; however, it exposes China to huge exchange rate risks due to the devaluation of US dollars. The economic growth in China contrary to the economic depression in western countries in addition to the depreciation of US dollar and the appreciation expectation of Chinese yuan, international funds speeded their steps to get into China, which makes the prohibitive risks in the capital market.

MEASURES TAKEN BY CHINA The subprime crisis has challenged the existing financial system in the United States; measures taken by the US government shed lights on the overseeing of the real estate and financial markets. How to manage risks, we think, is one of major issues we might learn from this overwhelming financial crisis. The financial industry was hit first and hard in the crisis; thus, paying attention to the potential risks behind mortgage loans should be a priority by commercial banks in China. Mortgage loans are the primary property for most commercial

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banks when the real estate market booms with higher yields and lower default rates. Even defaulted, banks can still auction the houses to compensate their costs. Mortgage loans occupy relatively high percentage in the assets of commercial banks in China and it is one of the major sources of income. However, once the prices of housing decrease and the interest rate increases, the default rate will increase by a large scale. Even the auctioned funds may not cover both interests and principle, which in turn causes sharp increase in bad debts. In the long run, the risks associated with mortgage loans should not be neglected and restrictive borrowing qualifications and audition procedures should be established. The financial crisis triggered by the subprime crisis initiates self-reflection of the financial regulation in the world. As described in Chapter 5 of the book, China governments have taken a series of macroeconomic policies to reduce the negative impacts of the financial crisis on the economy. These measures, including lowing interest rates, reducing property taxes and strengthening the regulation of lands, have been shown to be effective. Beware of the lessons of the crisis may help us avoid similar crisis happening in China.



Chapter 6

NEW ENERGY: NEW EXPLORATION ON ENERGY DEVELOPMENT IN CHINA Lin Weibin*, Li Xiaozhong, Rong Tingting and Song Tao In recent years, as China's economy continues to grow rapidly, it also faces an increasingly severe problem of resource bottlenecks and environmental constraints. Due to this reason, the Chinese government has made a major strategic plan to build a ―resource-saving‖ and ―environment-friendly‖ society. Compared with traditional fossil energy, the new energy such as wind energy, solar energy and bio-energy have the advantages of abundant reserves, recyclability, cleanness and so on, which can fundamentally overcome the shortcomings of the traditional fossil energy. Traditional energy is limited in reserves and creates severe pollution; in comparison, new energy resources are more conducive to sustainable economic development. In response to imbalances between energy supply and demand and environmental pressures from social and economic development, China is stepping up to develop new energy and renewable energy, and actively exploring paths suitable for China‘s circumstances. This chapter analyzes the new trend of the world's new energy development under the financial crisis and introduces the history of China's new energy development and its current situation. It also introduces public policies of promoting new energy development and the prospects of China's new energy development.

SECTION 1: RECENT DEVELOPMENT OF THE WORLD'S NEW ENERGY UNDER THE FINANCIAL CRISIS Nowadays, the world‘s social and economic development is faced with severe energy constraints and environmental pressures. On one hand, the under-supply of the traditional energy such as coal, oil, and natural gas is increasingly severe. According to current energy consumption trends, the world's oil supply is enough for only about 40 years, natural gas 60 * Dr. Lin Weibin is lecturer at Institute of Economics and Resource Management of Beijing Normal University, who earned his PhD degree from School of Economics, Peking University. Email: [email protected]

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years or so, and coal resources about 120 years. On the other hand, in the process of the traditional energy consumption, the large amount of greenhouse gas emission from carbon, sulfur compounds, nitrogen oxides, dust and so on greatly harms human health. New energy and renewable energy such as wind, solar, biomass, geothermal power and hydropower are considered to be the strategic choice to solve the problem of energy bottleneck and environmental constraints because of their abundant reserves, recyclability, cleanness and efficiency. Many countries boost investment in new energy and renewable energy in order to reduce their dependence on traditional energy and to enhance the sustainability of their economic development In the context of the international financial crisis, the development of new energy will become many countries‘ crucial choice to turn adversity into opportunity. From a historical view, every major financial crisis will be accompanied by a new revolution of science and technology and brings about global industrial restructuring and profound changes in the global division of labor. Facing the current world financial crisis, all major countries around the world have taken action by introducing relevant policies and boosting investment in new energy to seize advantage in the scientific and technological progress and economic development.

I. Obama‟s New Policy and the New Energy Development in U.S. Taking office during the financial crisis, U.S. President Barack Obama chose the development of new energy as one of his major policy measures to turn adversity into opportunity and to restore the U.S.‘s economy. The short-term goal of his energy policy is to promote employment and stimulate economic recovery while the long-term goal is to reduce the dependence on foreign oil supply, get ahead in the field of new energy, and keep United States‘ leadership role in the world‘s economy. For this reason, the U.S. government issued a series of energy development plans, which includes the development of new energy and the 2 construction of infrastructures that can be used to support alternative energy. Obama‘s administration accelerated the new energy decision-making and planning. Obama's core energy policy is to explore new energy and reduce the dependence on oil, which is mainly reflected in the following five aspects. First, great efforts are made to promote the development of clean energy. In the next 10 years, the government will make an annual investment of 15 billion U.S. dollars to promote the commercial development of alternative energy and energy-saving buildings and automobiles, while giving tax credits to companies engaged in the research of this field. Second, they emphasize environmental protection to cope with climate change. Through the implementation of the ―Total Amount Control and Carbon Emission Trading‖ scheme, by 2020 greenhouse gas emission will be reduced to 1990‘s level and by 2050 emission will be reduced by another 80%, making the United States a leader in the field of climate change. Third, they try to achieve the diversification of energy resources. By 2010, 10% of the electricity consumption will come 1 2

Source: BP World Energy Statistics Yearbook, June 2009 Zhou Tao, November 19, 2008. New Energy of the United States under Economic Crises. China‘s Power Network.

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from clean and new energy. By 2025 this proportion will reach to 25%. At the same time, they will develop nuclear energy under the premise of security. The fourth is to improve vehicle fuel efficiency. Economic standards of vehicle fuel will be improved by 4% annually. By 2011, they will begin to adopt new energy efficiency standard, promote the commercialization of plug-in hybrid vehicles and accelerate the introduction of low-carbon and non-fossil-fueled cars. The fifth is to achieve energy-saving, cost effectiveness and energy-efficiency. By 2020 the U.S.‘s forecasted electricity demand by the Department of Energy should be reduced by 15%. The energy-saving programs include constructing energysaving federal buildings, adjusting the current federal energy efficiency standards and implementing new stimulus packages to give public utility companies incentives to increase 3 energy efficiency. U.S.‘s new energy development is both an opportunity and a challenge for China. The current international environment will further promote international cooperation in new energy technologies and stimulate industrial restructuring and the development of new energy technology. In addition, the overflow of new energy technologies will gradually emerge, which will benefit China's new energy technology development. Barack Obama's energy policy for China is also a huge challenge. The implementation of Obama‘s new energy policy will increase China‘s pressure on emission reduction. Obama indicated that on one hand, the United States would actively join the international community's efforts to address challenges of climate change; on the other hand, he reiterated on many occasions that developing countries had to bear their corresponding responsibilities to reduce emission. China, as a developing country with the largest amount of greenhouse emission, will face the biggest pressure.

II. The EU‟s “Smart Investment” and Its New Energy Development Facing the grim situation of the financial crisis, the European Union adopted an economic recovery plan named ―Smart Investment‖ of 200 billion euro. This plan has three items directly related to environment protection and energy conservation: improvement on energy efficiency of buildings, promotion of rapid development of green products and development of clean energy for cars and buildings. This plan effectively promoted the development of low-carbon economy with emphasis on wind and solar energy. According European Wind Energy Association‘s report, the EU‘s wind energy development ranked first among all new energy source, accounting for 4% of the EU‘s electricity supply. At the same time, Europe alone accounted for more than 80% of the total solar power generation in the world. In April 2009, the EU announced its ―Climate Action and Renewable Energy Package‖, which promised that by 2020 the EU would cut the greenhouse gas emissions by 20% or more from 1990's level and achieve the goal that the EU's renewable energy accounted for 20% of total energy cost. The EU and its member states have played a dominant role in the international climate and environmental issues. The core of the EU‘s new actions on climate change is to comprehensively take climate change, energy and environment into account set specific new 3

Qin Zhilai, 2009. the ―Forum of Chinese Party and Government‖, Issue 4.

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energy goals that mitigate climate change and link the objectives of domestic environment quality with climate change mitigation. After the outbreak of the financial crisis, the EU countries further increased government support for the new energy sectors in order to strengthen its already achieved comparative advantage. For example, Germany has adopted a new bill of greenhouse gas reduction, which would increase the utilization of renewable energy such as wind energy and solar energy from the current 14% to 20% by 2020. French Ministry of Environment published a scheme on November 17, 2008 aiming at renewable energy development. The French government hoped that the proportion of renewable energy consumption would substantially increase through a series of initiatives. The European Parliament approved the EU Energy and Climate Package on December 17, 2008 to ensure that the European Union‘s utilization of the new energy and renewable energy would reach 20% of the overall energy consumption by 2020. Almost simultaneous with Obama's new energy strategy, Germany, Spain and Denmark together launched the International Renewable Energy Agency (IRENA) in Bonn, Germany on January 26, 2009. This agency officially becomes the ―New Spokesperson‖ of new energy whose purpose is to expand the utilization of new energy in industrial and developing countries all over the world. The organization aims to promote structural transformation of energy globally, increase new energy usage, and 4 help developing countries acquire technology and build their own new energy industries.

III. Japan's New Energy Development Plan Amid the economic recession led by the financial crisis, the Japanese government, based on the relief methods of the U.S., is taking active measures to save Japan's key industries, and significantly reducing dependence on traditional energy by developing new energy under the consideration of long-term strategic needs. The Japan Energy White Paper (2008 edition) points out the necessity to change Japan's energy supply structure from a petroleum-based energy system to non-fossil fuels such as solar energy, nuclear, etc. The White Paper also recommends the promotion of investment in resource-abundant countries to ensure the stability of access to energy and make full preparations for potential inflation of oil prices after global economy's recovery. The White Paper points out that although the economic recession causes declination of global oil demand in the short term, the supply shortage in emerging countries such as China and India may cause the oil prices to rise once again. For this reason, an economic structure that is less vulnerable to changes in oil prices and other existing energy must be established. From a long-term point of view, Japan should also actively promote development of energy conservation, new energy and nuclear power. Japan's Ministry of International Trade and Industry (MITI) noted that in order to promote the development of solar power generation and other new energy, the related fiscal budget in 2009 increased by about 1,300 billion yen compared with that of 2008, which also grew by 50% compared to 2007. In addition, the budget increase also included government‘s support for enterprises‘ investment in energy-saving equipments. Japan also introduced subsidy measures for new energy. Japanese government announced the new objectives of 4

Source: China Securities News , July 3, 2009.


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renewable energy development on July 20, 2009 and introduced the new subsidy measures. Meanwhile financial subsidies were also increased to promote household solar power and geothermal power generation.

IV. New Energy Planning of Other Countries Facing the severe financial crisis, many countries in the world are carrying out new energy development planning and developing new strategies energetically besides the three major economic entities: the United States, Japan and the European Union. Renewable energy generation in Australia is expected to account for more than 20% of total energy generation by 2020. By mid-2009, the amendments of this bill is expected to be passed and within one year and half of the approval of the bill, 500 million Australian dollars of renewable energy fund will be available to encourage home installation of solar systems and investment in wind energy and solar energy. South Korea will invest 103 billion U.S. dollars for the development of new energy by 2030. India adopted a new energy security policy in December 26, 2008, one of its goals being the advocacy of clean and renewable energy.

SECTION 2: CHINA‟S NEW ENERGY DEVELOPMENT STATUS China is the second-largest countries in energy consumption in the world, but its energy efficiency is 10 percent lower than the world‘s average level and its energy use per unit of GDP is more than three times of the world‘s average level. China has also become one of the three largest carbon dioxide emitter sin the world. Can China's economy achieve sustainable development? Developing new energy will be the key measure to answer this problem. China's new energy development mainly experienced three phases. The first is the initial phase (1958-1980) which is characterized by the promotion of biogas technology. The second is the exploration and development phase (1981-2004) which aims to do follow-up research and exploration on hydropower, wind energy and solar energy. The third is a stage of scientific development from 2005 to the present. This section focuses on the current development status and technology of wind energy, solar energy, biomass, nuclear energy, hydropower, geothermal and ocean energy. In a strict sense, nuclear energy doesn‘t belong to new energy. However, nuclear power will be introduced as China's ―new energy‖ in this section in view of its importance in China's energy structural adjustment and energy strategy in the future.

I. Wind Energy The utilization of wind energy is mainly in wind power generation. The total reserves of wind energy above 10-meter altitude in China are 3.226 billion kilowatts, of which 253 million kilowatts can be actually exploited. The wind energy in China is mainly distributed in two major areas: the North and offshore areas of south-eastern coast. Specific distribution is shown in Figure 6-1.

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Column 6-1: Wonders of the World in the Utilization of New Energy 1. Solar Power The first solar power plant is Barstow No. 1. Solar Energy Power Generation Station built in Mojave Desert of California, the United States. Solar thermal power and high-temperature solar thermal power is also known as tower type generation of solar power. Several such power stations had been built in the United States, Japan, Europe, etc. The world's largest solar power station is Barstow No. 1. Solar Energy Power Station built in Mojave Desert of California by the U.S. Department of Energy with a power of 10 MW, height 100 meters and heliostats 2 × 1818 pieces of 39.9 meters. Now the No. 2 Thermal Power Plant is being built near the No.1 Solar Energy Power Station whose power is also 10 megawatts. It is expected to be completed in 1996 with an investment of 48.5 million U.S. dollars. 2. Nuclear Power The world's first nuclear power station was built in Russia in June 1954. It honorably retired without any serious problem in almost half a century‘s operation in April 30, 2002. 3. Wind Power Denmark is the earliest country to use wind energy to generate electricity. The wind power is now commonly used. Although Denmark just has a population of about 5 million, it is a big country in wind power generation and windmill production round the world. There are 5 manufacturers of wind wheel in Denmark among 10, and more than 60% of the wind wheel manufacturers around the world's are using Danish technology. Denmark is a real ―windmill power‖. 4. Marine Energy The world's first pumped storage power station was Lurton Pumped Storage Power Station built in Switzerland in 1879. The world's largest pumped-storage power station in terms of installation capacity was Bath County Pumped Storage Power Station built by the United States and on operation in 1985. The world's first tide power station was built on the coast of the North Sea by Germany in 1913. The world's largest tide power station is Lens Tide Power Station in France with an installation capacity of 240,000 kilowatts. The French physicist Arsenal first proposed to use the differences of sea water to generate power. In 1926, Claude, a student of Arsenal, successfully approved this theory. In 1930, Claude built the world's first power station of sea water differences on the beach of Cuba. Japan‘s Hamming testing vessel for wave power generation, which is built in 1978, is the world's first large-scale wave energy power station.


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5. Hydropower France built the world's first hydropower station in 1878. The world's largest hydropower station in the 20th century is the Itapúa Hydropower Station built by Brazil and Paraguay jointly with an installation capacity of 12.6 million kilowatts. At present the world's largest hydropower station is the Three Gorges Project started its construction in 1994 with an installation capacity of 17.86 million kilowatts. This project is expected to be accomplished in 2009.

Source: http://www.xnyfd.com/kepu/html/?12367.html Figure 6-1. Distribution of Effective Wind Power Density in China (Unit: W / M2).

China's wind power industry started in 1986 and it grew into full force in ten years. Especially since 2005, the international ranking of China's wind utilization rises year by year. The ―Report on China‘s Wind Power Development – 2008‖ issued by National Energy Bureau shows that by the end of 2007 there were 20 provinces (autonomous regions and municipalities) that had developed their wind power fields (the total number of built wind power fields is 91). Installation of wind turbine units has reached 331 and the cumulative

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installation capacity has reached 6.05 million kilowatts, ranking fifth in the world. Inner 6 Mongolia ranked first in China with the total installation capacity of 1.59 million kilowatts. By the beginning of 2009, there were 25 provinces, municipalities and autonomous regions in total having wind power installation in China. According to the latest study, by the end of June 2009 China‘s grid-connected wind power installation capacity will reach 11.81 million kilowatts, a growth rate of 101% compared with the same period in 2008. China‘s wind power installation capacity achieved ―100% growth‖ for three consecutive years with its total 7 installation capacity ranked fourth in the world (Table 6-1).

Table 6-1. The Status of Wind Power Development in China since 2005 Year Total installation capacity（ million kilowatts） World ranking

2005

2006

2007

2008

2009

1.26

2.60

6.05

12.153

11.81

8

6

5

5

4

8

Source: Based on the sorting out of China's Development and Reformation Committee, China‘s Wind Energy Association website.

China‘s wind power relies on high-voltage and large-scale long-distance transmission. The instability of wind energy brings many problems in the system of peak load frequency modulation, power grid adaptability, voltage control, security and stability. China must solve these issues in its wind power development. China‘s wind power equipment can be basically self-produced except some core technology is still imported. Subsidies for cost of wind power is gradually resolved. By the end of July 2009, ―Notice on Improving the Grid-Connected Price Policy on Wind Power‖ issued by China's Development and Reformation Committee divided the country into four categories of wind energy areas and nailed down the gridconnected price benchmark of wind power correspondingly. China also continued to implement wind power cost-sharing system. That is, the grid-connected price of wind power within the part of the local desulfurization coal-electricity price will be subsidized by provincial power grids, the higher parts will be covered through the national sharing of renewable energy surcharge on the electricity prices.

II. Solar Energy China, located in the eastern part of northern Eurasia, belongs to the temperate and subtropical zone with abundant solar energy. In China, two-thirds of the land area has 5 6 7 8

China‘s Wind Energy Association: http://www.cwea.org.cn/hynews/display_info.asp?cid=196 Li Junfeng, Gao Hu, Wang Zhongying, Ma Lingjuan , Dong Luying, October, 2008. ―Report on China‘s Wind Power Development 2008‖. Chinese Environment Press, 16-37

Investment Consultants: http://www.ocn.com.cn/reports/2006005fenglifadian.htm

The data refers to grid-connected installation capacity in the first half of 2009, ―Shanghai Securities News‖, July 31, 2009.


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sunshine of more than 2200 hours annually. The annual solar radiation in China is more than 5000 mega joules per square meter and the total solar radiation in a year is about 170 billion tons of standard coal equivalent, thus China's favorable conditions qualify for solar energy utilization. The distribution of China‘s solar energy is mainly concentrated in the west and the northern part, as shown in Figure 6-2. It is estimated that if the average area of solar water heater panel reaches 30 square meters per 100 people, the total usage of solar water heaters nationwide can reach 500 million square meters, which can save 65 million tons of standard 9 coal.

Source: China Meteorological Center for Wind and Solar Energy Resource Assessment. Figure 6-2. Distribution of Solar Energy Resources in China (Unit: MJ / M2 • year).

China‘s utilization of solar energy is mainly by solar water heater. The technology of water heaters is relatively mature, which can be highly market-oriented and very suitable for China's conditions. China's solar water heater industry has developed rapidly with an annual growth rate of 20% or more since 2000. According to statistics, China's total production of solar energy was 154.8 million square meters in 2008, up 20% from 129 million square meters in 2007. Water heater products are exported to many countries in Asia, Europe and Africa.

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National Development and Reformation Committee, Energy Bureau, Renewable Energy and Countryside Power Office, April, 2004. Renewable Energy: The present situation and the prospect, ―Venture Investment and High tech in China‖, 54-56.

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In the aspect of manufacturing technology, China's solar water heater has formed its industrial system in which the raw material processing, product development and manufacturing, engineering design and marketing services can be accomplished independently. China's solar water heater as an emerging industry expands rapidly. China is leading the world in the aspect of its independent innovation on the heat pipe technology of vacuum tube, which is widely used in China with an annual output of more than 16 million square meters, accounting for over 90% of the world market of vacuum tube water heater. It is a global trend to integrate solar water heaters with buildings in the long run. China has just started in this regard and a number of real estate projects have been started with the construction of solar water heaters simultaneously. 10

Table 6-2. the Utilization of Solar Water Heaters in China since 2003 (Unit: million square meters) Year Cumulative production Growth rate（ %）

2003 45

2004 60

2005 78

2006 100

2007 129

2008 154.8

---

33

30

28

29

20

Source: Compiled from ―China‘s Energy Yearbook 2005/2006‖, ―Report on China‘s Renewable Energy Industry Development‖ from China‘s Development and Reformation Committee, China's Renewable Energy website.

Photovoltaic (PV) power generation is mainly used in home systems and small-scale photovoltaic power stations in China, which mainly aim to solve power supply problems in remote villages without electricity. In addition, PV power generation is also utilized in public buildings and facilities such as roads, parks, and stations in many cities. In 2001, China's output of photovoltaic battery was only 3 megawatts. However, it had reached 2,000 megawatts by the end of 2007 with an increase of 600 times in six years, which made China the biggest producer in the world.11 It is estimated that China's total applications of PV power system will grow to 40 million kilowatts by 2010 and 1.8 million kilowatts by 2020. The utilization of photovoltaic power generation in the rural and remote areas accounts for 46% of total usage, telecommunications and industry accounts for 37%, photovoltaic consumer products accounts for 12% and PV gridconnected systems accounts for 5%.12 The rapid development of photovoltaic power generation industry relies on the fast development of crystal silicon materials and the production capacity of solar battery. According to statistics, China's production capacity of crystal silicon was 71,500 kilowatts and China‘s monosilicon production capacity was 63,500 kilowatts in 2004. The production capacity of crystal silicon and silicon chip soared to 200,000 kilowatts in 2005, a growth of 180% compared with the same period in 2004, in which single crystal silicon production capacity was 150,000 kilowatts.13 10

Wang Zhongying, Li Junfeng, July 2009. ―Report on Development of China‘s Renewable Energy Industry 2008‖, Chemical Industry Press, 33-67 11 Nanfang Daily, August 28, 2009. 12 Hong Kong Venture Capital Research Institute, 2008. ―China Venture Investment Yearbook‖ Democracy and Nation-found Press, 539-541. 13 China‘s Energy Yearbook Editorial Committee, August 2007. ―China‘s Energy Yearbook 2005/2006‖. Science Press, 255-256.


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Statistics also show that there are more than 10 poly-silicon enterprises, 60 silicon chip enterprises, 60 battery businesses and more than 330 component companies in operation in China's current PV industry. The production of solar battery in China accounts for 30% of the total production in the world . 14 Although China has already been capable of supplying equipment for the development of photovoltaic power industry, monitoring experiments and training personnel independently, it still faces some technical problems. The biggest problem is the purification technology of poly-silicon and mono-silicon, which has been relying heavily on Japanese and German technologies over a long period of time. Therefore, it is urgent to overcome the so-called bottleneck of ―Technology Lease‖. 15 China‘s study on grid-connected photovoltaic power generation system is at the demonstration phase of research and all the grid-connected photovoltaic power station being built in China are low-voltage grid-client models. Therefore, China will focus on developing large and super large grid-connected photovoltaic power stations in the future.

III. Bio-energy In theory, China's bio-energy production reaches 65 billion tons per year. If the average calorific value per kilogram is 15,000 kilojoules, China's theoretical bio-energy resources is 3.3 billion tons of standard coal equivalent, three times of the total energy consumption in China. However, the total amount of developable bio-energy resources is about 700 million tons of standard coal equivalent. With the commencement of ―Conversion of Cropland to Forest and Pasture‖ project, afforested area is expanding and the potentially exploitable volume of bio-energy can reach 1000 million tons of standard coal equivalent. China‘s bioenergy mainly includes straw, firewood, agricultural production and livestock waste, municipal solid waste and industrial organic waste water and residues (Table 6-3). Table 6-3. Volume and Potentially Exploitable Amount of China's Bio-energy Resources Types of Bio-energy Straw Firewood Industrial organic wastewater Agricultural and aquaculture waste Municipal solid waste Municipal wastewater

Amount (million tons) 700 220 2,500

Potentially exploitable volume 350 million tons 220 million tons 11,000 million cubic meters

1,800

20,000 million cubic meters

149 24,700

9,000 million cubic meters 1,000 million cubic meters

Source: Lin Boqiang, September 2008. ―Report on China's Energy Development 2008‖. China Finance and Economics Press, 331.

14 15

―Economic Information Daily‖, August 24, 2009. ―Economic Information Daily‖, August 26, 2009.

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As shown in the table above, at present the amount of straw resources in China is more than 720 million tons, which is about 360 million tons of standard coal equivalent, of which 350 million tons can be used as energy. The annual average production of firewood from forestry, salve-cultural pruning and firewood forest is about 220 million tons, equaling to 128 million tons of standard coal. Industrial organic wastewater, agricultural and aqua cultural waste, and municipal solid waste and water waste can be developed each year amounting to 41 billion cubic meters. Research and utilization of bio-energy technology are key projects of China's energy utilization. The central government arranged 8 billion Treasury bond accumulatively to support the construction of 8.23 million bio-gas in 73,000 villages from 2003 to 2007. By the end of the first half of 2009, the rural biogas utilization has reached 30.5 million households, 16 with all kinds of agricultural waste biogas projects in place at 39500 locations. China‘s bioenergy power generation got its start in 2006 with a total installation capacity of 1.284 million 17 kilowatts, which is expected to reach 5.5 million kilowatts in 2010.

IV. Nuclear Energy Nuclear power does not belong to either renewable energy, or new energy. The reason that we explore nuclear energy in detail in this section is because of its importance in China's energy structure adjustment and China‘s energy strategy in the future. Nuclear power has the merits of being clean and economical; therefore, it is favored by industrial countries. Since the completion of China's first nuclear power station — Qinshan Nuclear Power Station in 1991, China's nuclear power has developed rapidly and now China already has a comprehensive system of nuclear industry. At present six nuclear power stations are in operation commercially with 11 generating units and a total capacity of 9.068 million kilowatts. Meanwhile eight generating units with 7.9 million kilowatts capacity are under 18 construction. China‘s nuclear power development status is show in Table 6-4. Table 6-4. China’s Nuclear Power Development Status since 2001 Year Installation capacity (million kilowatts) Generated energy (billion kwh)

16

2001

2002

2003

2004

2005

2006

2007

2008

2.10

4.47

6.19

6.84

6.85

6.85

8.85

8.85

17.5

26.5

43.9

50.1

53.1

54.3

62.6

68.4

2009 9.07 19

---

―People's Daily‖, September 3, 2009, 2. ―Economic Information Daily‖, August 26, 2009 18 By the end of July 2009, Source: State Power Information Network, The latest results of install ion capacity of nuclear power approved. 19 ditto 17


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Source: Based on the sorting out of National Power Information Network, ―Report on China's Energy Development 2008‖ (Lin Boqiang, September 2008. China Finance and Economics Press, 284292).

According to China's ―Medium and Long-term Nuclear Power Development Plan‖, in order to protect the security of energy supply and to optimize the power structure, it is planed that the installation capacity of nuclear power should reach 40 million kilowatts and nuclear power generating capacity will reach 260-280 billion kwh per year by 2010. These figures are calculated after considering China‘s overall technical strength, the construction cycle, independence of equipment manufacturing and supply conditions of nuclear fuel. The current nuclear power capacities both in operation and under construction are 16.968 million kilowatts. On this basis, the new installation capacity of nuclear power is about 23 million kilowatts. At the same time, considering the follow-up development of nuclear power, the capacity of nuclear power under construction will be about 18 million kilowatts in late 2020 (Table 6-5). Table 6-5 .Schedule of China's Nuclear Power Construction (Unit: million kilowatts) Planning period Before 2000 2001-2005 2006-2010 2011-2015 2016-2020

New operation scale --3.46 12.44 20.00 18.00

Production scale

Carry-over next five years‘ scales

--4.68 5.58 12.44 20.00

--5.58 12.44 20.00 18.00

The overall scale of the end of the period 2.268 6.948 12.528 24.968 44.968

Note: Since the unit capacity may change, the nuclear power capacity may change actually when it is finished. Source: Based on the sorting out of ―Planning of China's Medium and Long-term Nuclear Development‖.

In the aspect of engineering design, China already has the capacity to independently design and construct pressurized water reactor nuclear power stations of 300,000 kW and 600,000 kW . In the course of nuclear power development in the future, China will achieve the ability of designing, constructing and operating pressurized water reactor nuclear power station of million kW. It will also establish operation and management model geared to international standards and form a relatively comprehensive industrial system of nuclear power. As for the performance of operation and nuclear safety, the nuclear power stations in China are performing well and the operation is continuously improved. The main performance indicators has matched the advanced level of World Association of Nuclear Operation (WANO). Technical route of China's nuclear power development has been clear. The present goal is to develop thermal neutron reactor nuclear power stations and the longterm goal is to develop fusion reactor nuclear power stations.

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V. Hydropower China is a country rich in hydropower resources. According to the general survey result of hydropower resources of China in 2003, the technical developable installation capacity of national hydropower resources was 540 million kilowatts, and the annually generated energy was 2.47 trillion kilowatt-hours; the economical potentially developable installation capacity of national hydropower resources was 400 million kilowatts, and the annually generated energy was 1.75 trillion kilowatt-hours. About 70% of hydropower resources are distributed in southwest China, mainly in the Yangtze River valley, the Yellow River valley, and the Pearl River valley, with total installation capacity accounting for about 60% of the economic potential installation capacity of national hydropower resources. The utilization of China's hydropower is divided into two parts: one is the traditional medium-sized hydropower 20 stations, mainly referring to China‘s 12 hydropower bases (see Figure 6-3); the other is a real new energy source — small hydropower, which has potential developable amount about 87 million kilowatts, accounting for 23% of the potential development amount of national 21 hydropower resources and ranking the first in the world. Hydropower development has always been emphasized by the Chinese government. Since the 1990s, China's hydropower output has kept increasing. The generated energy in 2006 and 2007 amounted to 435.79 billion kWh and 485.26 billion kWh, but its proportion in total electricity production in that year has been falling, from 20.4% in 1990 to less than 15% in 2007, as shown in Table 6-6. It is expected that by 2020 China's installation capacity of hydropower will reach 300 million kilowatts, with small hydropower reaching 70-80 million 22 kilowatts. Table 6-6. China's Hydropower Production Capacity and Its Proportion of Total Output of Electric Power (unit: billion kilowatt hours ;%) Year Hydropower production capacity Hydropower‘s proportion of total output of electric power in that year

1990 126.72

1995

2000

2005

2006

2007

190.58

222.41

397.02

435.79

485.26

20.4

18.9

16.4

15.9

15.2

14.8

Source: Based on the calculation through National Bureau of Statistics Web site.

At present, the proportion of developed hydropower in China has reached about 27%, among which the traditional medium-sized hydropower resources account for more than 60% 20

The classified criteria of China‘s hydropower stations: large hydropower stations‘ installed capacity is

more than 250,000 kilowatts; medium-sized hydropower station‘s installed capacity is 25,000 to 250,000 kilowatts; small hydropower station‘s installed capacity is less than 25,000 kilowatts. 21 22

Cui Minxuan, 2008. China‘s Energy Development Report 2008 [R]. Social Sciences Academic Press, 288. Speech of Han Wenke, Director of the National Development and Reform Commission Energy Research Institute, at the Second International Symposium on China‘s Distributed Energy on April 20th, 2006.


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of the total hydropower resources. There is still much room for hydropower development. Currently there are 12 hydropower projects under construction with installation capacity of more than 15 million kilowatts (Table 6-7).

Photo Source: http://www.xnyfd.com Figure 6-3. Distribution of China's Hydropower Bases.

The Chinese government has always valued the development and utilization of small hydropower. At present, there are more than 1600 countries developing the small hydropower all over the country, and nearly half of these countries‘ power supply is primarily from small hydropower. In 2006, hydropower installation capacity in China‘s rural area reached 6 million kilowatts, and the total installation capacity amounted to 50 million kilowatts, approximately accounting for 37% of the aggregate national hydropower installation capacity. The annually 23 China‘s hydroelectric equipment generated energy amounted to 150 billion kWh. manufacturing develops rapidly, and dam construction and hydroelectric power station construction are leading the world. The Three Gorges crew successfully achieved ―the introduction, the digestion, the absorption, and the re-innovation‖ of technologies. Now they could almost undertake any large and middle scale hydroelectric power station‘s design, 23

Speech of Han Wenke, Director of the National Development and Reform Commission Energy Research Institute, at the Second International Symposium on China‘s Distributed Energy on April 20th, 2006.

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construction, and equipment manufacture and so on. China‘s small hydropower design, construction and equipment manufacturing are also leading the world, and China is one of the exporting countries of professional hydropower technology in the world. Table 6-7. China’s 12 Hydropower Projects under Construction with Installed Capacity More than 15 Million Kilowatts Serial number

Name

1

Three Gorges Xiluodu Xiangjiaba Longtan Xiaowan Laxiwa Jinping I Jinping II Pubugou Goupitan Pengshui Jinghong

2 3 4 5 6 7 8 9 10 11 12

Installed capacity (million kilowatts) 224

Commencement date

Generating date of the first set

Completion date

December 1994

July 2003

2009

126 60 54 42 42 36 48 36 30 17.5 15

December, 2005 November,2006 July, 2001 2002 April, 200 November,2006 January, 2007 March, 2004 November,2003 April, 2003 July, 2003

2013 2013 2007 2010 2008 2012 2012 2008 2009 2008 2008

2015 2015 2009 2012 2010 2014 2015 2010 2012 2010 2009

Source: Based on the sorting out of ―China's Energy Development Report 2008‖.

VI. Geothermal Energy China is rich in geothermal resources, which has a bright prospect in development and utilization. According to the Ministry of Land and Resources‘ data, China has verified more than 4000 locations storing geothermal energy. The geothermal energy within 2000 meters of Earth's surface equals to the heat generated by 250 billion tons of standard coal. Every year the total quantity of potentially developable geothermic water is approximately 6.845 billion 24 cubic meters, which is equal to 32,848,000 tons of standard coals. The high-temperature geothermal resource mainly concentrates in the Circum-Pacific geothermic belt, which covers the south of China's Tibet, Yunnan Province, west of Sichuan Province and China‘s Taiwan Province. Most of China‘s geothermal resource is low-temperature geothermal resource and they are distributed in the municipalities and provinces of Fujian, Guangdong Hunan, Hubei, Shandong, Beijing, and Liaoning. According to the survey, there have been 1950 geothermal wells (springs) that passed investigation and won approval by the end of 2007. The amount of 24

Ministry of Land and Resources: ―Communiqué http://www.mlr.gov.cn/zt/2006dizhihuanjinggongbao/

of

China‘s

Geological

Environment

2006‖,


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geothermic resources which can be used directly amounts to more than 500 million cubic 25 meters. China utilizes geothermal resources mainly through using the high temperature geothermy for power generation and using the low and medium temperature geothermy directly. At present, with the exception of Yangbajin in the Tibet Autonomous Region where the geothermy is used to generate electricity, all the other areas‘ geothermal resources are used directly. Statistics indicates that the annual amount of geothermal resources directly used in China has amounted to 445.7 million cubic meters, ranking the first in the world. Moreover, it is growing by 10% every year. Generally, the geothermy is directly used for bathing，heating, planting, breeding, and so on. Among geothermy's many usages, heating accounts for 18%, bathing accounts for 6.2%, planting and breeding account for 9.1%, and 26 the rest accounts for 7.7%. In China, there are more and more buildings using geothermal resource for heating. By June 2009, in China, there are altogether 2236 buildings using shallow layer geothermal energy for heating. The floor space of these buildings are nearly 80 million square meters, among which 80% are located in North China and the south of 27 Northeast area such as Beijing, Tianjin, Hebei and Liaoning and so on.

VIII. Marine Energy China‘s continental coastline is more than 18,000 kilometers. China also has more than 6960 islands with a total area of 6700 square kilometers, among which there are more than 430 islands with human inhabitants. The marine energy is abundant in China. China‘s marine energy is mainly used to generate electricity. In 2005, China‘s marine 28 power industry began to take shape gradually. The annual total output value topped 100 billion RMB for the first time (109 billion), showing good trajectory for development. As for the scale of marine power production, Guangdong Province and Zhejiang Province are the biggest and their production value accounts for 90% of the national marine power industry. In 2007, the first offshore marine wind power station was put into service officially. In 2008, China‘s marine power industry grew quickly; the marine power industry‘s value realized the 29 increase of 800 million RMB the whole year, a 51.6% growth from 2007. In recent years, China‘s development and utilization technology of marine power grows very quickly. Moreover, remarkable improvement is obtained in the electricity generation efficiency of wave energy, the stability of output and the equipment manufacturing techniques.

25

Ministry of Land and Resources: ―Communiqué of China‘s Geological Environment 2007‖, http://www.mlr.gov.cn/zt/2007dizhihuanjinggongbao/ 26 Lin Boqiang, 2008. ―China Energy Development Report 2008‖[M]. China Financial and Economic Publishing House, 332. 27 The People‘s net: http://energy.people.com.cn/GB/9976104.html 28 The marine electric power industry refers to that the coastal area use marine energy and sea wind energy to carry on the electric power production activities, not including coastal area‘s thermal power and nuclear power. 29 ―China Ocean Statistical Bulletin (2008)‖. State Oceanic Administration: http://www.soa.gov.cn/hyjww/ml/tj/ba/webinfo/2009/02/1225332549609752.htm

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SECTION 3: CHINA‟S NEW ENERGY DEVELOPMENT POLICIES In order to promote the development of new energy and the renewable energy in China and guarantee the sustainable development of economy and society, in 2005, the Chinese government passed ―The People's Republic of China Renewable Energy Law‖ which is a milestone in China‘s energy history. Since then, the Chinese government formulated a series of policies on new energy and renewable energy, including ―Medium and Long-term Planning of Renewable Energy Development‖ in 2007 and policies aimed at the major fields of new energy. In order to cope with the global financial crisis of 2008, the Chinese government has made corresponding adjustments in the new energy policy.

I. “The People's Republic of China Renewable Energy Law” China is facing prominent problems such as energy security, environment protection, and the traditional coal dependent energy structure. Along with the economic development, China‘s energy demand keeps increasing. Developing renewable energy can increase energy supply, optimize the energy structure, and promote the country‘s sustainable development. Specifically speaking, before The Reform and Opening Up Policy, there was no systematic policy to develop new energy. In order to adapt to the establishment of the socialist economic market system as well as the requirement of implementing the sustainable development, the government has made development plans of renewable energy, through fiscal allocation and project subsidy to support the research and development of renewable energy; and through low interest loans and tax credit to promote the renewable energy‘s industrialization. Aiming to urge the development of the renewable energy industrialization, ―The People's Republic of China Renewable Energy Law‖ was passed officially in February 2005. ―Renewable Energy Law‖ primarily includes five aspects: set the overall goals and medium-long term goals of renewable energy; prioritize science and technology research of renewable energy development and utilization in the technology development and the hightech industry development; arrange financial support for the renewable energy research, demonstration and industrialization to promote the technological advancement of renewable energy; encourages and supports the renewable energy development and utilization in rural area - the energy department of local government above county-level, joint with other department concerned, should make plans of renewable energy development in rural area, promote the transformation and utilization of bio-energy such as methane, solar energy, wind energy and hydropower energy in small scale and provides technology and financial support according to local economical and social development, zoology protection and the need of controlling the sanitation comprehensively; China‘s renewable energy price administration and cost allocation system; set up special fund and support policies on tax and credit to promote the science and technology research of renewable energy development and utilization, establish criterion and demonstration project. ―Renewable Energy Law‖ has played a significant role in China‘s new energy and renewable energy industrialization development. But because the accompanying policy of ―Renewable Energy Law‖ is not perfect, legal execution and effective implementation also need to be further coordinated and optimized. There is no doubt that ―Renewable Energy


169

Law‖ has provided legal and institutional safeguard for China's new energy and renewable energy development and utilization, and has brought new opportunities for China's new energy industry.

II. “Medium and Long-term Planning of Renewable Energy Development” The Chinese government proposed explicitly in ―Summary of National Economic and Social Development of the 11th Five Year Plan‖: ―Implement the preferential finance, taxation, investment and compulsory market share policy, encourage people to produce and consume renewable energy, and enhance its proportion in energy consumption.‖ In order to achieve this goal, based on the summary of China‘s renewable energy‘s industrial situation and drawing on the international experience of new energy and renewable energy development, ―Medium and Long-term Planning of Renewable Energy Development‖ was published in September 2007, proposing the goals, key fields and safeguard mechanisms of China‘s renewable energy development from 2007 to 2020. ―Medium and Long-term Planning of Renewable Energy Development‖ involves many key fields of renewable energy such as hydropower, bio-energy, wind power, solar energy, and so on. (1) The hydropower: by 2010, the national hydropower installation capacity will amount to 190 million kilowatts, among which large and middle-scaled hydropower will be 140 million kilowatts, and small hydropower will be 50 million kilowatts; by 2020, the national hydropower installation capacity will amount to 300 million kilowatts, among which large and middle-scaled hydropower will be 225 million kilowatts, and small hydropower will be 75 million kilowatts. (2) The bio-energy: by 2010, the total installation capacity of bio-energy generating electricity will amount to 5.5 million kilowatts, among which the annual utilization amount of solid bio-energy fuel will be 1 million tons, the annual utilization amount of methane will be 19 billion cubic meters, adding the annual utilization amount of the non-grain raw material fuel ethanol 2 million tons, and the annual utilization amount of biological diesel oil will be 200 thousand tons; by 2020, the total installation capacity of bio-energy generating electricity will amount to 30 million kilowatts, among which the annual amount of solid bio-energy fuel utilization will be 50 million tons, the annual utilization amount of methane will be 44 billion cubic meters, the annual amount of biological fuel utilization ethanol 10 million tons, and the annual utilization amount of biological diesel oil will be 2 million tons. (3) The wind power: by 2010, the national wind power installation capacity will amount to 5 million kilowatts. The key point is to construct about 30 large-scale wind power projects with the level of 100 thousand kilowatts in the eastern coast and ―Three North‖ areas, forming 3 wind power bases with the level of one million kilowatts in Jiangsu, Hebei, and Inner Mongolian and completing 1 or 2 offshore wind power pilot programs with the level of 100 thousand kilowatts. (4) The solar energy: by 2010, the solar energy‘s aggregate generation capacity will amount to 300 thousand kilowatts, and by 2020, it will amount to 1.8 million kilowatts. (5) The geothermal energy aspect: by 2010, the annual amount of geothermal energy utilization will achieve 4,000,000 tons standard coal; by 2020, the annual amount of geothermal energy utilization will achieve 12 million tons of standard coals and the tide power plant with 100 thousand kilowatts will be completed. The formulation of ―Medium and Long-term Planning of Renewable Energy Development‖ sets up the goal for China to carry out the Scientific Outlook on Development, to construct economical society and to realize the sustainable development. It is an important action of China to protect ecological environment, to optimize energy structure, and to cope with the climate

170


change; it is also important for China to build a new socialist countryside, to solve the problems of electricity and energy supply for countryside residents according to local situations, to raise agricultural benefit, to increase farmers' income, to improve rural environment, and to promote economic and social sustainable development of the countryside. However, it has not yet achieved the anticipated effect, so the implementation needs to be strengthened in the future.

III. The Policies in New Energy‟s Key Fields Besides the above-mentioned ―The People's Republic of China Renewable Energy Law‖ and ―Medium and Long-term Planning of Renewable Energy Development‖, the Chinese government has implemented the corresponding promotion policies of new energy‘s key fields such as the wind energy, the solar energy, the nuclear power, etc. The main contents of these policies are shown in the table 6-8. Table 6-8. The Policies’ Data Sheet of New Energy’s Key Fields Field

wind energy

solar energy

nuclear energy

Policy name ―Notice on Perfecting the Policy of Wind Power Generation‘s Online Price‖

Policy content Regulate the administration of wind power price and continue to carry out the wind power price cost allocation system. Implement the bench-mark grid-connected price policy.

―The Implementation Opinion on Speeding up the Photoelectric Construction Application of Solar Energy ‖

Promote the photoelectric construction application; adopt the way of demonstration project in the initial development period; the nation brings the financial funds policy into play; implement ―the solar energy roof plan‖; speed up the photoelectric popularities and application.

―Medium and Longterm Planning of Nuclear Energy Development (20052020)‖

The development target is set explicitly that by 2020 China‘s nuclear power installed capacity in operation will amount to 10,000 kilowatts and nuclear power installed capacity under construction will amount to 18 million kilowatts. The proportion of the nuclear power accounting for the total electric power installed capacity will increase from less than 2% to 4%. Further strengthen the development of coastal nuclear power, and scientifically plan the nuclear power construction in inland area. According to the estimation based on the nuclear power installed equipment‘s recently proportion change, in 2020 the nuclear power‘s total installed capacity will possibly increase to 70 million kilowatts from 40 million kilowatts proposed in the past.

Source: Based on the sorting out of State Development and Reformation Commission website.


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As the table shows, Chinese government will keep strengthening support on the new energy development policies. In the future, in the field of wind energy, China's main focus is still wind power generation and price reform; in the field of solar energy, the main focus is enhancing the heating capacity; in the field of nuclear power, the main focus is large-scale construction and application of the nuclear power.

IV. China‟s New Energy Policy Trend under the Global Financial Crisis Confronted with the financial crisis, the government has made the corresponding 30 adjustments to the new energy development policy. It is mainly manifested in the following aspects: 1. Develop low-carbon economy. The industries that involve the low-carbon economy are very broad, mainly including the development and utilization of the low-carbon products, the low-carbon technology, and the low-carbon energy. Technically, the low-carbon economy involves many industries such as electricity, transportation, building, metallurgy, chemical industry, petrochemical and so on, as well as the new technologies of controlling greenhouse gas emission effectively in renewable energy and new energy. In August 2009, Wen Jiabao held the State Council Routine Conference in which ―Planning the Environmental Effect Appraisal Rule (Draft)‖ was discussed and passed in principle, with the aim to comprehensively implement national scheme to deal with the climatic change. There are 6 key fields in the next stage of work, and the low-carbon economy will become a new point of economic growth. Since 2008, the global financial crisis greatly influenced China's economy, especially in export. The development of low-carbon economy has played a crucial role in adjusting the internal structure China‘s economy. China‘s traditional export products are high-energy consumption products, but now the main attention must be paid to restructuring the export products; otherwise, China‘s economy structure problem cannot be solved. 2. Strengthen the development of the nuclear power. In the nuclear power aspect, along with China‘s promotion of ten measures aiming to expand domestic demand and promote the economic growth, the nuclear power projects become one of the first approved projects to stimulate domestic demand. The peak of the nuclear power construction is coming. For instance, in 2009, China Guangdong Nuclear Power Group, the only energy enterprise focusing mainly on the nuclear power in China, undertakes 70% of nuclear power unit construction task of China‘s approved nuclear power unit construction task, ranking the first in the world right now. In sum, it will start 6 construction tasks in the 2nd phase of Ling‘ao nuclear power station, Liaoning Hongyan River nuclear power station, Fujian Ningde nuclear power station, Yangjiang nuclear power station, Taishan nuclear power station, Fangchenggang nuclear power station and Hubei Xianning nuclear power project. 30

Chenwei＆Jiangwei, August 11, 2009. New Energy Industry: The Strategic Commanding Point of New Round International Competition. ―Economical Reference Newspaper‖.

172

Lin Weibin, Li Xiaozhong, Rong Tingting, et al. 3. Deal with the surplus energy problem of new energy industry positively. China's new energy industry has begun to take shape and has great development momentum. But 31 some new energy industries have already shown surplus. In August, 2009, it was pointed out in the State Council Routine Conference that the emerging industries such as polycrystalline silicon industry and wind power equipment industry are listed in the ―key strengthening instruction‖ industries due to their surplus energy and duplication problem. At present, China has already made the adjustment plan for industrial development. Generally speaking, China is rich in new energy resources and the new energy development is very promising. Developing new energy such as wind power, solar energy, nuclear power is not only a way to deal with the global financial crisis, but also a way for China to seize a leading position in the new round of global economic development.

SECTION 4: THE PROSPECT FOR NEW ENERGY IN CHINA I. The Existing Problem of China‟s New Energy Development Along with the perfection of related laws and regulations and the continual reinforcement of policy support, China‘s new energy industry layout will be gradually clear, and there will be more new energy development opportunities. However, at present, China‘s new energy industrialization development is also facing many restrictions such as lack of technological innovation, the lag of energy system reformation, and difficulties in financing.

1. New Energy Enterprise Lacks Independent Innovation Technology The technology constraint is an essential factor for the slow development of China‘s new energy. Compared with developed countries, China‘s new energy utilization started later, and the average level of new energy utilization technology is lower. At present, the majority of core technologies and equipment in China‘s new energy depends on import and the proportion of domestic technology and equipment is still low, leading to high cost in the new energy industry. Take the wind power for example. At present, the overall equipment manufacturing capacity in the wind power industry is not high, and China's wind power manufacturing enterprises have not completely mastered the core technologies of core parts 32 such as turbine blades, shift gear cases and generators, etc. The technological inferiority becomes a great factor to restrict the development and expansion of China‘s new energy industry. If China wants to keep developing its new energy industry, independent innovation in technologies must be carried on continuously.

31

Liu Qi, August 28, 2009. The new energy development just started and particular industry presented overheating. The Economic Observer Net. 32 Song Qinghua, June 1st, 2009. New Energy Crisis. ―Elite‖.


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2. The Management System of New Energy Development and Utilization is Imperfect First, the existing energy management system is imperfect. For instance, China has two kinds of electricity pricing mechanisms now, which cause confusion in grid- connected new energy prices, twist the price signals, and have affected the entire plan and inspection order. At the same time, under the existing management system, there are too many proposed new energy projects and the examination and approval procedure is too lengthy and complex. The responsibilities, rights and benefits of the electricity grid companies to develop new energy 33 are also unclear, lacking incentives for electricity grid companies to develop new energy. Next, the new energy's subsidiary service mechanism is imperfect. In many places, solar cells are abandoned because local people do not know how to switch the storage battery fluid, and it‘s a common phenomenon that the small wind power generation equipment stops 34 working because nobody knows how to repair the turbine. Therefore the new energy enterprises should improve subsidiary service work. Only in this way could new energy enterprises become truly substantial and strong. Finally, due to the lack of national overall arrangement, some industries have already presented the overheated phenomenon. At present, there is a serious phenomenon in China‘s new energy industry called ―following up‖. The industrial development still has much blindness. Moreover, the new energy stock is overheated: massive funds enter the new energy domain continuously, and the market‘s non-rational ingredient inflates day by day, increasing the investment risk in new energy industry. Therefore, it is quite necessary to watch out and 35 prevent overheating in China's new energy development. 3. The Financing Channel of New Energy Development is Insufficient The development of new energy industry primarily depends on small and medium-sized enterprises, and the risk is relatively higher for these companies than others. Therefore it is a quite common phenomenon that the enterprises have financing difficulties. The banks focus on the loan risk management and they do not want to lend money to small and medium-sized enterprises with small scale and gloomy prospect. They are cautious toward medium and small scaled new energy enterprises. China's venture capital or private equity investment pay much attention in new energy field. However, the exit channel is insufficient because it restricts the incentives of venture capital and private equity investment and affects the stable development of new energy industry. 4. The Market Is Restricted by Traditional Energy Price The increasing international crude oil price results in a craze of new energy development and utilization. The quick development of China‘s new energy was closely related to the increasing oil price. However, affected by financial crisis, the oil price fell down sharply and brought challenges to the new energy development. 33

Zhang Yongwei, August 31st, 2009. Straightening out Management System while Developing New Energy. ―China Economic Times‖. 34 Zhanglei, August 21, 2009. The Opportunity and Challenge of China‘s New Energy Industry. China‘s Energy Resources net. 35 Zhou Xuesong, July 30, 2009. The Necessary Prevention from New Energy Foam. ―China Economic Times‖.

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Due to technological constraints, the price advantage of China‘s new energy product does not exist or is not remarkable. For the ideal consumer, they will not opt out from the traditional energy to choose new energy with higher price. Although the financial crisis brought a temporary drop in petroleum prices, they will remain to be high in the long run. At present the majority of energy economists believes that only when the international oil price continues to be more than 200 dollars each barrel, can this new energy technology have widespread market space to develop. After this financial crisis, all fields of new energy industry face big problems. On one hand, the economic crisis caused global economy‘s decline which reduced the total demand of energy sources. On the other hand, due to the sharp drop of petroleum price caused by financial crisis, traditional energy's price advantage emerged, which had substitution effect for new energy. Around the world, demand for new energy is declining rapidly. The market is in favor of traditional energy, not the new energy with higher price. Generally speaking, this financial crisis is a great challenge for the demand of new energy.

II. The Development Prospect of China‟s New Energy China‘s new energy industrialization development started later than most of developed countries, its technology is relatively behind and the overall industrialization level is not high. The outbreak of the financial crisis affected the energy industry seriously, but it actually provided a turning point for the development of new energy. Along with the expansion of industrial scale, the cost of new energy is decreasing Cost reduction, good policy and market environment cause the new energy to show the scale effect, which makes it more competitive than traditional energy. Moreover, in the long run, along with continuous innovation and improvement of technology, the cost advantage of China‘s new energy will emerge gradually compared with the conventional energy source. In this way, China‘s new energy product will have better competitiveness in the market. China has rich resources to develop the renewable energy and owns certain industrial foundation. From the resources, technology and the industry angle, it has great development potential in future. The government has paid much attention to the renewable energy sources development. According to China‘s development targets, in 2020 electricity generation from renewable energy will be over 15% (as shown in the table 6-9), and after 2040, the proportion can reach 30% or more. The renewable energy are expected to become an important alternative energy. After recent years‘ development, the role of renewable energy has already emerged in China's energy supply. The following 5 to10 years will be the key phase for the development of wind power, photovoltaic generation and bio-energy in China. In order to promote large-scale application of renewable energy, it is crucial to seize the opportunity, build a firm foundation and rapidly form a renewable energy market and industry. To sum up, China‘s renewable energy has huge development potential and broad prospect, but in order to break through the barriers, the division and cooperation among government, related enterprises and research institutes are essential.

Table 6-9. the Development Prospect of China’s New Energy In 2010

In 2020

Development capacity

Physical energy

Standard coal


Physical energy

Standard coal

Power generation

Megawatt

Billion kilowatthour

Thousand tons of standard coal

Megawatt



Solar PV

500

0.75

248

1,000

1.5

531

Grid wind power generation

4,000

8

2,640

30,000

60

21,240

Off-grid wind power generation

70

0.21

69.3

100

0.3

106

Small hydropower

50,000

175

57,750

75,000

262.5

92,925

Micro-hydropower

300

0.43

142

500

0.72

255

Biomass Power

5,800

31.9

10,527

20,000

110

38,940

Ocean power generation

25

0.07

23

50

0.143

51

Geothermal power generation

50

0.36

119

100

10.72

2550

Sub-total

60,745

216.72

71,518.3

126,750

435.88

151,303

Billion cubic meters

2 .Gas/heat supply

Billion cubic meters

Rural household methane

30,000,000 (biogas digesters)

9

50,000,000 (biogas digesters)

15

Breeding farm methane

10,000(biogas digesters)

2

2,000(biogas digesters)

4

Table 6-9. (Continued) In 2010

In 2020


Physical energy

Standard coal


Physical energy

Standard coal

Power generation

Megawatt



Megawatt



Industrial organic wastewater

2,000 (plants)

4

12,576

5,000(plants)

6

1,650

City life sewage

1,000 (plans)

1

2,000 (plans)

2

Solar-powered water heater

150 miliion square meters

18,000

300 million square meters

36,000

Geothermic heating supplying hot water


700


1,400

Sub-total

31,276

57,050

3. Liquid fuel

Thousand tons of standard coals

Thousand tons

Thousand tons of standard coals

Biology ethyl alcohol

500

4,290

19,000

16,300

Biology diesel oil

20

290

1,000

1,430

Sub-total

520

4,580

20,000

17,730

Sum total

107,374

226,083

Source: Lin Boqiang. ―China Energy Development Reports 2008‖. China Financial and Economic Press, 341.

Translators: Liao Guiling(SUFE), Wang Fuming(SUFE) English Version Editors: Jiang Jiahui(SUFE), Li Zhan (Harvard)

REFERENCES [1] [2] [3] [4]

[5] [6] [7] [8] [9] [10] [11] [12] [13]

Liu Ke, 2009. A discussion on the development environment and prospects of China‘s new energy industry(Chinese) [J]. Enterprise Reporter, 5. Yang Jiejun, 2008. The new way of thinking on China's new energy and renewable energy legislation(Chinese) [J]. Law and Business Research, 1. Yang Jiejun & Lai Chaochao, et al. 2008. The development and utilization policy and legislation and regulations of China's new energy and renewable energy(Chinese) [J]. Rule of law and Essays, 23 (3). Wang Mingyuan, 2007. "Visible hand" props up a bright sky for China‘s renewable energy industry — based on the analysis of "The People's Republic of China Renewable Energy Law"(Chinese) [J]. Modern law, 29 (6), 156-165. Wang Bingchen & Wu Yuanwei, et al. 2009-4-18. Ground-source heat pump project need standardization urgently(Chinese) [N]. Geological Survey Reporter, 4. Wang Qingyi, 2007(4). Current situation and prospects of Renewable energy（Volume I) (Chinese) [J]. Electric Technology and Economy, 19 (2), 19-25. Wang Qingyi, 2007 (6) Current situation and prospects of Renewable energy（Volume II) (Chinese) [J]. Electric Technology and Economy, 19 (3), 23-25. Shi Lishan, 2004. An analysis on the current situation of China's energy and development plan of renewable energy(Chinese) [J]. Renewable Energy, 5, 1-4. Hong Kong Venture Investment Research Institute, 2008. Yearbook of China‘s Venture Investment [M]. Beijing: Democracy and Nation-building Press, 539-541. China‘s Energy Yearbook Editorial Committee, 2007, China‘s Energy Yearbook, 2005/2006 [M]. Beijing: Science Press, 255-256. Lin Boqiang, 2008. China Energy Development Report 2008 [R]. Beijing: China Financial and Economic Publishing House. Cui Minxuan, 2008. China's Energy Development Report 2008 [R]. Beijing: Social Sciences Academic Press. Wang Zhongying, Ren Dongming, &Gao Hu, et al. 2009. China‘s Renewable Energy Industry Development Report, 2008 [R]. Beijing: Chemical Industry Press.




GETTING READY FOR THE COMING OF THE NEW ENERGY ERA Liu Shiyong* Chapter 6 initially debriefs the new energy policy in the three major economic entities i.e. European countries, United States, and Japan as well as other countries. It then systematically addresses the status quo for the development of new energy in China and existing issues left unsolved. And then, it introduces the policies related to new energy in China. Lastly, this chapter proposes the perspectives on the development of new energy in China. This comment mainly discusses, China as a major country in energy consumption in the world, how to handle the unresolved issues related to new energy by referring to the experiences and strengths in the new energy policies of the developed countries. Those issues include but are not limited to ideology, political system, policy, technology, innovation, and operation management with regard to new energy. This comment provides some constructive suggestions and advices on exploring diversified new energy sources and consuming energy in an efficient way in order to achieve the goal of sustainable development of energy in China. Rapid economic development in China, like other industrialized and developing countries, is demanding continuous supply of cheap and clean energy. It has already become the second largest countries in energy consumption. The trend is still increasing. Therefore, the rising import dependency on energy renders China vulnerable to political and economic threats in the years to come. It is a simple logic that a country‘s economy is doomed to collapse with the exhaustion of traditional fossil energy if it solely or to great extend relies on the import of traditional energy. Most importantly, the problem between rising demand and limited supply is unboundedly magnified by political factor sometimes. For a county without energy, the leading producers in oil and gas might be able to control this country‘s economy * Liu Shiyong, PhD in Industrial and Systems Engineering, Virginia Polytechnic Institute and State University, Associate Professor in Research Institute of Economics and Management, Southwestern University of Finance and Economics.

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by suppressing the energy supply. For example, the case of gas debate between Russia and Ukraine apparently gives many countries a warning that a country‘s government might use energy supply as a measure to assert the sovereignty and political privilege over another country. China, with ever-increasing energy consumption for more than 1.3 billion population pursuing better quality of life, is facing even bigger challenge in security of energy than ever. China‘s national security is partially determined by energy security. Thereby, continued exploration and exploitation for new energy should enter the agenda of national major policies. The new energy policy should be able to consider diversifying the sources for new energy and using them in an efficient way.

1. POLICY SUPPORT FOR DEVELOPING NEW ENERGY By introducing the technology and operation experiences in exploration and exploitation of new energy from developed countries, China central government should draw up policies supporting diversified energies and implement them based on China‘ real situation and the exploitable potentials of those energies. First of all, central and state governments should provide an environment that facilitates the industrialization for full-fledged technology in new energy and associated equipment. Secondly, for energy that has potentially extensive application value, requests for investment, technology, and professionals should be given the highest priority. Last but not the least, the local governments in different locations should take advantage of their proprietary geographic strengths to develop and make use of potential new energy that characterizes local socioeconomic and natural environment. Three facets should be given ad hoc attention in drafting and implementing new energy policy in China. First of all, it is how the governments in different hierarchies can offer support, in the policy and investment, for the research and development on the new energy which already has full-grown theoretic foundations. For example, the generation and utilization for the wind energy, solar energy, and methane have been experienced for years by many countries including China. What the government and investor should do is put focus on the Research and Development (R&D) of core technology, manufacturing of relevant equipment, and construction of infrastructure needed for producing these kinds of new energies. Core technology and equipment can be obtained through independent R&D and importing technology from developed countries. The independent R&D is to begin with the intensive investment in high-end laboratory and associated facilities. It is imperative to construct a platform by which professionals and experts can exert their knowledge and skills in the field of new energy, which requires sufficient funding to support the operation. It is the government‘s responsibility to build a general environment which involves building more supplementary laboratories in universities and research institutes. In order to provide a continuous supply of professionals in new energy R&D, universities should open some courses and dedicated funding for new energy research. Different governments and institutions should have incentive and reward mechanisms in place to encourage more researchers to contribute to the field of new energy. At the same time, the government should design various grant plans in order to invite foreign experts and oversea scholars in new energy field to engage in R&D in China. The financial and policy support should keep consistent and continuous because the research in energy cannot be done overnight. Central

Getting Ready for the Coming of the New Energy Era

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government should frame an environment to encourage the long-term risk investment, especially private capital, in new energy research by exercising preferential tax policy. In terms of introducing foreign technology and equipment, a multilateral cooperation strategy should be adopted in order to realize the win-win situation. This, consequently, can reduce the development cycle for critical technology in energy. More importantly, by sharing the new technology in energy, different countries can work together to realize the sustainable development in energy and reduction in poverty, which can also ease the regional or national conflicts caused by energy issues. In addition, the development and use of new energy, especially the clean energy such as solar energy, wind energy, and hydrogen can reduce the emission of greenhouse gases. Secondly, national and state policy in new energy should also encourage and guide the investment in manufacturing of relevant equipment and constructing of associated infrastructure. The source of investment may come from dedicated fund from central and local fiscal income, private capital, or foreign risk investment. Central and local governments should actively provide channels to attract different investment schemes and build up a platform on which investors have confidence to play game in this field. Another important supporting source for new energy R&D is traditional energy conglomerates namely, PetroChina Company Limited1, China Petroleum & Chemical Corporation (Sinopec Corp)2, and China National Offshore Oil Corporation (CNOOC)3. These enterprises should increase their investment in R&D and expedite the industrialization on technology of new energy by using their abundant capital accumulated from operation of fossil fuel. It is going to be crucial for the energy enterprises to survive and prosper whether they have breakthrough in new energy R&D and can master the critical the technology for using new energy or not. Presently, many international oil groups are making huge investment in R&D and use of new energy. By coordinating with UC Berkeley, University of Illinois, Urbana-Champaign and the Lawrence Berkeley National Laboratory, British Petroleum (BP) put up a plan in 2007 to invest $500 million over the next ten years to establish a dedicated biosciences energy research laboratory4. By the same token, ExxonMobil announced plans in 2009 to invest $600 million to develop next-generation bio-fuels from algae5. Thirdly, the energy strategy should also support the fundamental research on the potential energies which are still in the conceptual stage. In order to diversify the new energy supply, China should explore different new energies according to the distinctions in natural environment, geologic, geographic, industrial, agricultural, forestry, hydraulic, climate factors in different regions. For example, it has been known that the deposits of Natural Gas Hydrate 1

New energy exploration of PetroChina, http://news.cnpc.com.cn/system/2008/01/09/001150679.shtml, retrieve on Oct 5th,2009. 2 Rivalry in new energy PetroChina vs. Sinopec, http://www.bioon.com/biology/bioengery/315151.shtml, retrieved on Oct 10th, 2009. 3 Exploration on Natural Gas Hydrate (NGH) by China National Offshore Oil Corp and The Ministry of Land and Resource http://www.in-en.com/newenergy/html/newenergy-200720070724112006.html, retrieved on Oct 10th, 2009. 4 BP pledges $500 million for Energy Biosciences Institute, http://www.energybiosciencesinstitute.org, retrieved on Oct 13th, 2009. 5 Exxon Mobil sinks $600 million into algae-based bio-fuels in major strategy shift, http://www.guardian.co.uk/environment/2009/jul/14/green-algae-exxon-mobil, retrieved on Oct 5th, 2009.

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(NGH)6, at the north continental slop of South China Sea, are equivalent to 18.5 billion tons of oil which can provide China with 50 years‘ supply based on the consumption in 20087. Based on the assumption that NGH can be found at tundra regions, scientists in China found another giant NGH reserve with estimated deposits being approximately equivalent to 35 billion tons of oil at place located at Qilian Mountain of Qinghai Province. Taking another example, in some regions of China, producing bio-fuel such as biodiesel through algae can not only generate alternative fuel but also cleanse the polluted water caused by eutrophication8. Another example of alternative bio-fuel is to use nitrogen-fixing bacteria to decompose grass or woodchips to produce hydrogen. The key benefit of burning hydrogen is that the only emission is water vapor, which significantly reduces emission of the greenhouse gas 9 . The R&D of alternative fuel needs governmental policy to encourage and support innovation. Authorities can set up a channel to expedite the industrialization of patents related to new energy. Given that the great potentials in alternative fuel, China‘s 12th and 13th fiveyear plans should give higher priority in R&D and industrialization of new energy. Most optimistically, with mastering key technology in diversified new energy and generating enough electricity power, China can consider directly exporting electricity power to adjacent countries after sufficing local needs in decades to come.

2. POLICY SUPPORT FOR USING NEW ENERGY China has been exploring and exploiting new energies including methane, hydraulic electricity, wind energy, and solar energy since the foundation of The People‘s Republic of China. The financial crisis became a turning point for China to adjust the structure of different industries. In the new act, part of the ￥4,000 billion investment should be used to replace the old equipment and upgrade infrastructure associated with these energies. It is also very necessary to adjust the way they were operated. Taking wind energy as example, in some areas, due to the instability of wind, it is hard to be combined to trunk grid. Under this circumstance, family-size and/or community-size wind energy generators are more efficient than that of centrally connected power supply. Especially for remote village or minority areas, family-size solar photovoltaic generation board and wind energy generators can be complementary to provide uninterrupted power. In addition, methane can be used for cooking and/or heating by using family-size methane tank in which organic waste and livestock dropping are used. Local government should provide allowances or other financial support to promote the participation of using new energy because this is a fundamental requirement for building harmonious society especially for the countryside. Once the family-size or community-size generators enter into different families, it is indispensable to have enough technicians to do maintenance for relevant facilities and equipment. Therefore, it is necessary to train required technicians in some vocational schools or colleges. Let‘s make an 6 7 8 9

Natural Gas Hydrate http://www.newenergy.org.cn/b_ice/index.htm, retrieved on Oct 10 th 2009. Chine Energy Yearbook（2007-2008） Economical biodiesel fuel from Algae, http://www.oilgae.com/, retrieved on Oct 10th, 2009. Alternative energy, http://www.alternative-energy-news.info/technology/biofuels/, retrieved on Oct 10th, 2009.


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assumption that each administrative village needs 5 to 8 maintenance technicians. Optimistically, this scenario can create 3.2 million to 5.1 million employment opportunities if calculated based on the existing 640,000 administrative villages in China. Furthermore, by adding the communities in different cities and towns, the number is going to be 5 million to 7 million or even more than that. This is a double-gain game in which the policy not only realizes the continuous supply but also creates millions of employment opportunities. Except for training maintenance technicians, for enterprises which do business in wind and solar energy, they need many professionals who master skills and knowledge in both technology and operation management. Universities and vocational schools should design relevant courses and diploma program to provide appropriate talents for the coming the new energy times. Due to the vast territory of China, the exploitation of new energy should vary by taking the regional differences and characteristics into account, so do the relevant polices. For instance, in Xinjiang Autonomous Region, windy and sunny weather can provide enough sources for generating energy; for coastal regions, energies generated by tide, wave, sea current, wind, and differences in seawater are major sources. Given the diversity in energy sources in different regions, different local governments may not be able to implement appropriate policies due to bureaucracy or some unanticipated difficulties. There are possibly some conflicts when allocating limited resources to promote new energy or other activities. Thus, achievements and efficiency in employing new energy in different regions should become one of the key performance indicators for government officials in order to monitor and stimulate the scale of support of local governments. Central government should promote the widespread application of new energies such as biomethanol, bio-ethanol, biodiesel, waste vegetable oil, bio-butanol, hydrogen in vehicles and machines which traditionally use fossil fuel. Therefore, enterprises have to develop new type of engines for car, ship, and airplane as well as capital machines used in plants. Consequently, the running of transportation vehicles and machines used in companies can no longer rely on traditional fossil fuel.

3. ESTABLISHING LINKAGE BETWEEN NEW ENERGY INDUSTRY AND ASSOCIATED SECTORS The R&D and exploitation is, in many countries, becoming a new growth point in economy because the equipment manufacturing and construction of associated infrastructure can drive the growth of upstream and downstream industries or sectors. As a result, it can create more employment opportunities. Furthermore, the widespread use of new energy is going to bring significant changes in socioeconomic systems. For example, it will change the traditional way in using agricultural produces because crops harvested might be used for producing new energy e.g. corn is used for producing alcohol; crop stalks mixed with livestock waste are used for producing methane. By this token, the products generated from refinery towers are not gas and diesel but bio-fuel. Additionally, the exploitation of new energy put a request for constructing associated infrastructure or upgrading existing infrastructure ever used for producing fossil fuel. During the transition from using fossil fuel to new energy, there might be many issues or conflicts of interests coming from different

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stakeholders. As mentioned previously for rebuilding or obsolescing existing facilities and equipment, this undoubtedly adds financial burden to enterprises. Besides, the technicians and engineers also need technical training in order to operate the new equipment efficiently. In consideration of the different characteristics of new energy, traditional supply chain may be broken and old operation management skills may become obsolete. In a current supply chain of energy, a refinery plant‘s raw materials come from crude oil produced locally or imported from foreign countries. However, in the new energy case, the upstream for a fuel-producing might be many farms. Changes and challenges brought by the process of exploring and exploiting new energy are not limited to the above-mentioned aspects. Central government, local government, and energy enterprise should prepare a package of policies, strategies, operating tactics to handle potential issues.

4. AVOIDING UNDER- OR OVER-SUPPLY IN EQUIPMENT CAPACITY OR INFRASTRUCTURE Central government should, as necessary, employ macro-control mechanisms to avoid under- or over-supply in equipment capacity or infrastructure associated with new energy. The potential reserve for different new energies should be systematically studied in order to rationally allocate funding, investment, and fiscal subsidies. Moreover, central and local governments should deliver accurate and timely information to the public in order to get private risk capitals involved in the macro-control process on the capacities of associated equipment and facilities. The enterprises in manufacturing energy associated equipment can also look for opportunities outside China to expand their market.

5. ENERGY CONSERVATION With so large population base in China, energy consumption cannot follow the ways the developed countries have been using. According to statistics of the United State Energy Information Administration10, the energy consumption per capita in US in 2008 is 94765.42 KW11. While during the same year, the number in China is 17556.32 KW12, which means that an equivalence of 2.85 billion tons of standard coal needs to be burned in order to suffice the need. Based on this assumption, a total of 15.39 billon tons of standard coal need to be burned if all people in China were to achieve the same quality of life as in USA. This definitely will cause disastrous effects on China in terms of both energy consumption and emission. Therefore, as a country with ever-increasing economy, China should not only continuously explore various new energy sources but also increase the efficiency of using energy. Even though there are going to be breakthrough in new energy R&D, the resources are still scarce. 10

United State Energy Information Administration, http://www.eia.doe.gov/, retrieved on Oct 10th, 2009. Average energy consumption in USA 2008, http://www.eia.doe.gov/emeu/mer/pdf/pages/sec1_3.pdf, retrieved on Sept 25th, 2009. 12 Energy Consumption of China in 2008 http://www.stats.gov.cn/, retrieved on Oct 10th, 2009. 11


185

Meanwhile, in order to achieve the goal of green China, it is pressing, for major energyconsuming enterprises, to improve their overall efficiencies in energy consumption through technology upgrading in production, process reengineering and improvement of operation management. Besides, another major demand for energy comes from transportation. Given the situation of population, China, in the long run, should consider using mass transit as transportation mode for meeting travel need instead of promoting private car driving. Even though promoting private car driving can drive domestic demand in short term, the long-run consequence is going to be the rapid increase in energy consumption and toxic emission. Moreover, too many vehicles running in cities will cause traffic congestion which makes idling vehicles consume more energy and emit more toxic gas (carbon monoxide) due to insufficient burning of fuel. Metropolitan areas such as Beijing, Shanghai, and Guangzhou can consider taking measures such as levying higher oil tax or traffic congestion pricing to mitigate traffic congestion. The revenue accumulated can be used to improve mass transit capacity and facilities accordingly. As a result, people are better off by switching to take mass transit or ride high occupancy vehicle (HOV) with improved mass transit services. Central and local governments might consider enacting regulations and laws to regulate operation of energy-consuming enterprises and enforce environment protection. For example, it is possible to push real estate companies to install solar water heater and sufficiently utilize solar energy13 when they construct new buildings. In addition, more strict industrial standards for energy conservation should be set for auto, electric appliances, and industrial capital equipment. Last but not the least, it is necessary to promote the energy conservation throughout the whole society through public participation and supervision. Rewards can be given to those enterprises, communities and families which have outstanding performance in energy conservation. In a word, China government needs to employ all kinds of feasible policies and measures to develop and use new energy to improve people‘s quality of life and to guarantee the sustainable development of economy.

13

Solar house at Virginia Tech, http://www.lumenhaus.com/, retrieved on Sept 20 th, 2009.



Chapter 7

EMISSION TRADING: NEW MECHANISM FOR RESPONDING TO CLIMATE CHANGE He Jinyu*, Xiao Boqiang and Zhang Mingming The current global triple crisis of energy, environment and finance has made a great impact on China‘s economic development. Since the financial crisis has not completely faded away, it will have a profound long-term influence on the entity economy. While countries all over the world are looking for the new engine for economic growth, developing the low-carbon economy has become the common choice of most of developed countries and the impetus of China for future‘s development. In the production and management activities of humans, it is evitable to discharge greenhouse gas and all kinds of pollutants, which act directly on our natural environment, change human‘s living environment and furthermore affect people‘s daily life. Emission trading is the derived trading of right and interest based on environmental factors and is designed to reduce emission through economic means. Having entered the 21st century, some developed countries, including European countries and USA, have started developing all kinds of emission trading and achieved good results. Since China is a fastest-developing country in the world, choosing the right opportunity to develop an appropriate amount of emission trading is of necessity for China to respond to climate change and provides China with the new mechanism and exploration.

SECTION 1: EMISSION TRADING IS OF NECESSITY FOR CHINA TO RESPOND TO CLIMATE CHANGE The National Energy Program predicts that the total demand for global energy will have risend by 50% by 2030, while China‘s demand for primary energy will have increased from 1.2 billion tons in 2002 to 2.5 billion tons. China will face serious energy safety problems in the future. With regards to environmental crisis, the global climate change has already become an undisputable fact, and the development of high energy-consuming and emission * He Jinyu obtained his PhD degree from the Institute of Economics and Resource Management of Beijing Normal University, and he is now working with PetroChina (CNPC). Email: [email protected]

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industries will be seriously restricted. Developing emission trading is an effective model to realize low-carbon development. It also satisfies the need of China to realize the sustainable development of economic society, actively respond to the global climate change and achieve the goal of energy saving and emission reduction.

I. The Need for Actively Dealing with the Global Climate Change The Intergovernmental Panel on Climate Change (IPCC) established by World Meteorological Organization (WMO) and United Nations Environment Program1, pointed out in its forth evaluation report of 2007 on the climate change that global warming has already become an undisputable fact. The major cause is the emission of greenhouse gases, including carbon dioxide caused by human‘s activities, which results from the consumption of energy (mainly fossil energy) and other resources caused by the population growth. It is estimated that by 2020, the consumption of global energy will have increased by more than 70%, and the emission of carbon dioxide will have increased by more than 50% if effective measures are taken. The harsh reality of global warming has attracted attention of countries all over the world. The United Nations promulgated Kyoto Protocol in December, 1997, which quantitatively specifies countries‘ obligation of emission reduction and introduces three major market-based emission reduction mechanisms: Emission Trading, the Clean Development Mechanism and Joint Implementation. In November, 2005, the Montreal meeting secured the operation of Kyoto Protocol in legal terms and launched the ―negotiation in the post-Kyoto times‖. In December, 2007, the Bali meeting promulgated the "Bali road map", which stateses that a new emission reduction agreement must have been issued by 2009 and stresses the importance of respecting the convention and principles of the protocol. As a positive and effective method to deal with the global climate change，emission trading mechanism has been fast developed in the United States, the European Union, etc. As the world's largest developing country with the fastest economic growth and a large quantity of greenhouse gas emission, China proposes to incorporate the plan of responding to climate change into national economic and social development plan, and actively develop low-carbon economy and emission trading to a new development model, which is of great significance to dealing with global climate change.

II. The Need for Effectively Integrating Resources and Achieving China‟s Goal of Energy-saving and Emission Reduction National "Eleventh Five-Year Plan" 2clearly states the binding target that GDP energy consumption per unit in 2010 should have reduced by 20% from 2005. Energy-saving and emission reduction has already become one of the major tasks of China‘s reform and development. In the first three years of "Eleventh Five-Year", the central government will allocate 33.6 billion RMB from the budgetary investment and 50.5 billion RMB from the 1 2

IPCC forth evaluation report. Outline of China's the Eleventh Five-year Plan, State Council of People‘s Republic of China.

Emission Trading: New Mechanism for Responding to Climate Change

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central fiscal fund to support the construction of key energy-saving and emission reduction projects. Now, the energy-saving and emission reduction work in China during the first period has already taken effect. In the first half of the year 2009, the national GDP energy consumption per unit declined by 3.35%, 0.47 percent higher than the decline rate of last year; while the added-value energy consumption of above-scale industrial units declined by 11.35% compared with that of last year. It is estimated that the emission of sulfur dioxide and chemical oxygen demand (COD) will decline by 5% and 2%, respectively, among which, coal industry will decline by 3.83%; iron and steel, building materials, electricity and petroleum and petrochemical industries about 8% -9%; non-ferrous metal industry 19.59%; chemical industry 15.16%; and textile industry 11.45%. In the first half of the year, among the key enterprises whose comprehensive energy consumption of standard coal over 10,000 tons, 80% of the 25 key energy-consuming products and 108 unit consumption indicators showed downward trends. Although the energy-saving and emission reduction work is in progressive advance, the mid-term evaluation report of ―Eleventh Five-Year Plan" released at the end of 2008 shows that the decrease of two indicators, GDP energy consumption per unit of energy-saving and emission reduction and the major pollutants, is not optimistic. If we want to meet the requirement proposed in "outline" by 2010, there is still a long way to go. China is currently accelerating urbanization and infrastructure construction, and of depends strongly on export. Undoubtedly, the industrialization and great amount of long-term export of high-energy vector make it more difficult to save energy and reduce emission. To achieve our goal of energy-saving and emissions reduction, traditionally, we could assign the binding quotas of energy-saving and emission reduction to the all the provinces, autonomous regions, municipalities and related businesses through administrative means. However, this single means is hard to realize lack long-term mechanism. Compared with high-cost administrative means, low-cost greenhouse emission reduction through market mechanism is much more effective. The emission trading platform encourages the capable regions and enterprises to save as much energy and reduce emission as possible, and sell their surplus quotas in the market. Regions and enterprises that have limited ability to save energy and reduce emission would also finish their producing tasks through purchasing the quotas from the market. Compared with sending the traditional administrative instructions, it is most flexible and efficient to introduce the market mechanism to save energy and reduce emission at the lowest cost and at the same time maintain the economic development.

III. The Need for Sustainable Development of Economy and Society Since the reform and opening-up policy, China's economic growth has made universally recognized great achievement. While China enjoys high GDP growth, it exerts great pressure on the environment. In 2005, the total emission of sulfur dioxide in China was 25.494 million tons, and the acid-rain stricken area caused by sulfur dioxide counted for 6.8% of the national land. In areas stricken by comparatively serious acid-rain, such as Guiyang, Chongqing and

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Changsha, the average pH value of precipitation acidity is approximately 4.53. Due to the rapid development of industrialization, the national annual emission of carbon dioxide is always at a high level throughout the year. Along with the process of industrialization, high energy-consumption and environmental problems have become increasingly prominent. In order to achieve sustainable development of economic society, it is particularly important to solve environmental problems and actively respond to global climate change. The externality of environmental pollution and global climate change is the major cause of the spread of environmental pollution. The countermeasure is to internalize the externality. At present, countries all over the world are actively promoting emission trading, making it an important means to solve the problems of environmental pollution and global climate change. The nature of emission trading is to trade the emission trading as a commodity. Under the premise of controlling total emission, the government encourages enterprises to minimize the total pollution emission through technological progress and pollution abatement. The enterprises will be granted the legal right of pollutants emission and allowed to transfer or change the surplus quota after pollution abatement. Under this framework, our environment would be improved based on the market mechanism. In 1999, China National Environmental Protection Administration and U.S. Environmental Protection Agency signed a cooperation agreement to unfold ―the study of SO2 emission reduction through market mechanism‖ in China. Nantong in Jiangsu Province and Benxi in Liaoning Province became the first two pilot cities, which marks the beginning of China‘s solving the problems environment pollution through market mechanism. Since then, China has successively conducted pilot emission trading in seven other provinces and municipalities, such as Shandong, Shanxi, Jiangsu, Henan, Shanghai, Tianjin, and Liuzhou. Ten years of exploration and practice has shown that, as a new environmental and economic policy with the characteristics of market mechanism, emission trading system, could effectively control the environment pollution and promote sustainable development of the economy.

SECTION 2: EMISSION TRADING HAS ITS FAVORABLE FOUNDATION FOR DEVELOPMENT IN CHINA China's research and development of emission trading has quite a long history. Since the 1990s, national environmental protection departments have been studying the emission trading of sulfur dioxide in U.S. electric power industry. With the further development in the developing countries of the Clean Development Mechanism (CDM) specified in "Kyoto Protocol", China has become the country that reduces the greatest amount of CO2 emission under the mechanism of CDM. Beginning in 2008, China has also established a number of emission right exchanges, laying a favorable foundation for developing emission trading.

3

The Eleventh Five-year Outline of China's Environmental Protection, 2006-2010,State Environmental Protection Administration, China.


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I. Practice under the Framework of UN Climate Change Convention and Kyoto Protocol The homogeneous distribution of greenhouses, such as carbon dioxide, in the Earth's atmosphere leads to the globalization of climate change. On May 9, 1992, "United Nations Framework Convention on Climate Change" ("Convention ") was passed by Intergovernmental Negotiating Committee (INC) in New York, and was signed by the participating countries during the Rio Conference on Environment. At the end of 2008, 191 countries and regional organizations had been ratified to join the Convention. TheConvention specified five major principles, including principle of differentiated responsibilities based on the common interest, precautionary principle, sustainable development principle, openeconomy principle, principle of giving full consideration to the specific needs and special circumstances in developing countries. However, details about how to operate these principles have not been decided. In 1997, "Kyoto Protocol" specified the law-binding quantitative quotas of emission reduction for developed countries, but not for developing countries. The core of the protocol is that from 2008 to 2012, the total emission of greenhouse in industrialized countries must be reduced by 5.2% from 1990. Due to the higher abatement cost in developed countries, "Kyoto Protocol" specially included three kinds of flexible implementation mechanisms: Joint Implementation (JI), Emission Trading (ET), and Clean Development Mechanism (CDM). Protocol officially came into effect on February 16th, 2005. At present, there are already 142 countries and regions that signed the Protocol. The performance of "Kyoto Protocol", however, is not so optimistic as expected. The statistics in August, 2007 shows that emission in some developed countries increased rapidly rather than declined. The emission reduction goal of both Japan and Canada is 6%, but their amount of emission increased by 7% and 27%, respectively. Though Australia ratified the Protocol in 2007, specifying that it aims to reduce emission by 8% during the first commitment period, but in contrast, its emission increased by 25%. USA, who has not ratified the Protocol, increased its emission by 16%, although its intended goal under protocol is to reduce emission by 7%. Under the framework of "Convention" and "Kyoto Protocol", a large number of emission reduction trading systems have been established and developed worldwide. Convention and Kyoto Protocol have really become the systematic basis for emission trading. The world's major emission trading systems are summarized in Table 7-1. The first three trading systems are derived directly from Kyoto Protocol, while the latter two are either directly or indirectly come into being due to the pressure of implementing Kyoto Protocol. Among these systems, both Clean Development Mechanism and voluntary emission-reducing system of the Chicago Climate Exchange involve the participation of Chinese enterprises. The system infrastructure introduces emission trading system into China.

II. Large Potential for China to Reduce Emission China's potential for emission reduction is mainly shown in the following two aspects. On one side, energy demand and industrialization lead to a higher emission of greenhouse gas and major pollutants; on the other side, China has a large amount of renewable energy sources

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that could be used to replace traditional energy, so that the emission of greenhouse gases and major pollutants could be reduced. According to the " Medium and long-term planning of Renewable Energy" of China‘s National Development and Reform Commission, China plans to make full use of the proventechnical, economic renewable energy resources, such as hydro-power, bio-gas, solar thermal and geothermal to accelerate its industrialized development of wind power, biomass power, solar power, and gradually improve the proportion of high-quality, clean and renewable energy in its energy mix. China should make the effort to increase percentage of the renewable energy consumption in total energy consumption to 10% by 2010, and to 15% by 2020. Table 7-1. Major Emission Trading Systems in the World

Clean Development Mechanism (CDM) Joint Implementation (JI) International Emission Trading (IET)

Trading Commodity Certified Emission Reduction (CER) Emission Reducing Unit (ERU) Assigned Amount Unit（AAU）

Regional Emission Trading（RET）

EU Admission (EUA)

Trading System

Chicago Climate Exchange (CCX) Regional Greenhouse Gas Initiative (RGGI)

Voluntary Emission-reducing (CFI) Regional Greenhouse Gas Initiative (RGGI)

Buyer developed countries developed countries developed countries

Seller developing countries developed countries developed countries

EU entities

EU entities

voluntary emissionreducing business, Charities

voluntary emissionreducing business, Charities

states, provinces in U.S. and Canada

states, provinces in U.S. and Canada

Source: Tianjin Climate Exchange.

According to the development program, the development goal includes that in 2020, the annual consumption of renewable resources will be equivalent to annual emission reduction of sulfur dioxide of about 8 million tons, nitrogen oxide of about 3 million tons, soot of about 4 million tons, carbon dioxide of about 1.2 billion tons, water of 20 billion cubic meters and deforestation of about 3 million acres. Therefore, market mechanism oriented emission trading can contribute to the mercerization of emission reduction products and the further of its effect. In order to achieve this development goal in 2020, the expected investment totals 2 trillions RMB.


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Table 7-2. Development Scope of the Renewable Resources in China Types of renewable resources Hydro-energy water and electricity (100 MW) small hydropower (100 MW) Biomass energy Biomass power generation(10 MW) agriculture, forestry, biomass power generation (10 MW) Biogas Power Generation (10 MW) Garbage Power (KW) Bio-solid fuel annual consumption(ton) Biogas utilization (100 million cubic metres) Non-grain feedstock fuel ethanol (10 thousand tons) Bio-diesel (10 thousand tons) Wind power Wind electricity (10 MW) Solar power Solar electrical energy generation(10 MW) small-scale photovoltaic power stations Solar grid-connected photovoltaic power generation large-scale solar power stations Commercial Photovoltaic Applications Solar thermal use of alternative energy consumption (standard coal, 10 thousand tons) other alternative renewable resources geothermal energy annual consumption (standard coal, 10 thousand tons) Tidal power stations (10 MW)

2005

2010

2020

1.17 0.38

1.9 0.5

2.25 0.75

200 170

550 400

3000 2400

5(2008)

100

140

20 -

50 100

300 5000

80 102 5

190 200 20

440 1000 200

131

500

3000

1.9 1.9

30 15 5 7 3 3000

180 30 100 40 10 6000

400

1200 10

Source: Medium and long-term planning of Renewable Energy", China‘s National Development and Reform Commission.

III. The Government‟s Promotion for Emission Trading Pilots In December 2008, after Premier Wen Jiabao proposed in his government work report "to actively carry out the emission trading pilots", the construction of provincial and municipal emission trading pilots has been speeding up. In 2003, Zhejiang province was the first to establish the Jiaxing reserve and exchange center of emission rights, followed by the release of documents on the emission trading in seven cities. In particular, the establishment of on-

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line monitoring network of key pollution sources and progressive advancement of "three quantity" account construction and pollution permits issuance laid the foundation for purchase and trading of emission rights. Encouraged by the government, Zhejiang Province has drafted the "Zhejiang Province, sulfur dioxide emission trading management approach" Jiangsu Province was the first to adopt the emission trading of thermal power sulfur dioxide. Under the guidance of" sulfur dioxide emission trading management approach in the Electric Power Industry " of Ministry of Environmental Protection, Jiangsu Province formulated a pilot program in Taihu Lake Basin, and utilized sewage expenditure about 1.2 billion to support the establishment of the platform of emission trading in this area in 2007. On November 20, 2008, Jiangsu launched the "Program and Rules for the Paid Use of Major Pollutants‟ Emission Right in Taihu Lake Basin of Jiangsu Province and its Pilot‖. On February 25th, 2009, Jiangsu released ―Management Approach for the Paid Use of Major Pollutants‟ Emission Right in Taihu Lake basin of Jiangsu Province and Purchase of Trading Pilots for the Emission Quota‖. Hubei provincial government has been actively promoting the construction of emission trading market, and recently Wuhan Guanggu Property Exchange in Hubei Province has started the quota trading of sulfur dioxide and COD. On October 27, 2008, Hubei Province promulgated the "Interim Measures for Emissions Trading of Major Pollutants‖. In November,19,2008, Environmental Protection Agency in Hubei Province published the "Interim Measures of Implementation of Emissions Permits in Hubei Province", " E-auction Trading Rules for the Emission Rights of Major Pollutants in Hubei Province (Trial)",and " Emission Trading Rules for Major Pollutants in Hubei Province‖(Trial). As of now, the emission trading of major pollutants in Hubei Province has already exceeded 50 million RMB. Hubei Province was officially established as the national emission trading pilot in August 2009. In 2002, Tianjin Municipal Government established Financial Innovation Group to study the sulfur dioxide emission trading, and started to allocate the emission quotas in the same year. In 2008, it jointly set up Tianjin Climate Exchange with China National Petroleum Corporation and Chicago Stock Exchange, reported to Ministry of Finance and Ministry of Environmental Protection and obtained their joint approval to explore emission trading in Tianjin Economic and Technological Development Zone. In December 2008, Tianjin Climate Exchange conducted the first sulfur dioxide emission trading on the electronic bidding system of Chicago Climate Exchange, and then launched a voluntary emission trading system in 2009.

IV. National Policies to Support the Energy-saving and New Energy Industry In 2007, China allocated a special fund for energy-saving and emission reduction, totaling 23.5 billion RMB, and offered subsidies to environmentally friendly energy-saving projects. That means the tax on those projects will be exempted for the first three years and halved for the latter three years. Subsidizes have been provided for energy-saving equipments of enterprises in operations. For those enterprises that purchase and physically use the required energy-saving and water-saving equipment, 10% of their investment in the equipment could be deducted from the tax of that year, or the tax of the following five years if the equipment expenditure exceeds the tax expenses.


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With regards to the supporting the new energy industry, China offered a special subsidy for wind power. For the first 50 turbine groups of wind farm construction, 600 RMB / kW will be subsided, including machine manufacturers and key components manufacturers respectively 50%4. With regards to subsidizing renewable energy power,"Notice on subsidies for renewable energy subsidy and quota trading program from January to June (or JulyDecember) in the 200X-year" jointly released by National Development and Reform Commission and National Electricity Regulatory Commission provides subsidies biannually. China have also issued a special policy for the subsidy to energy-saving products, including subsidies ranging from 4,000 to 60,000 RMB for energy-clean cars based on the latest published "Interim Measures for demonstration and promotion of financial subsidies to the energy-saving and new energy vehicle". In terms of energy-saving lamps, the Development and Reform Commission and Ministry of Finance plans to allocate up to 600 million RMB, to subsidize 120 million efficient lighting products in 2010. Policy banks may provide support to energy-saving projects in business, and most of the major commercial banks are also starting to offer green credit businesses. In addition to offering subsidies, the government also uses various tax policies to control the consumption of traditional energy and environmental resources, in order to support energy saving, emission reduction and the new energy industry. At the same time, new taxes that supports the energy-saving and new energy industry are being designed.

V. Optimistism of all Kinds of Market Players in Trading Market The confidence of China‘s all kinds of market players in the emission trading are evidenced in the following two aspects: the increasing enhancement of energy-saving and emission reduction activities and full participation in CDM market of large enterprises.

1. Increasing Enhancement of Energy-saving and Emission Reduction in Large Enterprises In 2008, China National Petroleum Corporation published the amended "Energy-saving and water management measures in China National Petroleum Corporation" and carried out oil associated gas‘ recovery projects mostly in western Tarim Oilfield and Changqing oilfields. It also developed CDM projects, and increased its capability of recycling gas to 810 million cubic meters each year through the implementation comprehensive recycle project of venting natural gas. It is estimated that 12.0 billion will be invested into 10 key energy and water-saving projects, which would save standard coal 4.6 million tons each year, substitute fuel oil 1 million tons and save water 280 million cubic meters; At the same time, with the improvement of producing and storage technologies, the consumption of crude oil and refined oil will be reduced by one million tons. At the same time, the Group planned to invest 12.15 billion RMB to establish 184 pollution abatement projects by 2008, including 66 sulfur dioxide emission reduction projects and 118 COD emission reduction projects5. 4 5

Ministry of Finance, People‘s Republic of China,2008. ―Report of Enterprises‘ Social Responsibility: 2006, 2007, 2008‖, China National Petroleum Corporation.

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In 2007，China National Offshore Oil Corporation became the first Chinese enterprise to be invited to join 3C, an international organization dealing with global climate change. In 2008, China National Offshore Oil became a member of United Nations "Global Compact" and collaborated with the international community in response to the global climate change. It proposed the "zero emission" concept and standard, which states that" Any new project must be designed and constructed according to the zero emission standard.‖ In addition, it convened seminars to discuss the zero emission of pollutants and greenhouse gas emission control and clarified what zero emission means and how to carry it out. By the end of 2008, new energy generation capacity of power generation groups, such as Huadian, State Power, Datang, Shenhua and etc, was approximately 500MW. By 2010, it will have reached 850MW, and by 2020, 3000MW. According to professional estimate, this figure is considered very conservative. With the ongoing implementation of industrial policies of new energy, and of solar energy in particular, the figure may double. Liu Zhenya, General Manager of the State Grid Corporation of China, said in May 2009 that the development of strong and smart grid would be carried out period after period and, a strong smart grid will have been completed by 2020.

2. China’s Actively Involvement in the CDM Project Since the development of CDM projects in China, all the provincial and municipal enterprises are actively involved in. As of September 7th, 2009, 2174 projects have been approved by National Development and Reform Commission, among which 131 have reveived the issued CER. Due to the differences in the natural environment, the number of CDM projects and the amount of emission reduction vary greatly among different provinces and cities, as shown in Table Table 7-3. Table 7-3. Distribution of CDM Projects Approved in Different Provinces and Municipalities

Area

Quantity of Area projects



Yunnan 258

Sichuan

Shandong 104 Zhejiang 84 Guangxi 71 Liaoning 54 Shanxi 46

Gansu 103 Hubei 78 Guizhou 70 Guangdong53 Chongqing 46

Inner 143 Mongolia Shanxi 90 Henan 73 Fujian 64 Jilin 50 Jiangxi 45

Ningxia 22

Qinghai

17

Hainan

Beijing

Tianjin

7

Tibet

13

220

Quantity of projects

Hunan

128

Hebei Jiangsu Heilongjiang Anhui Xinjiang

84 72 58 49 44

15

Shanghai

13

0

Total

2174

Source ： CDM database of China‘s National Development and Reform Commission ， http://cdm.ccchina.gov.cn/web/item_data.asp?ColumnId=63.


Source CDM database of China‘s National Development http://cdm.ccchina.gov.cn/web/item_data.asp?ColumnId=63.

and

Reform

197

Commission ，

Figure 7-1. Pie Chart of CDM Projects Approved in Different Provinces and Municipalities.

As shown in the figure above, Yunnan and Sichuan are abundant in water resources, and Inner Mongolia has the largest number of wind power projects. Thanks to the unique resources available for development, enterprises in these three areas are actively involved in developing CDM projects. Take Yingjiang basin in Yunnan Province as an example. There are as many as 47 CDM small-scaled hydropower projects. In contrast, the three municipalities, excluding Chongqing, rank last since they started late (no CDM projects have started yet in Tibetan). The emission reduction of CDM projects vary greatly among provinces and municipalities, as shown in Table 7-4.

198

He Jinyu, Xiao Boqiang and Zhang Mingming Table 7-4. Estimated Annual Emission Reduction in Different Provinces and Municipalities

Area Sichuan Shandong Henan Guangdong Hubei Jilin Beijing Tianjin Zhejiang Inner Mongolia Hunan Heilongjiang Chongqing Shanghai Ningxia Tibet

Estimated annual emission reduction 39,114,980.5 30,408,334 14,418,617.43 11,602,348 8,668,001.977 7,044,579 4,344,351 1,119,094 36,432,693.37 25,559,287 12,988,104.5 10,261,251.8 8,601,677 6,076,237.68 3,224,341 0

Area Jiangsu Yunnan Gansu Guangxi Anhui Guizhou Jiangxi Hainan Shanxi Liaoning Hebei Fujian Xinjiang Shanxi Qinghai Total

Estimated annual emission reduction 37,393,282 26,006,032.4 13,062,610 10,515,604 8,681,180 6,620,618 3,666,293 816,986 34,026,141 21,321,627 12,595,576.4 9,450,804.586 8,202,206 4,756,504 1,703,669 418,683,031.643

Source ： CDM database of China‘s National Development and Reform Commission ， http://cdm.ccchina.gov.cn/web/item_data.asp?ColumnId=63.

Source ： CDM database of China‘s National Development and Reform Commission ， http://cdm.ccchina.gov.cn/web/item_data.asp?ColumnId=63. Figure 7-2. Pie Chart of Estimated Annul Emission Reduction of Approved Projects in Different Provinces and Municipalities.


199

Due to the small scale of hydropower projects in Yunnan province, itse annual emission reduction is estimated to be much smaller than that of Zhejiang province, where there are large-scaled key projects, such as Zhejiang Juhua. Enterprises, such as the Conch Cement Company and Landscapes Cement Group in central China, have also developed many of waste heat power generation projects, and had greater amount of estimated annual emission reduction. Except Tibet, the amounts of emission reduction in Qinghai, Tianjin, and Hainan are estimated to be the smallest.

VI. Orderly Development of International Cooperation to Respond to Climate Change The Chinese government and the United Nations jointly held the High-level seminar on the development and transfer of technology to deal with climate change in December 2008. In the seminar, Premier Wen Jiabao pointed out that the Chinese government would continue to play an active and constructive role and make efforts to deal with climate change with the international community. He proposed that the international community must continue to collaborate in response to the global climate change. The Convention and Kyoto Protocol laid the legal foundation for international cooperation to deal with the climate change. And we should take full consideration of the factors specific to countries, including different countries‘ current situations, periods of development, historical responsibility, emission per capita, etc, focusing on our current situation and looking forward into the future. We should communicate with each other in open dialogues and cooperate with each other in the long term. Under the guidance of this principle, China‘s cooperation with the international community to deal with the climate change will be developed orderly.

1. Wide Development of International Cooperation in CDM Projects As of July 14th, 2009, 2128 projects with 135 international partners have successfully registered with the National Development and Reform Commission, with an annual emission reduction of carbon dioxide totaling 345 million tons. Among the Participants in China's CDM project, World Bank ranks first in the number of registered projects with the National Development and Reform Commission and EB issuances. The Eco-securities Group jointly run by the United Kingdom and the Netherlands has the largest number of CDM projects in China, which is 139 projects. Although Goldman Sachs has been involved in nine Chinese CDM projects, its registered amount of emission reduction ranks top ten. Its oil Liaohua N2O emission reduction project is the largest CDM project in China, with an annual emission reduction of 10 million tons of carbon dioxide (Table 7-5). Different international partners have their own technological advantages and preferred methodologies in different CDM projects. At present, most of the CDM projects approved by the National Development and Reform Commission are new energy and renewable energy projects. and Sweden Carbon Asset Management Ltd has the largest number of such projects in China (Table 7-6).

200

He Jinyu, Xiao Boqiang and Zhang Mingming Table 7-5. Major Partners of China CDM Projects

No

Organizations

Nationality

CO2 emission reduction registered in DRC

Amount of EB issuing (t/CO2)

Quantity of projects

1

World Bank

-

26984582

33789049

17

2

Mitsubishi

Japan

26274517.6

16760738

70

3

ENEL

Italy

25800792

9299792

66

4

Eco-securities Group

UK/Holland

23627856.5

214322

139

5

4C funds

Luxemburg

18091315

8144888

39

6

UK Emissions Trading Co., Ltd.

UK

14150815

338761

52

Sweden

13241893.3

837866

120

France

12574117.14

88082

71

UK

11767985

-

43

UK

11370389

4903988

9

7 8 9 10

Sweden Carbon Asset Management Ltd Electricite de France Trading Co., Ltd. Camco International Ltd(UK) Goldman International


Table 7-6. Major Types of CDM Projects in China Types of CDM projects in China New and renewable resources

Quan tity

1st in quantity

2nd in quantity

1250

Sweden Carbon Asset Management Ltd

Eco-securities Group

Save energy

306

Camco International Ltd(UK)

Methane recycle

111

N2O Emission reduction

23

Netherlands International Energy Systems, Inc. Eco-securities Group

Fuel substitute

21

UK Emissions Trading Co., Ltd

Greenhouse gas 13 disposition HFC-23 Others 25 Source: Tianjin Climate Exchange.

Victorinox Multi-oil group UK Emissions Trading Co., Ltd Mitsubishi Netherlands and China Carbon Fund

ENEL

4C funds

-

-


201

2. Strategic Cooperation with Other Countries to Respond to Climate Change China and USA and both the world‘s carbon dioxide emissions countries, and big producers and consumers of energy. They are complementary in terms of energy technologies. In August 2009, the two governments established a joint Sino-US Clean Energy Research Center, dedicated to promote joint research of Sino-US scientists and engineers in the field of clean energy technologies. The priority areas of the research center include: energy-efficient buildings, clean coal, clean energy vehicles, carbon capture and storage, smart grid, shale gas, the second and third generation bio-fuels, and advanced nuclear power. The research center will provide platforms and support for the relevant units in two countries to engage in bilateral cooperation of energy science and technology, and play an active role in enhancing Sino-US technological cooperation. The European Union always takes a hard-line stance in dealing with global climate change and reducing greenhouse gas emission. EU expects that by 2020, the emission in developing countries will have reduced by 15% -20% compared with 1990, but, while China wants EU to raise their own emission reduction commitment from 20% to 30%. EU hopes that China will announce a medium-term emission target, similar to what developed countries do, in order to persuade other developed countries into making more comprises. Currently, China and the EU are experts to study the problems with transferring technologies of relevant fields. In addition, EU hopes that China will make full use of the market mechanism to solve China's funding problems in implementing emission reduction. China-EU Clean Energy Center currently being established in Beijing will be of great help to China.

India and China are both developing countries, face similar pressure in dealing with climate change and hold similar attitude on this issue. Even in the case of economic high growth, the carbon emission of developing countries is much lower than the average amount of carbon emission of developed countries. China and India both refused to accept the binding carbon emission cap. Faced with the similar pressure, these two countries may establish good cooperation relationship in the international negotiations on climate change issues.

SECTION 3: PRACTICE AND DIFFICULTIES OF CHINA‟S EMISSION TRADING PILOTS Currently, China‘s emission trading pilots are being carried out in some provinces and cities. Cities, including Tianjin, Hunan and Hubei, have established regional environmental exchanges. Some areas have made remarkable progress in reducing emission while others are still facing difficulties.

I. China‟s Practice in Emission Trading Pilots The emission right market in China has a great potential and attracts many strategic investors. At the same time, large enterprises and government departments are actively exploring approaches to optimize the allocation of environmental resources through market mechanisms. The number of emission trading exchanges established by the environmental regulatory is gradually increasing. The current and planned emission trading pilots are shown in Table 7-7.

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He Jinyu, Xiao Boqiang and Zhang Mingming Table 7-7. Established or Planed Emission Trading Pilots in China

Established

Planned

Beijing Environment Exchange Shanghai Environment and Energy Exchange Tianjin Climate Exchange Equity Rights Exchange Center Emission Trading Center in Zhejiang Jiaxing Emission Trading System in Zhejiang Huzhou Environmental Resource Exchange in Changsha, Hunan Energy-saving and emission-reducing projects in Luliang,Shanxi Guanggu Property Exchange in Hubei Wuhan Environmental Exchange in Kunming, Yunnan Trading System of Chemical Oxygen Demand in Jiangsu Taihu Lake Basin Emission Trading System for Water Pollution in Nantong ,Jiangxi Sulfur Dioxide Trading Center in Heilongjiang Emission Trading System in Shaanxi Weihe Emission Trading Pilot Project in Chengdu, Sichuan Emission Trading Pilot in Tangshan, Hebei Emission Trading Pilot in Shenzhen and Guangdong Greenhouse Gas Trading System in Guangdong and Hong Kong Emission Trading Pilot in Henan Gansu and Ningxia, Zhejiang, Wenzhou, Quanzhou, Fujian and etc Hong Kong Exchanges and Clearing Limited


1. Local Support for Regional Emission Trading Pilots The exchanges in Changsha, Wuhan, Luliang, etc are established by the local governments. Changsha, Hunan Environmental Resource Exchange was officially established and held its first auction on November 28th, 2009. It was authorized by Hunan Provincial Environmental Protection Agency to execute emission trading of sulfur dioxide and chemical oxygen demand in the entire province. On March 19th, 2009, Wuhan-Guanggu United Assets and Equity Exchange delivered chemical oxygen demand emission permits of 100 tons and sulfur dioxide emission permits of 1,000 tons. The total transaction amounted to 956,408 RMB. Shanxi Lvliang Energy Saving and Emissions Reduction Trading Center was established in Beijing in July 2008, signed "Commission Agreement of CDM Project Development" with 10 units, and selected a number of key projects. 2. Environmental Financial Market-Oriented Emission Trading Exchanges At present, the three major exchanges designed to build environmental financial market are Tianjin Climate Exchange, Beijing Environmental Exchange and Shanghai Environmental Energy Exchange. Beijing Environmental Exchange was funded by Beijing Equity Exchange, and the major trading modes are over-the-counter (OTC) trading and open selling. In 2008, the amount of


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carbon dioxide reduction listed for open selling in Beijing Environment Exchange was 8895 tons, which was verified by Tsinghua University and has been successfully sold. The source of verification is the registration of enterprises and institutions during the traffic ban of Olympic Games (July 20 to September 20), using an even-odd system based on license plate numbers that keep vehicles off the road on alternative days. Since then, Beijing Environment Exchange established the strategic cooperative relationship with BlueNext of France, the world's largest Spot EUA Stock Exchange and all the projects listed in Beijing Environmental Exchange will be simultaneously listed in BlueNext, opening direct sales channels for CER produced by the CDM projects in China. Shanghai Environmental Energy Exchange was approved by Shanghai Municipal Government. With the support of METI in the energy-saving technologies, its transactions have exceeded 1 billion RMB, during the period beginning in 2008 and ending in September, 2008. The traded items are mainly the common stocks of the energy equipment manufacturers, provided by the Shanghai Property Rights Exchange. Soon afterwards, commissioned by the United Nations Development Program, Shanghai Environmental Energy Exchange will establish a training center for strategies to deal with global climate change in developing countries‖. On April 29th, 2009, Shanghai Environmental Energy Exchange signed a cooperation contract with Hangzhou Property Exchange, in which they agreed on the construction of the emission trading platform in Taihu Lake Basin. On August 5th, 2009, Voluntary Emission Reductions (VER), a voluntary emission trading mechanism and trading platform, was launched. During the 2010 Shanghai World Expo, visitors from all over the world can purchase their own carbon emission credits through this platform and reduce their reduction voluntarily. Tianjin Climate Exchange, co-funded by China National Petroleum Corporation, Chicago Climate Exchange and Tianjin Municipality in August 2008, is China's first comprehensive emission trading institution. Since its establishment, Tianjin Climate Exchange has been actively exploring emission trading mechanism of major pollutants, and conducted its first electronic auction of sulfur dioxide emission trading in December 2008. On February 14th, 2009, Tianjin Climate Exchange became the strategic cooperator of ―Enterprises switching in China - investigation on the low-capacity enterprises", dedicated to enhance the switching of low-capacity enterprises and promoting emission trading. In addition, Tianjin Climate Exchange will also shift its focus to the shareholders‘ resources, utilize the energy-saving and emission reduction potential of China‘s oil groups and offer a wide range of services, including the development of CDM projects and the construction of energy-saving and emission reduction platform.

3. Emission Trading Planning to Break the Administrative Regional Restrictions The aggregate credits of sulfur dioxide emission in China's power industry have been allocated using a unified performance approach. Based on the aggregate credits set by the state, the administrative departments of environmental protection in provinces, autonomous regions and municipalities will allocate sulfur dioxide emission credits to power supply enterprises according to performance credits of sulfur dioxide emission and local environment situation where these enterprises are located. Affected by the acid rain, Guangdong and Hong Kong started the cross-regional negotiations for the sulfur dioxide emission permits since 2003. And in 2006 they signed a framework agreement. The specific trading model is as follows. Following the pre-set price, Hong Kong will allocate special funds for the

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construction of desulfurization in Guangdong Province, and the amount of desulfurization completed in Guangdong Province will be counted as Hong Kong‘s. According to their agreement, by 2010, both Guangdong and Hong Kong will have cut sulfur dioxide emission by 30%. Due to the high cost that Hong Kong enterprises face in FGD abatement, Hong Kong decided that it is difficult to complete its desulfurization task before deadline; hence Hong Kong applied to Hong Kong and Macro Affairs Office of the State Council for cross-regional trading. In contrast, Guangdong province has a huge potential for desulfurization and Guangdong provincial government hopes that enterprises will benefit from pollution discharge and become actively engaged in emission reduction through sulfur dioxide emission trading. Consequently, after the approval of the National Environmental Protection Administration, both of the two provinces are still in a specific stage of negotiation.

II. Difficulties of China‟s Emission Trading Practice Generally speaking, the scale and degree of China‘s emission trading are far behind what is need to protect the environment. The obstacles to further developing emission trading are summarized as follows:

1. Lack of Legal Foundation In recent years, Chinese government established a series of emission trading pilots and aimed to optimize the effect of environmental control through introducing market mechanism and establishing the relative incentive mechanism. China ratified United Nations Framework Convention of the Climate Change in January, 1993 and Kyoto Protocol on August 30, 2002. In order to carry out the regulations in Kyoto Protocol and fully utilize the CDM to promote the energy saving and emission reduction in China, on October 12, 2005, four ministries, including the National Development and Reform Commission, jointly issued Measures for Operation and Management of Clean Development Mechanism, which specified the operation and management of CDM projects in China and established the legal framework for the greenhouse trading based on CDM. However, it did not address whether CDM should be allowed to trade CER in China and there are no legal regulations for the emission trading of other pollutants, such as SO2 and COD. It is difficult to decide its ownership and tradability. 2. The Immaturity of the Domestic Market The immature nature of the domestic market for greenhouse emission is shown as follows: First, the number of unilateral projects is small. By September 7, 2009, 43 unilateral CDM projects have been approved by the National Development and Reform Commission, accounting only for 21.5% of the approved projects, while in India, this figure reach as high as 40%. In order to avoid and control the risk and ensure that at least 2% of the emission income of CDM projects could be classified into the national CDM mechanism fund, China‘s policies do not support unilateral projects. Consequently, most of the carbon trading in China‘s domestic market is open selling, with the traditional property trading as the trading target other than the real CER price competition. However, since the unilateral project started to appear in 2005, India has adopted the unilateral carbon strategy and stored CER from registered CDM projectss so that they could be available for use or sell in the future. This


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would help India both with controlling the market fluctuation and reducing the cost of emission reduction. Second, China‘s financial industry is well monitored. According to Administration of Futures Trading Tentative Regulations, the establishment of options exchanges must be approved by China Securities Regulatory. Without the approval of China Securities Regulatory, any individual or entity must not establish or establish in disguised forms futures exchanges. The trading of CER traded in CDM is similar to futures in nature. In most of the exchanges overseas, almost all the CER are traded as futures and not many of them are traded as existing goods. Consequently, China‘s monitoring of the financial market has limited the local trading of carbon futures to some extent. In addition, CDM projects are highly costly and difficult to register for. The certificate verification institution, DOE, charges as high as 100,000 RMB for one project, making the CDM projects in the current market with a carbon reduction amount of less than 100,000 not desirable to be further developed. Other obstacles to the emission trading of major pollutants are listed as follows. First, local protectionism still exists. Some local governments consider reducing emission as restricting production and hence, allow enterprises to increase their emission for the interest of local economic profits. In addition, in some cross-city and cross-province emission trades, the administrative departments where the sellers are located often forbid the sellers from selling the emission credits to other regions and only allow then to trade locally. This protectionism also restricts emission trading and the effective operations of the emission market. Second, it is difficult to achieve the balance between the target amount of total emission and the pursuit for economic growth. The total emission in a region must be first verified using scientific methods and once verified, should not be adjusted with a period of time, usually 12 months; otherwise, the target total emission may not achieved. The verification of emission right in China is still in the initial period. The growth model of extensive economy and the pursuit for high rate of development has not been fundamentally changed in some regions, leading to the conflict between economic growth and control of target total emission. How to decide on the total amount of emission has become the most difficult step in the emission trading and the emission trading system is made weaker since some regions often break the bottom line of their target total emission.

3. Uncertainty under the Changing Framework of Global Market First, there may be great changes to the existing CDM. According to the Act promulgated by EU commission in December 2008, the number of CDM projects in large developing countries, such as Brazil, China and India will be greatly reduced after 2012 Since EU enterprises are the largest purchasers of carbon credits, EU Commission has the major right of speach on the operations of carbon market in future‘s climate agreement. For example, EU‘s ban on forest carbon credits leads the projects in this industry into difficult situations----to some extent, this is because if EU enterprises do not purchase the carbon credit, the incentives from the market will be greatly reduced. Second, emission reduction obligation can also be adjusted. The Copenhagen Conference to be held in December, 2009 aims to reach a new agreement on dealing with climate change. But in the current global financial crisis, some developed countries are unwilling to take an excess emission reduction obligation. Some developed countries, such as Britain and German, who have achieved their emission goal in the previous phase (2008-2012) are also unwilling to undertake the unilateral emission reduction obligation. This will have a direct impact on the scale and trading structure of the global emission trading market.

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Column 7-1. Chinese Airlines Have Been Incorporated Into EU Emission

Trading System On January 13th, 2009, the European Commission (EC) officially passed the Act "Directive 2008/101/EC", and incorporated all airlines operating European routes into the EU Emissions Trading System (EU Emission Trading System, EUETS). On 2009 2 11, European Commission officially released the list of the major airlines and their regulator countries. 33 Chinese airlines, including Air China, Sichuan Airlines, Hainan Airlines, China Southern and other are in the list. The Act could be summarized as follows: 1. Considering that global warming should be controlled within 2 degrees Celsius over the next 50 years, EU decided to incorporate all the airline companies that operate business and land flights in Europe into the scope of greenhouse gas emission control; 2. Having passed 12 months‘ verification by the European Union, 1593 airline companies will be incorporated into the management scope of the European Union Emission Trading System (EUETS); 3. In order to soften its emission reduction target, the EU will distribute 97% free EU emission Allowance (EUA) to these airline companies with 2004, 2005 and 2006 as their baselines, decrease to 95% in 2013, and after the third year remain at 95% and move the baselines onwards. But the EUA allocated to the airline companies are not tradable. 4. 15% of the EUA allocated that the European Union allocated to the airline industry will be auctioned, and the profits from the auctions will be used to deal with climate change; 5. These airline companies will be assigned to EU member countries responsible for monitoring their emission credits; 6. The airline companies incorporated into the EUETS should use certified emission- reduction (CER) and joint implementation of emission reduction (ERU) to offset the EUA that should be purchased based on that year‘s income from operations. But the amount of reduction must be consistent with EUETS‘ requirement on CER and should not exceed the offset ratio that the monitoring member countries are allowed to adopt. Currently, the average offset ratio for EU membercountries is 15%.

7. The airline companies incorporated into the EUETS should submit the energy usage data and the monitoring report of greenhouse gas emission based on airline mileage before August 31, 2009; otherwise, they will not be granted the free EUA in 2012. 8. The airline companies incorporated into the EUETS that over-emits and do not pay for EUA will be fined 100 euro / tCO2e; 9. If the airline companies incorporated into the EUETS do not comply with this legislation and EUETS regulations issued in 2008, monitoring member countries could request the European Union to suspend those airline companies‘ operation in Europe. The date for submitting monitoring report proposed in the EU Act has passed, but the National Development and Reform Commission is still in negotiating with the EU and major airlines are waiting for the outcome of the negotiations. It is estimated that a consensus will be reached a short time before or after the Copenhagen meeting. However, during this meeting, the EU is making efforts to reduce a greater amount of emission and will treat all airline companies equally. Despite the Government‘s‘ negotiations, it is still difficult to suspend the implementation of the act. Sooner or later, China's airline companies operating European routes will be incorporated into the EUETS, and became China's first batch of enterprises demanding emission reduction.

Source: Wei Yiming et.al, The Enlightenment of EU Emission Trading System to China, Science Times, A3, August 20, 2009; Wei Dunren, The Enlightenment of EU Emission Trading System to China on Dealing with the Climate change, Wen Wei Po, September 9, 2009, http://whb.news365.com.cn/kjwz/200909/t20090909_2457900.htm.


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Third, the domestic emission markets of countries should be connected to the international emission trading market. Under the framework of the global emission trading, some countries have also started constructing domestic emission trading market, such as the voluntary emission reduction plan in Chicago Climate Exchange and the voluntary greenhouse gas emission reduction plans in some regions of China. Under the agreement made in Copenhagen Conference, the domestic emission trading market should be connected with the international trading market, in order to establish the global emission trading market, liquidate the validated emission quotas And lay a foundation for the development of environmental financial market.

SECTION 4. OUTLOOK OF CHINA‟S EMISSION TRADING MARKET According to the National Assessment Report on Climate Change, China‘s general guideline to mitigate climate change is as follows: under the premise of realizing the social and economic development and the goal of building a moderately prosperous society in all-round way by 2020 with basic realization of industrialization and modernization, we should update the economic growth and social consumption models, develop and promote advanced energy-saving technology, improve the efficiency of energy-use, advance renewable energy and nuclear energy technology, consume efficient, clean, low-carbon coal, utilize hydrogen energy technology to optimize the energy structure, protect the ecological environment and so on. We should take the route of developing low-carbon economy, and establish a system and mechanism to mitigate climate change step by step and reduce the emission of carbon dioxide and other greenhouse gases. Therefore, we may have some breakthroughs in the following aspects of emission trading.

I. Expectations to Establish a Market Structure on Legal and Policy Basis To establish a reasonable and orderly emission trading market, there must be relevant laws to follow and incorporate emission trading into the scope of legal management, and policy guidance. Emission trading system is concerned with market-economy behaviors and based on traders‘ ownership of environmental property. This requires the authority of laws, the clear definition of property rights, and the entity of judicial interpretation right in executing the laws and regulations. An effective property right system must clearly specify the owner of the property, the right to dispose the property, the right to gain benefits from the property and undertake the uncertain all the relavant risks and costs. Meanwhile, the emissions trading system emphasizes the role of government regulation. Especially in the economy transition, due to the lack of complete regulations, regulators should take a more active role in executing the regulations. But what the regulators do is contrary to what is expected from them .Regulators usually are not inspired to control the pollution for various profits and interests. The emission reduction system does not guarantee that these problems will be avoided. Thus, it is necessary to evaluate the responsibility of regulators in policies and impose aggravated penalties on law-breakers. In addition, policies and regulations of emission trading must be completed. As seen from U.S. experience, Clean Air Act plays an important role in the sulfur dioxide emission trading. At present, China does not have relevant laws. Therefore, Premier Wen Jiabao pointed out in August 2009 at National Climate Change Group meeting that we should improve the legal

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system to deal with climate change, speed up the establishment of supplementary regulations and policy system, formulate, monitor and evaluate corresponding standards, the necessary management system and supervising mechanism. Currently in China, there are already some local rules and regulations available for emission trading and the legal conditions for emission trading in China are being built.

II. Establishment of Market Model Based on the Medium-term Goal of Global Climate Change Setting the emission trading model based on the domestic and global medium-term goal of climate change is one of the viable models to explore. If the State targets carbon dioxide emission intensity, we should calculate the upper limit using the total GDP and increment, and conduct the difference trading. At present, many countries have already set their mediumterm goal to deal with global climate change, specifically as shown in Table 7-8. In order to meet the demand of international market for carbon offsets abroad, the exploration for China's international emission trading models can be made through establishing exchanges targeted at overseas traders and developed the same products as those in Chicago Climate Exchange(CCE) and ECE (European Climate Exchange ).

III. Expand of Market through Improving the Emission Reduction Technology and Financial Support At present, most of CDM projects in China are supported by the funds transferred from international cooperators, and little are supported through the transfer of emission reduction technology. In the global climate negotiations, developing countries have repeatedly called on developed countries to provide technical support. But these calls had not been effective, due to a higher degree of privatization in developed countries, where the emission reduction technologies are mostly held by private enterprises. On the other hand, some large enterprises in China lack advanced technology other than sufficient fund. If we could make more effort to promote the advancement of emission reduction technology, it will be beneficial for those enterprises to engage in the emission trading market and for the market to expand. At the same time, if we want to take full advantage of the emission trading system as an economic incentive mechanism, we should keep improving the market economic system. Economic incentives in the financial markets should also play an important role. For example, only when the emission trading could be stored and its price fluctuates with the market, the emission trading can be set up. This requires coordination with the financial system. In initial phase of emission trading, credits are not required; but the long term, it would be favorable to the development of the emission trading system if banks offer business to emission enterprises to use their future emission targets, the enterprises will benefit a lot. , the enterprises that emit pollutants also need the financial support from the market. If the enterprises short of funds cannot manage to finance their projects in the markets, they will not have capital to spend on controling the emission of greenhouse gases and other major pollutants. The large-scale facilities for carbon capture, carbon separation, and pollution


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abatement also need the support from both money and capital markets. Without these economic incentives these facilities will not operate due to the lack of the necessary funding. Translator: Yu Yan (SUFE) English Version Editors: Jiang Jiahui (SUFE), Ding Mengjie (MIT) Table 7-8. List of the Emission Situations and Emission Reduction Goals in Different Countries

Nationality

Emission situation in 2006

Goals of the countries in Kyoto Protocol 2008-2012

EU

-4.6%

-8

France

-9.4%

0

German

-19.3%

-21%

UK

-15.6%

-12.5%[20%]

Norway

-28.7%

1%[-10%]

Iceland

9.8%

10%

Canada

54.8%

-6%

Japan

5.8%

-6%

News land

33.0%

0%

Austria

6.6%

8%

America

14.0%

-7%

Mexico

-

-

Korea

-

-

Costa Rica

-

-

South Africa

-

-


Mid-term goal since 2012 (2020) Reduce emission 20% or 30% according to the national agreement Reduce emission 40% Reduce emission 26%-30% Reduce emission 30% by 2020 Reduce emission 20% compared with year 2006 Lower 15% than in 2005 Lower 5%-15% than in 2000 Lower 17% than in 2005 Set the emission cap in 2012 Achieve the carbon neutral by 2021 peak at 2020-2025

Long-term goal since 2012 (2050) Reduce emission 60%80% according to the national agreement Reduce emission 75% Reduce emission 80% achieve carbon neutral by 2030 Reduce emission 50%70% and achieve carbon neutral 60%-70% Reduce 60%70% compared with year 2006 Lower 60%-80% than in 2006 Achieve carbon neutral in energy department Lower 60% than in 2000 Lower 80% than in 2005 Lower 50% than in 2020 -

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REFERENCES Following CDM and JI，(2009,1-9)fortnightly Carbon Point CO.,LTD. Stern N., 2008. Key Elements of a Global Deal on Climate Change [R]. London: The London School of Economics and Political Science. UNFCCC. Report on the Workshop on Cooperative Sectoral Approaches and Sector-specific Actions, in order to Enhance Implementation of Article 4, paragraph 1 (c), of the Convention. Summary by the chair of the workshop [R/OL]. (2008-08-25) [2008-09-19]. Aldy J, Stavins R., 2007Architectures for Agreement: Dealing with Global Climate Change in the Post-Kyoto World [M]. Cambridge, UK: Cambridge University Press: 1J27 IPCC, 2007. Climate Change 2007: Synthesis Report. Contribution of Working Groups I, II and III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change [R]. Geneva, Switzerland: IPCC. Su Wei, Lu Xuedu, Sun guoshun，2008.The Core Elements of Future UN Negotiation on Climate Change and Its Perspective——The interpretation and analysis on Bali Roadmap[J]，Advances in Climate Change Research, 4 1 57-60. Deng Liangchun, Wang Yi, Wu Changhua 2008.To Explore the Road of Low-carbon Development: Important Orientation of China‘s Sustainable Development[ J]，Outlook in Climate Change,，（1）：1-16. Zou Ji，2008.International Mechanism Innovation of Technology Development and Transfer in Climate Change [J]，Environment Protection, 5A 16-17. Editorial Committee of China s National Assessment Report on Climate Change China s National Assessment Report on Climate Change[M]，Beijing：China Science Press 2007.



Comment on Chapter 7

MARKET MECHANISM AND THE LOW-CARBON ECONOMIC GROWTH IN CHINA Huang Jeff* Since the industrial revolution, the greenhouse gas, produced by the fossil fuel- based economy, is one of the culprits of global warming in the recent 100 years. And no country was spared the negative impacts of the more frequent extreme weather events caused by global warming. The 30 years‘ reform and opening-up endeavor enables China to seize the opportunities brought by the global economic integration to promote quick development and make remarkable achievements. But the high energy consumption and high emission growth pattern is widely questioned at home and abroad. As a developing country, China should actively seize the opportunities to balance, through innovation, climate change mitigation efforts and the need to grow its economy. Most importantly, market mechanism, financial innovation, and government policy all should play a role in this process. This Chapter made comprehensive analysis of China‘s policies and actions in dealing with climate change, energy conservation and emission reduction, with the focus on the emission trading in China, involving both the traditional pollutants as well as the development of CDM projects which is closely related to climate change. The statistics of the CDM Project Management Center of NDRC, cited in the Chapter, has shown that China‘s CDM mechanism has laid a solid foundation for the project-level carbon emission reduction. Currently, China ranks the first around the world in terms of the number of the CDM projects approved and the potential projects in the pipeline. Besides, At 208, China also ranks the first in terms of the number of CDM project developers active in the market. However, CDM, which is symbiotic with the international climate politics, is facing wellpublicized bottlenecks in credit registration and issuance. The low success rate means that the CDM mechanism can not be widely applied in domestic low-carbon transformation. In addition, the global negotiation over post-2012 Kyoto protocol has great uncertainties. Thus,

* Huang Jeff is Vice president of Chicago Climate Exchange.

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Huang Jeff

CDM is facing reform to solve the broader and more pronounced issues concerning greenhouse gas emission in China. Although there is no conclusive direction yet over the next-step development of CDM mechanism, the discussion over the sectoral mechanism of carbon emission reduction appears to be gaining attention, including the mechanisms of sectoral crediting and sectoral trading. Under a sector-by-sector approach, common baselines would be established for a particular industry - such as steel or cement - and plants could be awarded with credits for cutting emissions below that baseline. Specifically, sectoral crediting features a no-lose mechanism whereas sectoral trading represents a cap and trade mechanism at the sector level. Just as the case in the aviation industry cited in the Chapter, indicates, after 2012, EU will start to implement a cap-and-trade scheme for carbon emissions targeting all airlines that operate flights in and out of Europe. This seems to imply that airlines from China will have to comply in order that planes from China will continue to be able to take off and land in European airports. The sectoral approaches in other industries in the developing economies, such as steel, power and cement, are also being studied. Broad consensus is emerging about the need for low-carbon economic growth for both developed and developing countries. In China, Premier Wen Jiabao has made a statement recently: in the next few years, China will apply low carbon development strategy to a broader part of its economy. That means China would expand the scale of clean energy development, industrial energy efficiency projects, high-efficiency power generation and methane gas power generation, among others. But it is not easy to transition from the current fossil fuel- centered economy to low carbon economy. For instance, in terms of funding, China needs an annual additional investment of 1 trillion yuan or more1 to finance low carbon development. Climate change and low carbon development should not be viewed as difficult challenges ONLY in technological terms. Perhaps unlike some other, developed countries, the key issue in China is how market can be allowed to play a role in achieving emission reduction. Command and control may be effective short term. But in the long run, private sector engagement, stimulated by market mechanism, is indispensible. Benefitting from CDM‘s development in China, the phrase ―carbon trading‖ has become widely used in government circles as well as in the private sector. In addition, the term ―carbon neutral‖ appears to become increasingly popular with corporations and private individuals in the area of corporate (and individual) social responsibility. But, what a real carbon market should look like and how it may work remain unclear in China. The fundamental goal of carbon trading is to reduce overall carbon emission at the least cost. This would require a ―cap‖ on CO2 emission. Under total emission amount capped, carbon emission reduction credits become a scarce resource. Then enterprises or individuals are allowed, under established rules, to trade permits or credits in order to meet the cap. The cap could be both mandatory, as in EU Emission Trading Scheme and voluntary (but legally binding once agreed upon) as in the ―Chicago Accord‖ developed by and used at the Chicago Climate Exchange in the United States. However voluntary carbon trading is a very vague term. The carbon emission credits, which is similar to CDM credits, but is not related to a mandatory emission capping scheme, is generally called VER in China. This article seeks to establish voluntary carbon trading as a 1

NDRC Energy Research Institute, 2050 China Energy and CO2 Emissions Report

Market Mechanism and the Low-carbon Economic Growth in China

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cap and trade scheme where the only ―voluntary‖ part involves the capping, especially in the absence of a government-mandated target on emission. Under such a voluntary scheme, a participant (an emitting enterprise) would voluntary sign on to the emission cap. Once inside the scheme, the emitting company must comply with the pre-set emission targets and if the company emits more than the target within the required time period, the company must buy carbon credits to meet its compliance targets. A typical example of the voluntary carbon trading market is the Chicago Climate Exchange (CCX). Established at the beginning of the 21st century, CCX recruited 13 emitting companies and started the Phase I of a voluntary cap and trade market in 2003 with 14 original members. Today it has over 460 members. The aggregate emission baseline of these enterprises has reached 600 million tons, exceeding that of Germany. For Phase I (2003 to 2006), CCX emitting members are required to cut their emissions by 4%. For Phase II (2007 to 2010), this target is 6%. The accumulative emission reduction by CCX members now exceeds 460 million tons CO2, of which 400 million tons come from direct emission reduction, 51 million tons come from ―carbon offsets‖ projects, 11 million tons come from forest projects. All these cuts are third-party audited. CDM is fundamentally an offset mechanism. It is related to the cap under EU ETS. Contrary to the popular understanding in China, CDM represents only a part of the carbon market. The cap drives the market. Generally speaking, what needs to be emphasized is that both mandatory and voluntary carbon markets, a cap must be established in order for the trading to work. CDM and ―carbon neutralization‖ projects can bring forth overall social, ecological and economic benefits. In the future more, these projects may continue to play a role in the Chinese carbon markets, but a real carbon market, like anywhere else, must involve a cap. When talking about carbon cap in China, it is inevitable that the attention is on the eternal topic— the principle of ―common, but differentiated responsibilities‖. For developing countries in the midst of industrialization, it may not be feasible to adopt an absolute Cap on CO2 output, as differentiated from the developed countries in this regard. A responsible developing country, China has taken active mitigation actions. China must reach the peak of aggregate CO2 emission in around 2030, according to a publicly released research report by influential scholars from a government think-tank in China. And during this time period, the emission intensity (carbon emission per economic output) can drop continuously, an example being the energy intensity target per unit of GDP, as specified in China‘s 11th five-year plan. In a similar vein, China could conceivably set a target over carbon intensity or cap the growth of carbon emission in the future. On a pilot basis, it is conceivable that Chinese emitting enterprises from different sectors could join together to design a voluntary cap and trade scheme. China is famous for crossing the river by feeling the stones and once a large scale demonstration pilot is operational, it could inform policy makers in the future as to how market mechanism functions in achieving environmental goals. To finance the transition to a low carbon economy, putting a price on carbon is essential. The carbon price, as reflected in the price of CERs under the CDM mechanism, is widely known and cited in China. However, the CER price is influenced by too many factors beyond China‘s borders. What is needed is a domestic carbon market that sets the price on carbon domestically. Take bio methane development projects as an example. As the mid to long term objective for renewable energy development, China‘s sets up a 4.4 million m3 target to promote bio methane in rural area with heavy governmental subsidy. But the reality is not quite encouraging: in certain area in the northeastern part of China, within one year, 90% of

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the rural households abandoned their government subsidized methane pits 2 . This case indicates that government funds may be needed to get the projects started, but they can not seem to sustain these projects due to various reasons including poor policy design and ineffective implementation. Fundamentally, the presence of a carbon price could make things easier. Compared with this, in the US, a farmer in the rural household could sell carbon credits generated from recovering methane from the digester because there is a carbon price on CCX. Of course, there was not US government subsidy whatsoever involved. A price on carbon could drive private investments into these areas, instead of government (i.e., taxpayers) subsidy, in a sustained manner. China has 30 million methane-generating pits, increasing by 5 million annually. This space could be very well served by a well designed, properly functioning domestic carbon market. According to the International Energy Agency (IEA), emissions worldwide in 2020 would need to be cut by 3.8 gigatonnes (Gt) worldwide to achieve the 450 ppm (parts per million) scenario, with 1.6 Gt of this reduction needed in OECD (Organization for Economic Cooperation and Development) industrialized countries. Meanwhile, policies and measures in China – already being considered by the country‘s government – could account for 1 Gt of emissions reductions, underlining the leading role China will play in the global combat against climate change, the IEA indicated. In light of this, the real question that needs to be asked in China is no longer ―have you cut your carbon lately‖. The question that gets asked should be ―did you manage those cuts at the least cost‖.

REFERENCES [1] [2]

2

The Stern Review on the Economics of Climate Change by Nicolas Stern, 2006 Sectoral Approaches in Electricity – Building Bridges to a Safe Climate by International Energy Agency, 2009.

China Economic Weekly, the scrap rate of the methane-generating pit in the rural area of Heilongjiang province, worth of hundreds of millions yuan, is over 90%. http://news.ifeng.com/society/5/200908/0831_2579_1327527.shtml



Chapter 8

NEW GROWTH ENGINE: THE RISE OF GREEN ECONOMY IN CHINA Shao Hui*, Lin Yongsheng, Qin Jian and Xiao Huaiyang The 2008 Financial crisis suddenly led world economy into the slow traffic lane, but a new engine for the recovery of world economy-green economy also emerged. The expressions such as "Green New Deal", ―Green Recovery‖ and ―Low Carbon Economy‖ have been widely discussed by many national governments. Such Emergence means that the sustainable economic growth has become the mainstream of global development in today‘s society, where the idea of environmental protection has been deeply rooted in the minds of the people. For all countries, green economy is not only a moral choice, but also a development opportunity. Those who have seized the development opportunity will become first movers in the future development and take the lead— This incentive is also the driving force for all countries to develop green economy. In the present chapter, the emphasis is mainly put on the development status of ―Green Economy‖ in China, including measures taken and results achieved by Chinese government regarding the development of green economy and its system construction, especially with regard to some related economic policies, which have formed long-term mechanism to promote and safeguard the development of China‘s green economy. We have also enumerated several Chinese cases about the enterprise and urban construction, which have carried out through China‘s green economy policy. ―Green actions‖ taken by enterprises have showed hope for the future, and these active actions taken in green urban constructions have shown that the idea of green economy has been understood and carried out in a rather broad sense.

SECTION 1: THE BACKGROUND OF THE RISE OF GREEN ECONOMY Green economy is not a new concept which was a hot topic discussed when financial crisis in 2008 swept all over the world. In fact, we should be aware that green economy is an *Dr. Shao Hui is lecturer at the Institute of Economics and Resource Management of Beijing Normal University, who earned her PhD degree from the Institute of Regional & Urban Economics, Renmin University of China. Email: [email protected]

216

Shao Hui, Lin Yongsheng, Qin Jian, et al.

eternal subject along with the development of human society. Today, people all over the world advocate the implementation of green economy, which is not a whim or a fashionable saying, but an inevitable choice to meet the needs of the times.

I. What is Green Economy? The term ―Green Economy‖ was first put forward in Blueprint for A Green Economy1 written by economist David Pearce, which was published in 1989. Green economy stands for establishing ―An Affordable Economy‖ and advocates the abolishment of the traditional development model which emphasize the pursuit of economic development without consideration of environmental and social costs. Such old models has caused ecological crisis, resource exhaustion and social disruptions. By correctly handling the relationship between "men" and "nature", ―man‖ and ―man‖ so as to efficiently realize the sustainable use of natural resources in a civilized manner, the continuous improvement of ecological environment and continuous enhancement of quality of life have become a mode of production or an economic development pattern. The core of such pattern is the sustainable development of the economy and society, so as to ensure the continuity and development of human society. At present, the concept of green economy which is cited widely becomes more concrete. Green economy mainly refers to the mode of economic growth which has adopted environmental friendly technology to realize the harmonious development between men and nature, and coordinated economic and social development. Green economy focuses on environmental protection and clean production, and emphasizes the sustainability of economic development. The philosophical root of ―Green Economy‖ is not new to China. The philosophical ideas such as ―Unity of Nature and Men‖ and "Tao Follows Nature" in ancient China have put emphasis on the harmonious coexistence between men and nature, but not ―nature acts against men. Such philosophical ideas showed that Chinese had ―Green Feelings‖ since ancient times. Since the 16th Party Congress Meeting, the Communist Party of China (CPC) has put forward the strategic thought of "Scientific Outlook on Development", which aims to correct certain ―ungreen‖ elements of traditional economic growth model. The traditional economic model simply emphasizes economic growth, which might intensify the inharmony between men and nature. Especially hence the economy expands excessively, it might result in the loss of social value. As an alternative, the basic connotation and characteristics of the ―scientific outlook on development‖ is ―To put people first and to aim at comprehensive, coordinated and sustainable development so as to promote the overall development of economy, society and people.‖ The core idea is to strike the balance between men and nature on the one hand and to establish harmonious relationship among individuals on the other hand. The essence of the globalized idea of ―sustainable development‖also requires to embody harmonious balance between men and nature, as well as among individuals.

1

Pearce and others.Blueprint for A Green Economy , Earthscan Publications Ltd. , London, 1989

New Growth Engine: The Rise of Green Economy in China

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II. The Rise of Green Economy as an international phenomenon In October and December 2008, at the backdrop of global financial crisis, economic recession, food crisis and energy crisis, the UN Environmental Programme(UNEP) initiated multiple proposals to implement ―Green Economy‖ and ―Green New Deal‖ around the world and proposed that green economy as a new development strategy to maintain economic growth in the current global crises. Global financial and economic crises have offered opportunities for the development of green economy. Economic reconstructions and recovery after crisis require huge amount of investment. Green economy advocates changes of previous investment direction and mode so as to promote a sustainable development of economy and environment. In the past, environmental concerns were on the margin during decision-making process and a large amount of investment went into real estate and financial areas, which resulted in real estate bubble and financial bubble. A huge amount of subsidies were allocated to fossil fuel heavy industry that generate a large quantity of carbon emissions, but investment in renewable energy was not sufficient. Such policy intensified ecological environment problems such as forest deterioration, water loss and soil erosion, grassland degradation, resource exhaustion worsened. The UN Environmental Programme has realized that a new development strategy must be developed as the current status needs change. This strategy not only promotes economic development and social progress by investing in environment, but also drives industry adjustment and advancemeng of the ―Greening‖ of national economy. Such strategy can also create new green job opportunities, which helps to recover and upgrade world economy. Therefore, green economy itself is not a new concept, but it was put forward systematically for the first time by the UNEP under the background of multiple crises. The United Nation, with regard to global energy, food, finance and the like. This systematical proposal is characterized by appropriateness of timing, relevance of political implications and high degree of influence. Green economy starts to become a new trend in the field of environment and global development. Some countries in the world have started to develop its green economy by relying on economic stimulus plan. The European Union will invest 105 billion Euros to support ―Green Economy‖ in EU region before 2013, and all the investments will be used into environmental protection projects and its relevant employment projects in the hope of maintaining the European Union‘s the leading position in the field of ―Green Technology‖ the world. The new US Administration has put forward in the US $827 billion economic-stimulus plan that US $100 billion (which is roughly equal to 0.7% of America's entire GDP) will be used in green economic recovery in the next two years, which will create 5 million green job opportunities, and to speed up the transformation of its economy into to a low-carbon economy, one which regards new energy as its new characteristics. South Korea has put forward in "Green New Deals" that US $36 billion will be invested in a series of eco-friendly projects in the next four years. In Japan‘s green economic plan, it has put forward to expand green economic market and provide a loan policy of zero interest rates for environmentfriendly enterprises that create one million new green job opportunities. Brazil and India start

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their economic stimulus plans and new policies including the optimization of energy structure and emission reduction.2

III. Challenges for China In 2008, China experienced many natural disasters. In January 2008, an unprecedented snowstorm and frost swept more than half of China, which affected tens of millions of people and caused hundreds of billions of RMB of losses. On May 12, the 7.8-magnitude earthquake hit Wenchuan County in Sichuan Province which caused tens of thousands of deaths. Are there man-made elements behind these natural disasters? This question is worth asking. Snowstorm and earthquake are caused by natural changes. More rapidly the human society is developing, more intensely the earth change might become, which makes human beings panic. China is experiencing an unprecedented development and the conflicts between human beings and nature is becoming more obvious. As a large developing country, China is undergoing rapid industrialization and urbanization. From 1978 to the end of 2008, the total number of China‘s cities increased from 193 to 655, including the increase of megacities from 27 to 118 as well as the increase of metropolises from 13 to 39 respectively. The urbanization level is 45.7%, which is expected to be increased to about 75% by 2050.3 That is to say, there will be at least 400 million people living in cities in the upcoming urbanization process, which requires a lot of construction materials like cement and steel to be consumed. It also means that a lot of raw materials and energies will be consumed and huge quantities of carbon dioxide and various pollutants will be released. At present, China‘s urban building area is 17 billion square meters, increasing at an annual rate of 1 billion square meters4. Since the reform and opening-up policy was carried out, Chinese economy has experienced rapid development. For nearly three decades, the annual growth rate of China‘s GDP has reached 9.5%. The development of large-scale industrialization and extensive growth mode have made the conflicts between economic development and environmental resources more obvious. Heavy industry has always been the dominance of Chinese economy. Driven by massive infrastructure investment in the process of economic development and urbanization, heavy industry, especially high energy industry has experienced the most rapid growth in recent years. The ratio of the output value in heavy industry to China's total industrial output value was 55% in 1985 and reached 69% in 2008. This developmental mode has put China in severe shortage of energy resources: 50% of its oil are imported; the reserves of oil and natural gas only account for 7.7% and 4.1% of the world average level.5 2

Global Financial Crisis and Green Economy Review [OL]. Reference materials for 2009 roundtable conference organized by China Council for International Cooperation on Environment and Development, chief consultant experts technical support group in Taiwan ICDF. June 25, 2009. The website of China Council for International Cooperation on Environment and Development (CCICED) is http://www.cciced.org/. 3 Chinese Academy of Social Sciences. China Urban Development Report[R]. Social Sciences Documentation Publishing House, 2009. 4 WWF（World Wildlife Fund）Website information [OL]. http://www.wwfchina.org/index.shtm. 5 Si Lin. Low Carbon Economy-New Green Label for Energy-Saving and Environmental Protection. China Construction News，Version 002, May 8, 2008.


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Energy-intensive economic growth and industrial structure have resulted in severe environmental pollution, especially with respect of the use and development of energies which have brought about problems such as air pollution, water pollution, solid waste, the destruction of ecological balance, ―Greenhouse Effect‖ caused by massive carbon dioxide emissions and so forth. The influence on environmental pollution is hard to quantify, but by rough estimation, the present environmental pollution condition is quite surprising. According to a research report of green national economic accounting from State Environmental Protection Administration, the economic loss caused by environmental pollution in 2004 was RMB 511.8 billion, 3% of 2004 GDP.6 At present, the air pollution in 20% of Chinese cities is very serious, 70% of river water system is polluted and 40% is severely polluted. The rivers running through cities are commonly polluted, 1/3 of the land is affected by the acid rain, nearly 1/5 of land area suffers from some degree of desertification, nearly 1/3 of its land faces water loss and soil erosion, and over 90% of natural grassland is degenerating. Among the world's ten most polluted cities, China has six. China has also realized that environment and resources put strings on its economic development.。Although China has started its development of green economy for a while, the globalization of green economy pushed China to act further. Chinese people began to gain a deeper understanding of the concept of green economy, and they take more actions to practice such concept. For example, with respect to energy-saving, the annual output of energy-saving bulbs in China has reached 1.3 billion and its utilization rate is now higher than many developed countries. In terms of solar energy technology, China has provided hot water by solar energy for 35 million buildings.7 By the end of 2008, more than RMB 100 billion of China‘s total investment is directed to coal-fired desulfurizing machine with installed capacity of 363 million kilowatts, accounting for over 60% of thermal power-generating installed capacity. China has invested more than RMB 200 billion to build more than 1,550 sewage treatment plants and the urban sewage treatment rate has reached 66%8. All these achievements have shown that China is making positive efforts to tackle environmental problems.

SECTION 2: THE DEVELOPMENT OF GREEN ECONOMY IN CHINA In recent years, China has made great efforts to develop its green economy and achieved many systemic and obvious results, including energy-saving and emission-reduction, circular economy, the promotion of green consumption and so on. In 2008 world financial crisis, Chinese government promised RMB 4,000 billion investment and started a economic stimulus plan with at least RMB 210 billion Yuan to be used directly to ecological and environmental protection. From the fourth quarter in 2008 to April 2009, China distributed RMB 23 billion Yuan to be used in energy-saving and emission-reducing, ecological construction and environmental protection projects, which accounted for 10% of newly6

Pan Yue. Green Economy：To realize the sustainable development of the society，[N]. China Labor Security News, Version 003, April 9, 2008 7 Cui Dapeng. Promising future in developing low carbon economy [N]. People's Daily Overseas Edition, Version 003, July 5,2008. 8 Green economy: Open up new doors for the enterprises [N]. China Enterprise Newspaper, July 6, 2009.

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increased state investment. 9 This shows that China places a very high value on green economic development to guarantee its growth and expand its domestic demand.

I. Energy-Saving and Emission-Reduction Targeting intensive energy consumption and high discharge of pollutants, Chinese government has implemented energy-saving and emission-reducing policy for several consecutive years. The government has planned that the 2010 GDP energy consumption level with respect to GDP level will reduce about 20% compared with that of 2005 and the total discharge of major pollutants reduce 10%. These two goals are compulsory for governments at all levels. It is not easy to achieve this goal either for the more developed eastern coastal region or the less-developed western region. Most of eastern provinces at present are carrying out industrial restructuring from mature light industry to heavy industry, while western provinces with advantages of resource and energy hope to develop resource-based and energy intensive industry as the main impetus to start jump-start their economy. Therefore, it is difficult to realize the goal of energy-saving and emission –reducing under the current structure. Chinese government has taken a series of measures 10 to promote energy-saving and emission-reducing since 2006, which is mainly reflected in the following aspects: First to promote structural adjustment and industrial upgrading, including the control of the excessive growth of high energy consumption industries with heavy pollution, and the elimination of backward production sectors. For instance, small thermal power generators with a total capacity of 34.21 million kilowatts had been shut down from 2006 to the end of 2008. Funds used in autonomous innovation and structural adjustment arranged by the state can be used to reform and promote traditional industries, to improve the level of technology and equipment, and to develop high-added value products so as to promote energy-saving and emission-reducing. Second, to increase input and implement a full range of key projects. The central government had planned RMB 33.6 billion budgetary investment and RMB 50.5 billion central treasury funds to support the construction of the energy-saving and emission-reducing key projects. Third, to strengthen the management of energy-saving and emission-reducing, and to establish government accountability system for the energy-saving and emission-reducing process . Relevant governmental institutions will make assessment and evaluation of the annual energy-saving goals accomplished by provincial governments and the results will be announced to the general public. For regions and enterprises which are not up to the standard, they will be asked to make rectification within a time limit and might be punished.

9

Development and Reform Commission: 10% of the newly-increased central investment is used in energy-saving & emission-reducing and eco-environmental protection project [OL]. Chinese environmental protection website, August 27, 2009, http://www.chinaenvironment.com/view/ViewNews.aspx?k=20090827105951085. 10 Achievements and major measures made in Energy-saving and emission-reducing work since this year [OL]. August 2, 2009, National Development and Reform Commission Website, http://www.sdpc.gov.cn/hjbh/ hjjsjyxsh/t20090802_294569.htm


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Fourth, to improve the policy, to establish a stimulating and restriction system, to advance the price reform of resource products and adjust the price which is favorable to energy-saving and emission-reducing, and the fiscal & tax policy. For instance, at the beginning of 2009, the government lowered the price of vehicle purchase tax on small passenger cars; implemented "energy-saving products Waste Management Project‖ so as to increase the promotion investment in high-efficient and energy-saving products such as airconditioners, refrigerators and the like through financial subsidies; supported to carry out energy saving and new energy vehicles demonstration pilot projects in 13 provinces such as Beijing, Shanghai, Chongqing and etc. The central government spent RMB 7 billion to encourage automobile and household electrical appliances industry and to encourage people ―to replace an old one by a new one ‖. Fifth, to strengthen the publicity, to improve environmental consciousness of the people and to build an economical type of society. For instance, to implement the "plastic limit order" and trash sorting, to encourage the residents to use energy-saving lamps, to spread the concepts of resource-saving and environmental protection among people by widely publicizing through the media. Table 8-1. The Reduction of Energy Consumption Per Unit GDP Since the "11th FiveYear Plan" Period 2006 2007 2008 The First Quarter of 2009 The First Half of 2009

The Change of Unit GDP Energy Consumption -1.79% -4.04% -4.59% -2.89% -3.35%

Data resource retrieved from the National Development and Reform Commission Website http://www.sdpc.gov.cn/hjbh/hjjsjyxsh/t20090802_294569.htm.

Chinese government has taken painstaking efforts and as a result, energy-saving and emission-reducing work has achieved tremendously. Energy consumption per-unit GDP across China decreases every year. (Table 8-1) In 2006, the number fell 1.79% compared with the previous year. In 2007, it fell 4.04% compared with the same period and fell 4.59% in 2008. For three years combined, it dropped 10.1% cumulatively, and the total energy-saving was about 290 million tons of standard coal. The total discharge of the sulphur dioxide (SO2) and chemical oxygen demand (COD) across the country also decreased, which fell 4.66% and 3.14% respectively in 2007, and fell 5.95% and 4.42% respectively in 2008. The previous three years before ―The Eleventh Five-year Plan,‖ this number fell 8.95% and 6.61% respectively.11 Energy consumption per-unit GDP across China in the first half of 2009 fell 2.89% in the first quarter and decreased 3.35% cumulatively. The amount of decrease over the same period increased 0.47%, the industrial added value of unit energy consumption fell 11.35% compared with a year earlier. Estimated by State Environmental Protection Administration, COD and SO2 discharge across the country in the first half of 2009 will 11

Work arrangement for energy-saving and emission-reducing work in 2009 [OL]. August 3, 2009. Xinhuanet, http://news.xinhuanet.com/environment/2009-08/03/content_11819408.htm.

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continue to maintain the momentum of ―co-drop ", the number of which are expected to fall by 2% and 5%, respectively.12 See Table 8-1. The above table shows that energy consumption per-unit GDP in 2006 fell 1.79% compared with the same period last year.It decreased 4.04% in 2007 and 4.59% in 2008. For the past three years combined, it dropped 10.1% cumulatively and totally energy-saving was equivalent to 290 million tons of standard coal. 1.226

Tce/104 yuan GDP

1.4

1.204

1.155

1.2

1.102

1.01

1 0.8 0.6 0.4 0.2 0

2005

2006

2007

2008

Quarter 1 of 2009

Data sources were collected and calculated according to the Targets Announcement of Energy Consumption Per Unit GDP in each Province or Autonomous Region or Municipality in 2007 and 2008 jointly released by the National Statistics Bureau, National Development and Reform Committee(NDRC) and National Energy Board, and the quarterly statistical data is from the website of National Statistics Bureau. Figure 8-1. The changes of energy consumption per unit GDP in China since the implementation of National 11th Five-Year Plan.

As shown in figure 8-1, RMB 10,000 GDP energy consumption in China in 2005 was about 1.226 tons of standard coal and reduced to 1.01 tons of standard coal in the first quarter of 2009.

II. Circular Economy The difference between circular economy and traditional economy is as follows: Traditional economy is a linear economy with unidirectional flow of "resource-productpollutants discharge", characterized by high exploitation (of resources), low utilization and high emission. Circular economy requires economic activities to organize economic production of ―resource-product-renewable resource‖ characterized by low exploitation, high utilization and low emission, and to use materials and energies get sustainably so as to reduce the influence on natural environment caused by economic activities to a minimal level. 12

Achievements and major measures made in Energy-saving and emission-reducing work since this year [OL]. August 2, 2009, National Development and Reform Commission Website, http://www.sdpc.gov.cn/hjbh/hjjsjyxsh/t20090802_294569.htm.


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Column 8-1. Plastic (Bags) Limit Order in China

Since June 1st, 2008,on a national scale all sales outlets such as shops, supermarkets and market places are forbidden to offer free plastic bags and all plastic bags must be clearly marked with prices. A nationwide ban on the production, sales and use of less than 0.025 mm thick plastic bags was implemented. The positive influences to Chinese society caused by this implementation of the "plastic limit order" was great . First, it can save resources and serves the purpose to protect the environment. The cost of plastic bags is very low and recycling rate is extremely low. The number of plastic bags consumed in the world each year is an astronomical figure, a lot of which are contributed by Chinese consumers. Therefore, huge amounts of valuable oil resources are consumed. In addition, discarded plastic bags , which are refered to as ―white trash‖ have resulted in serious damage to the environment,‖. To limit the use of plastic bags, to a large degree, can save oil resources and protect environment to a large extent.What is more, it can cultivate people‘s consciousness of environmental protection. "Plastic limit order" is directly related to people's daily lives, which can play a good role in spreading concepts of environmental protection and cultivating citizen‘s consciousness and behavior of environmental protection. The "plastic limit order" has been implemented for one year as of June 1, 2009. The data released by China Chain Store and Franchise Association on June 20 showed that: at present, the usage rate of plastic bags has fallen by over 80％ in foreign supermarkets and over 60% in domestic supermarkets. The usage rate of plastic bags in the supermarket and retail industries across the country fell 66% on average and the consumption of plastic bags reduced 40 billion. Compared with the figure before the "plastic limit order" was implemented, it has reduced 0.4~0.5 million tons of plastic consumption, which can save 2.4~3.0 million tons of oils every year and reduce 7.6~9.6 million tons of CO 2 emission. Many consumers have already formed into the habits of shopping with their own shopping bags and re-use plastic bags, and the consciousness of environmental protection is enhanced. (Data source: Lei Min, ―To use fewer than 40 billion plastic bags does not influence on the sales of the supermarket‖ [N]. Xinhua Daily Telegraph, May 21, 2009: 7)

Aiming at correcting inefficient use of resources resulted from simple mode of resource utilization and high emission in economic activities, Chinese government started to advocate circular economy since the beginning of this century and focus on enterprises, industrial parks and regions and etc. with instant access to experiment and demonstration phase. There are 27 provinces and municipalities, 29 reproducible industrial zones, 79 enterprises, 4 agricultural towns or enterprises and 19 industrial parks, all of which have are representitives of circular economy in China.13 In August 2008, China enacted the law of Circular Economy Promotion Law of the People's Republic of China . This law has the name of circular economy explicitly , and it was implemented officially in January 1 2009. This implementation means that the circular economy in China has entered to a stage of all-round developments and will play an important role in transforming the production and consumption patterns in China. 13

Global Financial Crisis and Green Economy Review [OL]. Reference materials for 2009 roundtable conference organized by China Council for International Cooperation on Environment and Development, chief consultant experts technical support group in Taiwan ICDF. June 25, 2009. The website of China Council for International Cooperation on Environment and Development (CCICED) is http://www.cciced.org/.

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China has carried out practical experiments for the circular economy at three levels and achieved remarkable results. First, it is to actively promote clean production at the enterprise level so as to realize small circulation of circular economy and to build recycling enterprises. China is internationally acknowledged as one of the best developing countries in terms of clean production. In 2002, China enacted Law of the Peoples Republic of China on Promotion of Clean Production. At present, policy & law and regulations on local clean production have been stipulated in provinces such as Shanxi, Liaoning, Jiangsu, etc. and areas (cities) such as Shenyang, Taiyuan etc. According to statistics, China has started clean production audit in over 20 industries and over 400 enterprises in more than 20 provinces (regions and municipalities), and established Clean Production Center in more than 20 industries or regions with more than 10,000 people participating in different types of clean production training courses. More than 5,000 enterprises have passed the authentication of ISO14001 environmental management system and hundreds of products have environment labels.14 Second, ecological industrial parks should be built according to the principles of circular economy. The goal of ecological industrial park is to minimize waste materials as much as possible, to plan for scientific planning and to select scientifically and determine projects which can be entered into the park in accordance with the principles of industrial ecology, to regard by-products produced by a factory in the park as the input or raw materials of another factory. By means of waste exchange, recycling, clean production, among others, ―zerodischarge‖ of pollution should be realized. At the same time, logistics, energy flow, technical integration, information and infrastructure sharing should be realized so as to maximize benefits. China has ratified 27 national eco-industrial demonstration parks to be built, including comprehensive industry zones and professional parks, covering industries such as sugar manufacturing, electrolytic aluminum, salt chemical engineering, coal mining, phosphorus and coal chemical, marine chemical, steel & coal chemical, etc.15 Third, it is to carry out the demonstration of the circular economy and to realize big circulation at social level to build resource recycling society. Approved by the National Development and Reform Commission, 27 provinces and municipalities such as Liaoning province, Guiyang city, etc have become circular economy pilot projects in two time periods. The pilot projects include the establishment of municipal solid waste, special waste and used materials, and water recycling system in the city so as to improve the utilization rate of renewable resource. The establishment of circular economy information platform can regularly issue the information on the supply and demand of the enterprise products, byproducts, social waste and used materials to the society and release relevant technical catalogue and investment guidance of environment so as to promote healthy growth of circular economy.

14

Wang Qiuyan (Chief Editor).China Green Development Report, [R], Page 118. Beijing: China Modern Economics Publishing House, 2009. 15 The construction of the eco-industrial park steps into fast traffic lane [OL].September 11, 2008. The website of the Environment Protection Department of China ， http://www.zhb.gov.cn/tech/stgyyq/sp/200809/t20080911_128562.htm.


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III. The Start of Low Carbon Economy At present, the viewpoints which received global recognition are: to develop low carbon economy is the basic way to solve the problems of world climate change and environment deterioration. With the increasing demand for the resource and energy consumption, China, as a developing country, faces increased international pressures from emission reduction result from greenhouse effect in the process of rapid industrialization, urbanization and modernization. However, rapid economic growth is still needed to improve the people‘s income and enhance their welfare thus more greenhouse gas emission is also inevitable. Under such pressures, the most urgent thing is to explore a new path to develop the low carbon economy which is in conformity with China‘s status quo. At present, China, taking international experience as its developing reference, is positively exploring ways to develope low carbon economy and researching into its relevant strategy, policy and technology. These are expected to enter into the pilot phase and overall propulsion phase of low carbon economy. The Chinese government attaches great importance to climate change and considers the reduction of energy consumption per unit GDP to be measured by proxies such as obligatory targets to develop low carbon economy. China will continue to pursue the mode of production and the pattern of consumption which is favorable to preserve energy and protect the environment, and to establish recyclable and sustainable national economic system with low input and high output, low energy consumption & low emission so as to provide necessary policy foundation and condition for the development of low carbon economy. China will regard resource-saving and environmental protection as its basic national policy and the realization of sustainable development as national strategy. It plans to continue to actively respond to climate change and develop low carbon economy from three aspects including the adjustment of industrial structure, improvement of energy efficiency and development of clean and renewable energy resources.16 Further, China will actively adjust the economic structure and make great efforts to push forward the change in the pattern of economic growth: that is to speed up the development of the service industry, particularly modern service industries, to reduce the excessive dependence of national economic development on industrial growth and actively promote the development of high-tech industry to curb high energy, high pollution industries; to facilitate the transformation of foreign trade and to limit the exports of resource-based products simultaneously so as to accelerate the speed of the industrial structure adjustment. Also, it is to improve the standard of market access, to eliminate backward production capacity gradually, to speed up the annexation and reorganization of enterprises, to improve the intensive production level and effectively reduce the intensity of carbon emission per unit GDP. It is to continue to intensify efforts to save energy and improve energy efficiency, to reduce carbon emission intensity in high-energy-consuming industries such as steel, cement and chemicals, etc. by preserving energy and improving energy efficiency. In the future, China will also vigorously develop and use renewable and clean energy resources to develop

16

Development and Reform Commission: Continue to develop low carbon economy from three aspects [OL]. June 19, 2009. Xinhuanet, http://news.xinhuanet.com/society/2009-06/19/content_11569119.htm.

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and promote related techniques, establish necessary stimulating mechanism, carry out demonstration pilot and explore the low carbon development of key industries. The measures to develop low carbon economy in China will mainly include five aspects: First, it is to develop and implement China‘s national plan to respond to climate change in terms of clear and specific goals, fundamental principles, major fields and policy measures in 2010. Second, it is to promote the transformation of the economic development pattern and the adjustment of the economic structure, to take policies and actions to eliminate backward production capacity, to encourage and promote the production mode and consumption pattern that preserves energy and resources. Third, it is to incorporate energy consumption per unit GDP as obligatory target into the ―Eleventh Five-year Planning‖ and to establish the local enterprise responsibility system for energy saving and emission reduction which will be evaluated and assessed by level. Fourth, it is to vigorously develop low carbon energy such as water energy, nuclear energy, solar energy and rural marsh gas by enhancing policy guidance, enterprises' participation and capital input. Fifth, it is to further carry out the price reform in the fields of energy and resource as well as reforms in the fiscal and taxation system.17

SECTION 3: INSTITUTIONALIZED CONSTRUCTION OF GREEN ECONOMY Entering into the new century, Chinese government has put great emphasis on the relationship between environmental protection and economic development, and has since put forward a series of new concepts such as scientific view on development. It has also made a series of reform explorations to promote the development of green economy.

I. The Construction of Legal System of Green Economy Since the beginning of the 21st century, the goal of economic growth set by Chinese government is "good and fast". The state has put forward the scientific outlook on peopleoriented, overall, harmonious and sustainable development and established a resource-saving and environment-friendly society. In order to coordinate the relationship between environmental protection and economic development, Chinese government has put forward three ―historic transformations‖, namely the change from valuing economic growth highly and taking environmental protection lightly to attaching equal importance to both environmental protection and economic growth; the change from environmental protection which has lagged behind the economic development to environmental protection and economic development developed simutaneously; and the change from environmental protection carried out by using administrative means to the environmental problems solved by employing legal, economic and technical and necessary administrative means.

17

Su Wei said: Our country will take 5 steps to develop low carbon economy [OL]. June 23, 2009.Chinaview（ quoted from Economic Information Daily），http://news.xinhuanet.com/fortune/2009-06/23/content_1158 55 68.htm


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Since a long time ago, Chinese environmental protections were mainly carried out by State Environmental Protection Administration and other agencies with hige degree of administrative regulation. However, along with China's economic growth, environmental deterioration has become more severe. Government‘s attempt to solve the conflict between environment and development solved has become impractical and insufficient. The deficient environmental legislation obviously failed to match China‘s rapid economic growth. Such deficiency include lack of correspondingly assorted regulations and implementation rules, which value entity stipulations, lack of program specifications and value executive-led,. lack of public participation with weak sectors‘ cooperation resulted in weak operability of law and arbitrary law enforcement. After the outbreak of the international financial crisis, Chinese government has paid more attention to the development of green economy. At first, it begins with system design and research on the cooperation between environmental protection administrations and other relevant institutions. The government restructuring reform was released in March 2008, the environmental protection agency was upgraded to the environmental protection administration, an upgraded from an institution directly under the State Council to a component of the State Council so as to better perform its environmental protection function, and the relevant laws were established and modified gradually. In 2002, China enacted Law of the People's Republic of China on Promoting Clean Production which facilitated enterprises to preserve resources and energies so as to realize a circular economy. In February 2008, the revised draft Water Pollution Prevention and Control Law passed by National People's Congress (NPC) stipulated the responsibility of local government for environment quality, which was regarded as one of its assessment criteria and imposed a heavier punishment on any illegal act regarding environment. In January 2009, Circular Economy Promotion Law of the People's Republic of China was officially enacted, which stimulated the development of circular economy from the entire social various professions by formulating a series of fiscal, taxation and financial policies. On April 1, 2009, the new revised Energy Conservation Law of the People's Republic of China went into effect, which provides a legal guarantee for the energy-saving and emission-reducing work.

II. The Tentative Exploration for the System of Green Economy Policy In September, 2007, the framework of new environmental economy policy and roadmap were put forward for the first time in China in the ―Green China Forum‖ organized by the State Environmental Protection Agency to construct seven environmental economic policies such as green tax, environment charge, green capital market (including direct financing-green securities and indirect financing—green credit), ecological compensation, pollution discharge right trade, green trade and green insurance within four years.18 Subsequently, the State Environmental Protection Agency started to collaborate with the relevant departments such as China Banking Regulatory Commission (CBRC), China Insurance Regulatory Commission (CIRC) and China Securities Regulatory Commission (CSRC), etc. to introduce 18

Pan Yue, Vice minister of the State Environmental Protection Administration: ―Green China‖ nutured through environmental policy [J]. Study Monthly，2007(19):19-21

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a number of policies and started to make a tentative exploration for a system of green economy policy.

1. Green Credit Policy China‘s green credit policy is that commercial bank should regard enterprises‘ environmental information as an important reference, and to take some measures such as to limit, stop or retreat bank loans for enterprises that have harmful impact on environment in the audit process so as to impel enterprises to control their pollution and protect environment. The practice will be helpful to curb capital expansion of the enterprises that are environmental unfriendly and to achieve the goal of pollution control using the economic means. In July 2007, Suggestions on the Implementation of Environmental Protection Policies & Regulations and Credit Risks Prevention jointly released by the State Environmental Protection Agency, the People's Bank of China (PBC) and CBRC marked that the economic means of green credit had entered into China‘s green economic system and also marked the beginning of cooperation between the State Environmental Protection Agency and other government institutions. In November 2007, the Guiding Opinions on the Credit Work for Energy Conservation and Emission Reduction formulated by CBRC requires financial institutions such as the banking industry to combine the adjustment and optimization of the credit structure closely with national economic structure adjustment, in accordance with project classification of relevant institutions in charge of energy conservation and emission reduction so as to effectively prevent credit risks and adhere to “differential treatment‖ credit principle for different enterprises. At present, China‘s green credit policy has achieved certain results. Taking Industrial and Commercial Bank of China (ICBC) as an example, new policy implemented now will veto all projects which have a significant adverse effect on environment. In 2008, ICBC took the initiative to withdraw RMB 16.2 billion loan from environmental unfriendly enterprises, and cleared up 152 enterprise loans which came from ―double high‖ industries (i.e. double high refers to high energy consumption and high pollution).19 However, there are many problems in green credit. For instance, information communication and sharing mechanism between environmental protection institutions and the financial departments is far from mature, which might fail to provide supports for banks to review and examine credits in a timely manner. In addition, fierce competition among banks will offer spaces for environmental unfriendly enterprises to get private loans from some banks while some environment-friendly enterprises with limited profitability are not favored by some banks. Green credit is far from adequate only by relying on the consciousness of social responsibility of banks. The challenge now is to design an incentive mechanism for banks to remain profitable while being ―green.‖

19

Jiang Jianqing. RMB 16.2 billion yuan was actively returned and environmental protected was supported by "one-vote veto‖ [OL]. April 22, 2009. Sina Finance, http://finance.sina.com.cn/g/20090422/11026134 656. shtml.


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2. Green Insurance The introduction of China‘s green insurance started with About Environmental Pollution Liability Insurance Instruction Opinion released by the State Environmental Protection Agency (SEPA) and China Insurance Regulatory Commission (CIRC) in February 2008 This marks the second policy of green economy after the initiation of ―green credit‖. Environmental Pollution Liability Insurance refers to the insurance principle that insurance institutions should make timely economic compensation for the victims from accidents resulting from pollution caused by enterprises activities. This insurance is to stabilize socioeconomic order and to reduce the burden on enterprises. At the same time, insurance institutions will change the enterprise‘s insurance premium rate to push stronger environmental management from the enterprises‘ side. Proved by many countries, environmental Pollution Liability Insurance is an effective market mechanism for environmental risk management. It is explicitly stipulated in About Environmental Pollution Liability Insurance Instruction Opinion that: At the initial stage, the pilot work will be launched in enterprises which can produce, operate, store, transport and use hazardous chemicals, petrochemical enterprises which are more prone to cause pollution related accidents, and hazardous waste disposal enterprises, especially in those enterprises and industries which have caused serious pollutant related accidents. At present, national pilot projects are developed and have made some interim achievements. In 2008, the pilot work in provinces and regions such as Hunan, Jiangsu, Hubei, Ningbo, Shenyang, etc., achieved remarkable results and successfully settled the first claim for compensation. In 2009, the pilot work in provinces and regions such as Shanghai, Chongqing, Ningbo, Shenzhen, etc., will start successively.20 Chinese government hopes that, in 2015, various mechanisms such as risk assessment, loss evaluation and determination of relevant liabilities to accident handling and monetary compensation, etc. can be established by improving environmental pollution liability insurance system. 3. Green Securities Green securities can exercise control and supervision over direct financing channel, and introduce environmental assessment and environmental information disclosure mechanism for listed companies to promote listed companies to improve their environmental performance and to guide the inflow of funds into environment-friendly enterprises, which can effectively protect the interests of investors against losses. In February 2008, About the Enhancement of Environment Protection Supervision of Listed Companies Instruction Opinion officially released by the State Environmental Protection Agency focused on environmental protection verification system and environmental information disclosure system of the listed companies. Subsequently, China Securities Regulatory Commission (CSRC) issued Notice On IPO Application Documents For Production Management Company in Heavily Polluted Industry. According to the requirements of the above-mentioned documents, China‘s green securities are mainly embodied in issuance application and post-marketing verification. On 20

China Insurance Regulatory Commission: The pilot work for liability insurance of environmental pollution has been launched in Chongqing, Ningbo, Shenzhen and etc. [OL]. June 18, 2009. Sina Finance, http://finance.sina.com.cn/money/insurance/bxfg/20090618/15022902446.shtml.

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one hand, audit advices given by environmental protection institutions will be considered as one of the required document that CSRC reviews. Such requirement is particularly needed for industries engaging in thermal power, steel, thermal power, steel and electrolytic aluminum production and enterprises operated via a cross-province network in ―double high‖ industries (there are 13 types of heavily-polluted industries). On the other hand, after the companies are listed, environmental protection institutions will regularly report to the CSRC about environmental information of listed companies and a name list of listed companies which do not disclose their environmental information as required. In the mean time, their relevant information will also be announced to the public. Environmental Protection Agency will also release annual environmental performance indexes and rankings so that the majority of investors can discriminate and supervise the environmental performance of listed companies effectively.21 The policy of green security needs to be further improved, and effective implementation of green security policy will encourage funds raised from the public to go into green enterprises. Such incentive will promote listed companies to carry out their responsibilities for environmental protection, and economic rights and interests of green choice made by the majority of investors can be guaranteed and capital market can become an economic lever to promote energy-saving and emission-reducing industries and the development of green economy.

4. Green Tax Green tax policies can be roughly classified into two groups: one is to impose an environment tax on enterprises that cause damage to the environment directly; the other one refers to tax preferences with regard to value-added tax, consumption tax and other taxes which are more preferable to environment-friendly enterprises. The export rebate rate and other tax preferences will be eliminated for environmentally unfriendly enterprises. At present, the study on China‘s environment tax has already started. In addition, there are increased voices on the idea that resources such as water resource, forest resource and grassland resource should also be included into the scope of resource tax collection. Although the time is not yet mature for China to make specific environment taxation regulation, yet it has started to introduce green tax system. In August 2008, Preferential Catalogue of Enterprise Income Tax on Special Equipment for Energy Saving and Water Saving (2008 Edition), Preferential Catalogue of Enterprise Income Tax on Special Equipment for Environmental Protection (2008 Edition) and Preferential Catalogue of Enterprise Income Tax on Special Equipment for Comprehensive Utilization of Resources (2008 Edition) were issued jointly by the Ministry of Finance, the State Administration of Taxation (SAT), National Development and Reform Commission(NDRC). In December 2008, the Ministry of Finance and SAT jointly issued Notice on Comprehensive Utilization of Resources and Value-added Tax Policy of Other Products and Notice on Value-added Tax Policy of Renewable Resources. All the above policies have introduced measures such as to encourage the comprehensive utilization of resources, to preserve energy and to reduce emission, to promote the environmental protection, etc. 21

Journalist Chen Xiangjing. Green security policy launched by Environmental Protection Administration [N]. China Environment News, February 26, 2008.


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The extensive exploration and practice of green economy policy are deepened in China, nonetheless, more interests start to be involved that complicated the exploration process. The establishment of the green economic system still has a lot of work and needs to secure supports from the government and various aspects of the society. Other green economic policies such as green trade, region and watershed environment compensation mechanism, pollution-discharge right trade need to be studied, to be improved or be formulated. The hope is that China can formulate a complicated system of environmental policy frame to ensure long-term development of the green economy.

SECTION 4: CASES OF CHINESE GREEN ECONOMIC DEVELOPMENT I. Green City Construction-Green Beijing Since we entered into the industrial era, the urban development became extremely quick. At present, China is in its accelerating period of urbanization. The rapid urban development will cause a series of problems especially in respect of urban environment in various aspects such as water, air, noise, waste, etc. The urban ecological system is very complex and can easily cause greenhouse effect and heat island effect, which have exerted influence on the sustainable development of any city. On the basis of more profound knowledge about the relationship between human beings and nature, green city uses environmental resources efficiently to develop a new mode of production and way of life which can realize the harmonious development between human and nature as well as economy and society. Such city also uses the principle of ecological economy and system engineering methodology to design a city so as to establish an economically developed, ecologically effective, healthy, harmonious and sustainable environment for human inhabitation. Green city has become an irreversible green trend for the development of human beings. To establish a green city that keeps harmonious development between economy and society as well as environment has become a common subject in all societies. China has done substantive work on this and achieved great progress. A large number of demonstration projects have already been presented to the people. For example, the new eco-city of Tianjin, the first city to be different from tradition has started to be constructed in September 2008. According to the plan, Eco-city construction will be strictly carried out within a series of ecological index system. Taking ―land-saving, water-saving, energy-saving emissionreducing, ecological easy living‖ as its target, the city will design all the buildings in the ecological zone as green buildings22. Caofeidian international ecological city located in Hebei Province will follow the principle of "ecological priority‖ and reasonably organize multiple urban ecological systems to achieve internal ecological recycling by using existing factors and adopting urban ecological design ideas to build an ideal city. The new city will make a new environment coexist with natural environment harmoniously and achieve sustainable development. The future ―Caofeidian international ecological city‖ will promote the use of renewable energies such as wind power, solar power, ocean tidal power, geothermal energy, 22

Jia Yihua. New eco-city planning during a reading: Green city of 30 square kilometers [EB/OL]. July 19, 2009. http://news.enorth.com.cn/system/2009/07/19/004130444.shtml.

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etc. to generate electricity, while coal is regarded as an auxiliary energy. New building materials will be used instead of traditional ones, for instance, green building materials which can be permeated by water will be used in the pavement and there is a recovery system under the pavement surface that makes water backflow into the landscape lake. The transportation adopted in this future new town advocate buses, trolley buses, modem tramway, light rail, etc., with low pollution instead of private transportation and small vehicles.23 Beijing, as the capital of China and an international metropolis, has carried out the idea of green development into its urban construction. Especially in 2008, the Olympic Games has brought a good opportunity for Beijing to construct a green city. "Green Olympics" is one of the three principles adopted by Beijing Olympics Committee. When Beijing won its bid to host the Olympic Games, Beijing made seven promises to the world, including that the city green coverage rate would be close to 50%; mountainous area green coverage rate would achieve 70%; city green rate would be above 40%; the city would form three green ecological barriers; 23,000 hectares of greenbelts would be built in both sides of "five rivers and ten roads"; 12,000 hectares of isolated greenbelts would be built in urban area; the city natural protection area would be no less than 8% of city territory area. Through unremitting efforts, these seven promised green targets have all been achieved. Beijing has formed three green ecological barriers of mountains, plains and urban green isolation areas. Above 95% of its mountainous area has realized greening. Beijing‘s green city construction is not only reflected in the ―greening‖ of environment, but also in the seek of its sustainable development. Beijing is short of energy and resources and they are usually transported from the surrounding area. Thus, its external dependence is very high. To build a green city is also the requirement for Beijing to build an ―Easy Living City‖, which is another local development orientation. In sum, Beijing‘s green city construction can be concluded by the following three aspects: First, Beijing experienced the adjustment of industrial structure. Beijing city has accelerated the speed of high-pollution and high-energy consumption industry restructuring, and relocated Shoudu Iron & Steel Company and some other enterprises with high pollution. The orientation of future urban development and industry development has become more and more clear, and such orientation has further been transferred to high-end and high-efficiency industry. As China‘s political and cultural center, Beijing with its long history and profound cultural background also highlights the strength of its scientific and technical innovation with the unique advantage to develop its cultural and creative industry. Since 2005, Beijing has put forward clearly to regard cultural and creative industry as one of the most important pillars for its future development of its capital‘s economy and formed a set of unique cultural and creative industrial clusters. Modern service industry has also become an important economic pillar of Beijing. Beijing‘s service industry in 2008 amounted to 73% of GDP. In the first quarter of 2009, Beijing‘s aggregated economic output was ranked 10th nationally, its economic growth was the second highest, the proportion of its service industry to over all industries was ranked first. The percentage exceeded 76%, which is 32% higher than the national average, Since the service industry is a low-energy consumption industry, Beijing‘s 23

Dai Chao. Tangshan scientific planning and development of the coastal areas and the establishment of international ecological city in Caofeidian [EB/OL]. June 2, 2009. Binhai news website, http://www.bh.gov.cn/bhsh/system/2009/06/02/010028053.shtml.


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energy consumption per unit GDP in 2008 was 0.662 ton of standard coal, which decreased 7.36% compared to a year earlier. Second, Beijing has highly efficient use of resource and energy which can be recycled. The external dependence for energy in Beijing remains high and the corresponding environmental requirements become higher. Therefore, in respect of hardware facilities, Beijing has paid more attention to enhance its ability to carry out environmental protection and accelerate the construction of sewage treatment facilities. During the ―11th Five-Year Planning‖ period, 11 new sewage treatment plants will be built in the centre of the city. Beijing is also speeding up the construction of solid waste incineration plants, an important means to reuse resources and improve environmental quality. Beijing has made great efforts to use new energy. Yanqing has taken the lead in building 50,000 kilowatts of wind-power plants and filled the gap of Beijing wind-powered electricity generation. Thermal and photovoltaic use of solar energy has been greatly improved in Beijing. By the end of 2008, 110,000 solar lamps are used in Beijing. Third, policy guidance of Beijing pays more attention to ecological environment construction. The measures for the implementation of enterprise clean production introduced in Beijing give certain amounts of subsidies and guidance for the expenses of enterprise spend to clean production. In order to further reduce traffic flow, Beijing residents are offered more options and lower prices in terms of public transportations such as subways or buses. Beijing has put forward to construct ecological conservation zone, and isolated greenbelts will be built from the outskirts of the city in accordance with the overall pattern of city planning Suburban parks around the city and ecological vegetation will be built at both sides of the 5th ring road.

II. Actions Taken By Enterprises Enterprise is the base of market economy. All strategies and policies adopted in green economy can obtain their anticipated objectives only when they are truly implemented in the operation of enterprises and are accepted by the enterprises. In recent years, a number of excellent enterprises start to focus on sustainable development and have a strong sense of social responsibility. They actively respond to government‘s green economic development strategy, and explore new ways for their green development, which has achieved remarkable achievements. There are two reasons to explain the green transformation of these enterprises. On one hand, their action is caused by their responsibilities to the society, to the environment and to the public. These enterprises hope to establish a good public image and to achieve a long lasting trust from the market and consumers. On the other hand, the bottlenecks of resource and environment the whole society have to face are also the bottleneck of the enterprises' development. By making an attempt of green production, enterprises hope that they receive more opportunities in the future and to stay competitiven in the market. In the following chapter, we have chosen three green enterprises from three different industries to illustrate the rise of green economy in the enterprise level. The first one is the traditional energy industry, represented by Shenhua Group. The second one is advanced manufacturing industry, represented by Geely Automobile; the third one is producer service industry represented by Neusoft Group.

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1. Shenhua Group- Green Exploration of Black Energy Central Enterprise Coal, as the traditional fossil energy, is still the primary source of China's energy supply and consumption. When the world advocates ―Green New Deal‖ and vigorously develops green economy, China‘s coal industry and enterprises also have started to actively make green exploration. China‘s Shenhua Group is a typical and successful enterprise among them. China‘s Shenhua Group Co., Ltd., as China's biggest coal producer and exporter, has the country's largest high-quality coal reserves. In 2006, the coal reserve of Shenhua Group was ranked the second place in the world's listed coal companies and its coal sale was also the second. Now, the Group‘s business is expanded fields such as railway, harbor, power generation Shenhua Group has become a world leading coals-based integrated energy company. Shenhua Group is the first state enterprise to publish its corporate social responsibility (CSR) reports (in 2007) and demonstrates to the community that state enterprises can fulfill their social responsibilities and take actions to undertake their social responsibilities. Green economic exploration made by China Shenhua Group is mainly manifested in two aspects24: One is that its coal is cleaner. For Shenhua Group, traditional energy cleaning mainly means how to use coals in a clean manner. Now, Shenhua Group has found another way: One is to undergo further transformation of coals, such as to change them into oil products and chemical products, and to develop coal oils and coal chemicals. In 2008, China Shenhua realized coal liquefaction on millions of its installations. During this process, sulphur, nitrogen and carbon dioxide can be well controlled. After carbon dioxide is extracted from coal-to-liquid plants in Ordos, Shenhua produces it into more crude oil additives along with oil companies in Ordos Basin. In such carbon dioxide capture and sequestration are realized. The other one is to vigorously develop wind energy. Shenhua group is aspired to become a leading wind power company in China and its wind energy plate has developed in large scale. In China‘s coastal area and in the great western area, Shenhua Group has constructed its wind power plant on a large scale. Its future goal is that traditional energy should account for 80% in its energy supply structure. That is to say, it can supply not only coals and electricity, but also new energy such as wind power as much as 20% of its total production. 2. Green Standards Carried By “Four Wheels”— Geely Automobile Group It's hard to imagine no cars (―four wheels‖) in modem civilization, Nevertheless, automobile industry has also severe the conflicts among resource and environment and economic and social development. How to seek a balance among them needs one to implement clever strategies. After years of trials and mistakes, China Geely Automobile Group insists on its independent innovation and tries its best to seek for a solution. To be more specific, it tries to develop green technology that seeks green standards carried by four wheels. Green concepts conceived by Geely Automobile are mainly reflected in four aspects25: First is the green materials. Geely promotes the usage of automotive materials that protects 24

Huangqing: Shenhua has always stressed that how the natural cost is reflected in the coal price [OL]。http://finance.sina.com.cn/hy/20090423/14146141688.shtml。 April 23, 2009, Sina finance. 25 Li Shufu: The nation should improve automotive technical standard. [OL]. http://finance.sina.com.cn/hy/20090422/14276135569.shtml。On April 22,2009, Sina Finance.


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the environment and eliminates pollution of the environment. Briefly speaking, the standard is that when people sit in the car, no damage to their health can be made. This requirement set a high requirement for materials. Second is green spare parts. All the assorted automotive parts adopted by Geely Automobile must be green with environmental standards. When spare parts are used, the whole process must be green with environmental standard. The third is their green-manufacturing process. Geely Automobile requires that the manufacturing process be green with environmental standard, and the production process cannot harm the local environment and workers‘ health. At present, what Geely Automobile has done on the surface of their car is to besmear a coating. The coating Geely Automobile adopted is green with high environmental standard, unlike solvents with methanol that cause pollution to the environment. Geely Automobile has recently launched a new green car model. The body of this new model is very small, with the length of only 2.9 meters, nonetheless clever design allows a big tall man to still sit inside the car and feels comfortable. The new model can be powered by using solar energy in sunny days, and solar energy can be supplemented by charging when it is rainy or cloudy. The air conditioner in the car has adopted the principle of electronic oscillation. Thus, the surface of car makes it look like a wagon box, but actually it functions like a refrigerator. The difference between this car and a real fridge is that this car does not have compressor and it can reduce power consumption through electron oscillation. In summer, people will feel very cool in the car, while in winter, the car can be heated by using geothermal heating using batteries on the floor. The batteries can generate heat when they are discharging. This heat can be conducted and cycled from bottom of the car all the way to the top, and people will feel warm when they sit inside the car. This car is a complete innovation without an engine. Of course, it is a green vehicle since it has zero emission.

3. Green Concepts Reflected In System Optimization-- Neusoft Group Information management consulting industry belongs to producer service industry. In China, some enterprises engaging in producer service industry will not fall behind green economic development and try hard to infiltrate their green concepts when serving for their clients. Neusoft Group, China‘s largest offshore software outsource service provider has embodied the green concepts by designing software system for their clients. Neusoft Group is a company which focuses on software technology and its main business includes industry solutions, products and engineering solutions, related software products, platform and service, etc. This enterprise has designed an IT optimized project of medical system for its clients incorporating green concepts26. And this project attempts to solve the problem of inefficient use of medical resources in China. In almost all cities in China, if one goes to a big hospital, s/he will observe that big hospitals are much busier than Wal-Mart in China. Every early morning, many people stand in line waiting, which makes big hospital extremely crowded, while there are not nearly many people in the medium-small hospitals. what might possibly be the reason? One possible explanation is that most people do not trust medium-small hospitals, although they are closer to where they live. Such mentality of thinking results in 26

Liu Jiren: The pursuit of green is the need for the enterprise to survive. [OL].http://finance.sina. com.cn/hy/ 20090422/14306135590.shtml. On April 22, 2009, Sina Finance.

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inefficient resource allocation. According to the statistics, the best doctors in China‘s best hospitals spend 80% of their time with patients when professional knowledge is not required, (i.e. a disease can be cured in medium-small hospitals.) After full investigation, Neusoft Group discovers that an IT service system can be designed to form unified standard resource by connecting home computers to computer networks and collecting unified cases and resources.(check Chinese) The records and quality provided in the hospital can be guaranteed as the same as in big hospitals if a patient goes to see a doctor in a small hospital. In this system, each individual will create a health file and personal information can be obtained by researching on the internet. Some simple devices are needed at home, which can detect diabetes, chronic disease, heart disease, and pregnancy. All these data will be put into standard files in their expected hospitals. The wasted resources problem in the past have been greatly improved by introducing innovative IT models. We believe, more and more local enterprises will become ―Green Companies‖ which will help build a benign ecological system and gain sustainable competitiveness on the road to develop green economy. These enterprises will not only be the leaders in the business world, but also the leading force to make the society and the world a ―greener‖ place.

Translator: Yu Xuxiang (SUFE) English Version Editors: Jiang Jiahui (SUFE), Hou Yue (MIT)

REFERENCES Huang Yonglv, March 31, 2009. How does green economy resolve the financial crisis? [N]. China Environment News, Version 004. Liu Xiliang, June 2, 2009. Low Carbon Economy and the Development of Human Society, [N]. Guangming Daily，Theory Weekly Version 010. Liu Zheng (Chief Editor), 2009. Research Review on the Sustainable Development of Chinese Economy. Shanghai: Shanghai University Press. Pan Yue, April 9, 2008. Green Economy：To realize the sustainable development of the society，[N]. China Labor Security News，Version 003. Wang Qiuyan (Chief Editor), 2009.China Green Development Report, [R]. Beijing: China Modern Economics Publishing House. Yan Xingfang, 2008. Green Economy,[M].Beijing：China Industrial & Commercial United Press. Yang Dongping (Chief Editor), 2009.China Environmental Development Report(2009) [R].Beijing：Social Sciences Documentation Publishing House. Zhang Bingsheng ， 2006. Explorations into Green Economics ， [M].Beijing ： China Environmental Science Press. Zhang Chunxia ， 2002. Green Economic Development Research ， [M].Beijing ： China Forestry Publishing House. Edited by School of Economics in Chinese Academy of Social Sciences，2008. Ecological Environment and Economic Development [M]. Beijing：Economic Management Press.




GREEN MARKET AND GREEN ECONOMY Mou Pu * Rachel Carson‘s 《 Silent Spring 》 , published in 1962, brought the ideology of environmental protection to the people from the academic ivory towers. Enlightened people realized the unsustainability of economic development if it is at the cost of deteriorating the environments. In the past forty+ years, environmental protection gradually came out of the laboratories of the scientists, started with people‘s action, to government action, and to market regulation. The process has never gone smoothly, after all, money and interests, especially the short-term interests, are too powerful drivers in the market economy that people are hardly to pay attention to the environment and the consequences of environmental destruction in their ways to pursuit interests. The terrible records of environmental destruction resulting from the 19th century and early 20th century industrialization, and the following-suit behaviors of the newly industrialized countries today demonstrated that people will do anything for the interests without check. This reminds me what the Lois XIV said: after me, the flood (Après moi, le deluge). People have tried what they would to check these roaming beasts to save the only world. Ecologists and economists, the ‗reveries‘ with the same eco-root finally start to talk, to collaborate for computing the prices of environment for enclosing environmental protection into the market economy（Costanza et al. 1991, Costanza et al. 1997）. Then, so called ‗green economy‘ appeared, environmental protection using economic ways has been proposed and experimented. Just like an old Chinese say, untie the bell should be the ones who tied it on, once environment has its prices and can be precisely measured, the ruthless

* Prof. Mou Pu received his BS from the Northeastern Forestry University, Harbin, China in 1982, MS in forestry

from University of Idaho in 1985, PhD in natural resource from Cornell University in 1991. He taught several ecology and ecology related courses in the Virginia Polytechnic Institute and State University and the University of North Carolina at Greensboro for 12 years after a 3-year period postdoctoral research associate work at Auburn University. He has been working at Beijing Normal University as a professor since 2007. E-mail: [email protected]; phone: 0086-01-5880-2936 (China).

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economical development may be checked by the ‗GREEN‘. This is probably the right way of win-win situation in environmental protection and economic development. Ms. Hui Shao‘s chapter, entitled ―The New Engine: the Rise of Green Economy in China‖ provided a general description of serious environmental situation of China during the past two decades resulting from the rough managements and high resource ， energy consumption, high discharge, and the heavy pressure on the environment from the high-speed economic development. The author indicated that China‘s economic development has already been seriously checked by the deteriorated environment and the shortage of the resources, and the green economy is the only right way to sustain the country‘s high-speed economic development. The second section of the article describes the fruitful development of green economy in China in the recent years from three aspects: energy saving and discharge reduction, cyclic economy, and low carbon economy. To establish a sustainable economic system characterized low input, high yield, low energy consumption, low discharge and being able cycling, the Chinese government has conducted a series of effective measures, issued numerous government guidelines and achieved a certain degree of success. The third section of the article discusses the establishment of a law system and an economic policy system promoting green economy in China. I feel that this section should be the main portion of the article, and should explicitly analyze the situations described. For example, in the second paragraph of the first part of the section ‗A law system establishment for green economy‘, the description could be more vivid, more explicit and useful if some specific examples are given and analyzed to illustrate some environmental laws that have been accused as too broadly general, lacking specific regulations and implementing details. It should be recognized that many laws, particularly the environmental laws, in China are not of high quality. It is understandable to have the situation for countries like China that are undergoing the transition to rule of law. However, it is the professional articles with explicit and in-depth analyses would provide the best help for the law makers to improve the situation. The second part of the section, ‗A primary exploration of the policy system for green economy‘ briefly describes the implementation of the government policies on some of the green measures during the past few years, such as green loan, green insurance, green security, green taxation etc.. This part also needs some explicit and in-depth analyses, especially on the necessities, feasibilities, and the predictable promotion impacts of the policies on the economic development and environmental protections. The last section of the article provides some cases of green economy in China: The Green Beijing as an example of a green city planning, the Shenhua Industrial Group, the Geely Auto Inc. and the Neusoft Group as the outstanding examples of the industrial companies that carrying out the green development. These models demonstrate that the green ideology of environmental protection, low consumption and high efficiency in resource and energy uses, low discharge and recycle have been implemented, in China and becoming a new growth of economic development in the country. It should be recognized that so called green economy (Wagner et al. 2002) in China and anywhere in the world is far from mature, and still at explosive and experimental stage. The developments of the green economy are quite different and of various degrees of governmental guidance/governance among the countries. In the large government system of

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China, governmental governance is particularly powerful. The purpose of green economy, however, is to achieve self-maintained, sustainable economic development under the ‗green regulation‘ by utilizing economic rules. This needs to reduce the government directive guidance and to strengthen its roles in policy-making and rule establishment. In China, it seems more feasible to establish and improve so called ‗green market‘ at the mean time of establishing environmental legislation, because if ‗green‘ does not have a price, there will be no exchange, and no market, and consequently no green economy. I still remember my conversation a few years ago with Prof. Robert Costanza, the leading environmental economist who first computed the price of the global eco-services. By answering my question of why he did the computation as the eco-services are by no means perfect market commodities, he said that the politicians and policy makers evaluate everything with monetary standards, if we do not calculate the prices of eco-services, environments will no doubt become the costless sacrifice of economic development. I asked that how these ecoservices could be priced accurately since no market trading as the reference standards. He answered that we‘ll try our best. Of course, green economy can not be established without market, without trading. If the price calculation of eco-services is mainly to provide a reference for government in policy-making, not for trading, and the best estimation is sufficient, then establishment of green market does need far more accurate ways of calculation for all so called green products. The calculation of green products can be grouped into two types. One is pricing. The prices of some green products can be determined by the market, such as green foods, green tourism, high energy efficiency consumer products etc.(Schlegelmilch et al. 1996). While some others, relating to the public interests, having users but no specific buyers, are hardly market tradable goods, such as clean environments (i.e., water, air, scenery etc.), wildlife, plants etc. (Costanza et al. 1997), the government should involve. If the services, or green products, have the properties of public welfare and long-term interests, the government should provide subsidies (Reinhardt 1999，Wagner et al. 2002). Providing subsidies may have many ways, I feel the ways used should have the promoting impacts on green economy. The second type of calculation is to quantify the green products. Like pricing, some green products can be easily quantified, such as the energy efficient consumer products by using new technology. Others, such as how many carbon be assimilated by one hectare of pine (oak, or maple, etc) forest at high (medium, or low) productive stand; how much pollutant (nitrogen, phosphate, lead, or other heavy metals, pesticides etc.) can be buffered by one kilometer forested (or shrub protected) riparian zone, are hard to be accurately quantified at this time. If we could not accurately quantify the products, trading them in the markets is just some hollow words. All in all, generally acknowledged metrological standards are the foundation of market society. As the progress of technology, of course, many of these are doable at endurable costs. However, this will be an enormous and complex system and is by no means an easy job. In China, the work in this field seems to be processed at a fairly low levels. Green economy under the government guidance could greatly stimulate sustainable implementation of new technology and measures of environmental protection. The old fashioned industry, technology, and management of high pollution, high consumption, low efficiency of energy, resources uses, can be easily eliminated or replaced in the market competition. For instance, government can raise the competitiveness of the companies of low

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pollution, high energy/resource-using efficiency and low discharge, and promote forestation by establishing trading markets for discharge quotas of carbon and pollutants. Regulated monopoly (Raymond 2003）that has been used by some developed countries and turned out to be effective could be applied to the sectors that needs massive infrastructures, such as electricity, petroleum, natural gas and etc. to promote green technology. Of course, these enterprises should not be of state monopolized ones. Comparing to the developed countries, China‘s technology is generally less advanced, and its environmental standards are relatively lower. Therefore, the large scale exportorientated industry in China is easily subjected to the limitations of ever restricting environmental standards of technology-advanced countries, or country groups. Lagging behind in technology could not only just follow, obey the rules of the games established by the developed world, but also, by no means, to occupy the high environmental moral stands. Many developed countries come out extremely restrict environmental standards with beautiful moral justifications and set up the high barriers for the input products. This is doubtless a protection measure of their own economic interests by ignoring the current state of the developing countries. Some developed countries are unwillingly to sign the ‗Kyoto Protocol ‘, do not like to transfer the environment technology even it will benefit the whole world, because they are not willing to give up the rights in establishing rules of games with high moral position. Markets of competition are always the drivers in promoting new technology, and green economy will be a new engine of the next round of technology revolution for China. It will lead China to be a major player in making the rule of games, and a leader of the world economy. The world-wide financial crisis of 2008 provided China a good opportunity to update its industry with the newest technology, and to promote green economy. A green economic system with green market as its solid foundation will guide China‘s economy to be better than ever, and sustainable. China is the most populous large country in the world. Promoting green economy will lead to a win-win situation in economic development and environmental protection, and fit China‘s best long-term interests. China is large, pollution eventually will pollute its own lands and waters, it is China and its people suffer the most, while the largest beneficiary of green economy, sustainable economic development, and environmental protection is also China itself. In the recent UN environmental summit meeting and G20 meeting, The President of PR China, Hu Jintao delivered a presentations revealed the in-depth comprehension of China‘s leadership on green economy and environmental protection. The current round of green economy development in China indicated a good start, and the engine function of green economy on China‘s economic development and environmental protection has shown.

REFERENCES Costanza, R., Daly H. E. and Bartholomew J.A. 1991 Goals, agenda, and policy recommendations for ecological economics. In: Costanza R. (ed.) Ecological Economics The Science and Management of Sustainability. Columbia Univ. Press. New York pp. 120.

Green Market and Green Economy

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Costanza, R., d'Arge, R., de Groot, R., Farber, S., Grasso, M., Hannon, B., Limburg, K., Naeem, S., O'Neill, R., Paruelo, J., Raskin, R.G., Sutton, P. & van den Belt, M. 1997. The value of the world's ecosystem services and natural capital. Nature, 387: 253-260。 Raymond L. G., 2003. "Regulatory Impressionism: What Regulators Can and Cannot Do," Review of Network Economics, Concept Economics, vol. 2(4): 466-479 Reinhardt, F. 1999. Market failure and the environmental policies of firms: economic rationales for ‗beyond compliance‘ behavior. Journal of Industrial Ecology, 3(1), 9-21. Wagner, M. Schaltegger, S. & Wehrmeyer, W. 2002. The relationship between environmental and economic performance of firms: what does the theory propose and what does the empirical evidence tell us? Greener Management International, 34: 95-108. Schlegelmilch ， B. ， Bohlen, G.. & Diamantopoulos, A. 1996The link between green purchasing decisions and measures of environmental consciousness. European Journal of Marketing, 30(5): 35-55.



Chapter 9

THE NEW HEALTHCARE REFORM: THE NEW STARTING POINT OF HEALTHCARE DEVELOPMENT Wang Nuo＊,Yang Weibin, Ren Ran, Cong Yajing and Hou Rui Rapid economic development accompanied by urbanization and aging of the population in China have introduced new health problems and requires transformations of the healthcare service model. In order to meet the challenges, we need to consummate the institutional arrangements including public health service system, the medical service system, the health insurance system and the pharmaceuticals provision system, etc. The health reform plan newly published in 2009 is a new starting point of China‘s health system. In this article, the authors present a thorough analysis on the new health reform based on the background, the key contents, the initial implementation and the existing problems, to bring forth its expected goals for the readers.

SECTION 1: THE FUTURE OF CHINA‟S HEALTH SYSTEM I. The Tortuous Exploration for China‟s Health System In China‘s Planned Economy era, facing the fact of underdeveloped health service, the government attached great importance to basic public health inputs such as disease prevention and treatment of infectious diseases and epidemics. In urban areas, two major healthcare plans that depended totally on government funding, the ―labor insurance scheme‖ (LIS) and ―government employees insurance scheme‖ (GIS), were facilitated; in the countryside, the ―rural cooperative medical system‖ using production brigade as the unit had been promoted, as well as ―barefoot doctors‖. In this way, China achieved universal basic health insurance, and overall population health has been greatly improved. China was a poor country at that

＊

Wang Nuo is lecturer at the Institute of Economics and Resource Management at Beijing Normal University, who earned her PhD degree from the Graduate School of the Chinese Academy of Social Sciences. Email: [email protected]

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time, but its experience on improving health outcomes had been recognized by the World Health Organization (WHO). Since the Reform and Opening up in 1978, China‘s health system has experienced tortuous reforms. From 1970s to 1990s, owing to the reforms of the state-owned enterprises and the promotion of the rural production contracting system, the universal basic health insurance system had been weakened or even dissolved. Moreover, fiscal decentralization, termed ―power delegation and profit concession‖, had shifted the majority of health expenditure to local governments, resulting in not only decreased national health budget, but also money shortage caused by the local fiscal strain. The declining inputs led to the insufficient supply of health care, and problems of difficult access to quality health care, hospitalization and operations. For instance, there were 1 million malignant tumor cases each year, but only 11 thousand hospital beds to treat these patients. To solve this problem, the government decided to encourage private investment in health service, buoyed up the commercialized operation of the public hospitals and payment reforms. To some extent the efficiency of the health system was improved, but the system has also seen new problems such as ―free‖ or unregulated market competition, profit-seeking public hospitals, private village doctors, privatized pharmaceuticals provision, and price distortion on health services. The Reform and Opening up had produced China‘s economic development miracle and much higher income level, but at the same time heavier financial burden for individuals. From 1980 to 2005, the average outpatient visit and hospitalization cost for residents had increased 77 times and 116 times respectively, while the disposable income in the corresponding period increased only 16 times. 200 million Chinese did not have any health insurance in the year 2008, among which 28.1% were urban population and 7.5% were rural. The gap in access to healthcare services between the urban and rural areas has been gradually widening. In 2007, the average beds per 1000 people in the urban area are 2.83, while in rural area the number is 0.85. In Beijing, the city with the richest healthcare resources, the number is 6.90, while in Guizhou Province, the number is only 1.83. The over concentration of the limited health resources in urban or developed area deprived most of the rural residents of their basic health services. In addition to the problems of expensive health bills and difficult access to quality health services that remains unsolved, the new problem of health impoverishment has become more prevalent. Therefore, questions and doubts have been raised against the fairness of China‘s health system. At the turning of the new century, China began to realize that depending wholly on ―free‖ market competition cannot guarantee fair and effective access to basic healthcare services. The government should shoulder the indispensable responsibility in health care. Ignoring the welfare significance of health care and excessively pursuing profit directly raised the ratio of individual out-of-pocket payment on healthcare while reducing the proportion from government and society. In 1997, the nation began to undertake a healthcare financing reform and replaced the labor insurance and civil servants insurance with ―the Basic Medical Insurance for Urban Employees‖(BMIUE) to cover the employed population in the urban area; in 2003, the ―New Rural Cooperative Medical Scheme‖ (CMS) improved the old rural cooperative medical system to cover the rural population; in 2007, the ―New Basic Medical Insurance for Urban Residents‖ (BMIUR) was experimented in order to cover the unemployed population in urban areas. Thus China almost achieved universal coverage of basic health insurance; moreover, the increased proportion of government and social

The New Healthcare Reform: The New Starting Point of Healthcare ...

245

insurance expenditure, together with the reduction of out-of-pocket payment, are expected to improve the equity of healthcare in China.

II. The Issues for the New Scheme of Health Reform The conflicts such as unfair access to health service, doubts on the non-profit motivation of public hospitals, the underdeveloped health insurance system and high out-of-pocket expenses indicate that it is a must for China‘s health system to reform. Especially in the year of 2002, the outbreak of SARS completely disclosed the crisis of public health system. In order to turn the tables, Chinese government implemented the scheme for public health system construction of 2003-2006 so as to build up a sound emergency health system that covers both urban and rural areas and can fully function in the prevention and control of diseases. In 2006, government began to improve the rural three-tiered healthcare delivery system at the county, township and village levels, and at the same time initiated the urban community healthcare reform. The above-mentioned measures reflect the central motif of ―strengthen the responsibilities of the government‖ for the health reform in this phase. With fast and stably growing social economy, the current government highly concentrates on people‘s livelihood and welfare, health care included, which provides a benign political atmosphere for the reform and development of health system. Meanwhile, China‘s health reform, after its 30-year tortuous exploration, has accumulated rich experience by finding and solving problems. Based on the macro-situation and the health system‘s own demand, the Communist Party and State Council issued the ―Opinions on Deepening Reforms of the Health System‖ and the ―Priorities in Implementing the Reforms of Health Care System (2009-2011)‖ in April, 2009, which unveiled a new round of reform on health system and set the new starting point for China‘s health system. This reform is named as the ―New Health Reform‖ of China. The new health reform is based on the experience of China‘s 30-year reforms of health system and strategic planning of future development. It defines the direction and pivot of the development framework for health system from the new starting point, and puts forward the ultimate goals of ―to let everyone enjoy basic health service‖ and ―to improve the health level of the whole nation‖. The scheme of investing 850 billion RMB within 3 years in health system fully reflects not only the philosophy of people-oriented development, but also the determination of the Chinese government to actively face the financial crisis.

SECTION 2: THE 2009 HEALTH REFORM SCHEME The new health reform is a comprehensive action plan proposed for reforming the old health system, and will define a framework for future health system development. In this section, the author will focus on the analysis of ―Opinions on Deepening Reform of the Health System‖. We start with five key aspects presented by both international and Chinese scholars, namely, health care financing, payment, the organization of health care delivery, regulation and behavior of health workers, to discuss whether the reform scheme achieved its goals.

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The new health reform scheme has presented short-term, mid-term and ultimate goals respectively: 1) the short-term goal: by 2011, establish the basic public health service, improve the basic-level health service system in both urban and rural areas, implement the essential drug list, and pilot public hospital reform. The central government will input 850 billion RMB to fulfill the short-term goal; 2) the mid-term goal: by 2020, the public health system will be greatly enhanced and a universal basic health insurance system is established. The government should regulate the pharmaceuticals supply and establish the essential drug system; promote pluralistic patterns of health service provision and a sound health insurance system; 3) the ultimate goal: achieve the goal of universal coverage for the basic public health and health services, improve access and relieve the burden of out-of-pocket expenditure. The highlight of the new health reform is its emphasis on the welfare consequence of public health care; it provides basic health service as the public product to the society. The government reiterates its indispensable responsibilities and obligations in health care.

I. Health Care Financing: the Source of Public and Private Funds Public funding consists of government tax financing and the basic social health insurance. Public funding is more progressive in nature, especially the progressive tax financing, thus will contribute more to fairness of health care. The scheme points out that we should strengthen government‘s responsibility and increases its input, and insists that the public funds, especially tax financing, should play the leading role in maintaining the fairness of health care. From 1978 to 2007, the proportion of health expenditure in GDP has risen from 3.02% in 1978 to 4.52% in 2007; the average growth per year is 0.52%. However, the growth of private funding has been its main source, among which the individual out-of-pocket payment account for the majority, with the growth rate over 2% nearly in all years whereas the growth of public funding has been no more than 2% in most of the years. Social insurance fund has been the major part in public funding, which is 1.72 times the general tax（see table 9-1）. In response to this situation, the new health reform proposes that the growth of government input to the health system should be faster than that of frequent fiscal expenditure to raise the proportion of government health input in the frequent fiscal expenditure; this is the first time that a clear and operational public funding plan for health is proposed. Both the supply side and demand side have been fully taken into consideration and assigned respective investment plans, namely, the input on the supply side will be distributed to public health, rural health, urban community health services; the input on the demand side will be distributed to government subsidies on the basic health insurance systems. Besides, the principle that central and local governments would share health costs according to their administration level but local governments undertake the main responsibility has been clearly clarified. The central government is financially responsible for the national immunization plan, prevention and controlling for the critical trans-regional epidemic diseases, the basic health insurance for urban and rural residents, and the construction of public hospitals directly under Ministry of Health; local governments are responsible for all the rest. The earmarked payment transfer should be adopted to minimize the gap among the regions in their fiscal conditions.

Table 9-1. Health Care Expenditure in China by Source of Funding (%GDP), 1996-2007 1996 1997 1998 1999 2000 2001 Health expenditure 3.81 4.05 4.36 4.51 4.62 4.58 as a percentage of GDP The proportion of 1.78 1.79 1.82 1.84 1.77 1.63 public funding 0.54 0.54 0.60 0.61 0.61 0.59 1）The proportion of general tax funds 1.10 1.08 1.02 1.00 1.01 0.90 2）The proportion of social insurance funds The proportion of 2.03 2.26 2.54 2.67 2.85 2.95 private funds 2.14 2.39 2.52 2.72 2.75 1）The payment by 1.93 private out-ofpocket 0.02 0.03 0.05 0.03 0.06 2）The payment by NA private health insurance Source：Calculated according to The Report on China‘s Health Expenditure 2008, P245. NA，not available.

2002 4.81

2003 4.85

2004 4.75

2005 4.73

2006 4.64

2007 4.52

1.72

1.76

1.80

1.83

1.89

2.05

0.63

0.66

0.66

0.69

0.66

0.54

0.94

0.94

1.00

0.99

1.08

1.36

3.09

3.09

2.95

2.90

2.76

2.47

2.78

2.71

2.55

2.47

2.30

2.04

0.10

0.18

0.16

0.17

0.18

0.15

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With respect to private funding, we should bring private sectors into supplementing the basic health service, such as exploring ways of ―purchasing service‖ and select some service items to try out in certain regions. The new health reform proposes that the private funds (including foreign funds) should be encouraged to invest in non-profit health service, participate in the reform of public hospitals and qualified doctors are encouraged to open private clinics. In terms of health insurance (the health demand side), it proposes that the proportion of tax financing in basic health care should be raised while the share of private out-of-pocket payment should be lowered; but specialty care should be paid mainly by private cash or private health insurance.

II. Health Care Payment: the Inputs for Supply and Demand The healthcare payment refers to the use of health fund raised from public and private channels. It is mainly concerned with payment to the supply and demand sides. In this health reform, for the supply side, the government tax funds mainly invest in the basic health service supply and help maintain the non-profit characteristics of public hospitals; for the demand side, it mainly subsidizes the basic health insurance. Since 1978, in spite of the escalating trend of the absolute value of government health budget, China‘s budgeting was still influenced by the tradition of ―emphasizing the supply rather than the demand‖, which is chiefly reflected by the heavy input into public hospitals and free healthcare to government employees, but neglected subsidizing other healthcare customers until 2003. The change of government tax funding as a percentage of total health expenditure basically keeps in line with the changes of public hospital expenditures, whereas the financial subsidy to the demand side only account for a small proportion without changing over the past 20 years. Since 2002, the growth rate of government budget on consumption is 12.2%, slower than the 20% growth of public hospital expenditure, moreover, in 2006, the government budget spent on health supply increased 18.2% from the previous year, but the subsidy to the demand side declined 0.3%.

19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06

1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00%

the total government expenditures/GDP % the demanders expenditures/GDP % the suppliers expenditures/GDP % Source： Ministry of Health，The Statistical Year Book of Health 2008，Peking Union Medical College Press, July, 2008. Figure 9-1.The Ratio of Government Expenditure on the Supply Side and the Demand Side.


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The new health reform seeks to change this pattern of health expenditure. It proposes that at least 560 billion out of 850 billion RMB should be invested in the demand side. The government funds should be chiefly used in the subsidies for residents‘ health insurance and the compensation of treating serious illness. The scheme proposes that we should construct a health insurance framework with the basic health system as main body and other various health insurance and commercial (private) health insurance as the supplement. The urban worker health insurance, the urban resident health insurance and the urban-rural health aid compose the basic health security system that completely covers the urban employed and unemployed population, the rural population and the urban and rural vulnerable population. The funding of the basic health insurance should chiefly depend on the social health insurance which receives money from enterprises and individuals, and meanwhile be subsidized by government funds. In this system, the urban worker health insurance belongs to obligatory social insurances stipulated by nation and should be paid by employers and workers themselves as stipulated; the New Rural Cooperative and Urban Resident Health Insurance are voluntary under the government‘s instruction and financial subsidy. To the supply side, namely, the input in the health service institutions, we should stick to the principle that government playing a dominant role with financial supports from multiple channels. In practice, the government funds should be chiefly used for subsidizing the institutions which provide the public health service and primary health care. 1) The input in the public service should be led by governments through governments‘ tax financing and its nature of public goods should be confirmed. 2) The input on the basic health service should be dominantly led by government and partaken by society, individual and government at a reasonable ratio. For those township health centers and urban community health centers set up directly by the central government, the government should pay for basic construction, purchase of equipment, salary of stuff and operation funds. To those urban and rural basiclevel health providers that operated privately, the method of using government purchase to offer government input could be adopted. For instance, the central government should increase its input on the construction of village clinics and the public health service undertaken by village health practitioners. 3) The input on public hospitals should return to governments, and the public welfare of them should be insisted on. The government input will be used to infrastructures construction and equipment purchase, supporting the development of key research projects, health expenditure of retired staff, the subsidies on the policy-induced deficit and the special subsidies on the public health service task it undertakes. 4) The cost of specialty health care services should mainly be paid by private out-of-pocket and commercial insurance and basically without government funding.

III. The Healthcare Organizations: Co-development that Puts the Public Hospital as Primary and the Private as Secondary The development of China‘s healthcare delivery system should stick to the principle of setting the non-profit health institutions as main body while allowing the for-profit ones as their supplement; putting the public hospitals in the dominant place while co-developing the private ones to a balanced health service system that covers both urban and rural areas. In 2007, the number of China‘s public hospital is 9832, 2.75 times as that of private hospital,

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and most of the health services are provided by the non-profit hospitals（see the pie Figure 92 & 9-3）.

Source: Ministry of Health，The Statistical Year Book of Health 2008，Peking Union Medical College Press, July, 2008. Figure 9-2. Proportion of Outpatients in Profit and Non-profit Hospitals in 2007.

Source： Ministry of Health，The Statistical Year Book of Health 2008，Peking Union Medical College Press, July, 2008. Figure 9-3. Proportion of Hospitalized Patients in Profit and Non-profit Hospitals in 2007.

The new health reform insists on the idea that health service should be mainly provided by non-profit and public hospitals but also encourages the development of for-profit hospitals and private health care providers. Therefore the healthcare delivery system will contain multiple sources and types of investment. In the public hospital reform pilots, the proportion of public health institutions has been declined and social fund has been introduced to participate in the system reform of public health institutions to facilitate the mutual stimulation and the co-development of the public and private hospitals. The qualified doctors are supported to open their private practice to benefit patients who need to receive health service. The new health reform perfects the original tiered health service delivery system in urban and rural areas in hope of carrying out the referral mechanism and allocating health resources


251

reasonably in the future. In cities, we should set up the new urban health service system based community health service. We should construct community health service centers to provide public health service including disease prevention and control, primary diagnosis and treatment of common diseases and chronic diseases. The city hospitals should concentrate themselves on the diagnosis and treatment of the critical emergencies and difficult and baffling diseases, medical education and research and the instruction and training on the basic-level health personnel. The community health service centers should cooperate with city hospitals, city hospitals support the community health service centers with technology and staff. Community health service centers should improve the quality of their service, lower their charge and raise the reimbursement ratio to reduce healthcare demand. In this way, initial diagnosis in community health service centers, tiered medical treatment and the twoway referral will be gradually realized in the future. In the three-tiered rural health service system that contains village clinics, township health centers and county hospitals, village clinics should provide basic public health service and treatment of general health problems in the village; the township health centers offer comprehensive public health service and treatment of common and frequent diseases; county hospitals, as the health center in county regions, are mainly responsible for providing basic health service and emergency rescues. Meanwhile, higher-level health institutions have obligations to offer technology support and staff training the lower-level ones. The government devotes itself to operating county hospitals and assures there is at least one health center in each town, and encourages the investment from social fund to get involved in the construction of other health centers.

IV. The Management of Medical Institution We should implement localized and industry-wide management for healthcare organizations. Whatever their ownership, forms of investment, affiliation and nature of business are, the medical institutions should all be supervised and managed by local health bureau. The central and provincial authorities could establish medical centers with the functions of research and teaching and specialty hospitals that can undertake the diagnosis and cure of the national or regional difficult and complicated diseases; the county (city) authorities are responsible to operate county hospitals, the village clinics and urban community health centers; the city authorities are in charge of operating other kinds of public hospitals. To the operation mechanism for basic-level health service institutions, we should strictly define its service function and clearly regulate the technologies, the equipment and the basic medicine that can be used; adopt the financial management that ratifies tasks and accounting for income and expense as well as subsidizes based on performance assessment, and at the same time experiment innovative management methods like the separation of income and expense and global budget for t public health and health insurance; reform the drug price markup to sell medicine without extra profits; set up the evaluation mechanism with the quality of service as its core and the post responsibility and performance as it basis. The central authorities should figure out the framework policy of the basic health insurance management system, and local governments should undertake the task of organizing and implementing these policies. Therefore gradually increase the overall planning

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level and in the end realize the united administration of the basic health insurance both in urban and rural areas.

V. The Behavior of Health Personnel We should set up sustainable mechanism of retaining talents, and strengthening education and training of health professionals in public health, rural health and community health. We should issue benefit policy to encourage capable health professionals to work in the rural areas, the urban community and the mid-west region. We should initiate the concept of general practitioner and perfect the qualification system of it to guarantee that basic-level health institutions all have possessed qualified general practitioners. For the personnel in public health institution, the government should ascertain the staffing, wage and outlay standard and meanwhile set up effective incentive mechanisms; for those in basic-level health institution, the government should adopt competitive employment within strict staffing limits; for those in public hospitals, the government should adopt competitive employment as well as position management to strictly manage the gross salary and performance assessment based on the quality of service and the workload of the position.

SECTION 3: THE EXECUTION AND EFFECT OF THE NEW HEALTH REFORM In ―the basic health service that everybody can enjoy‖, the ―everybody can enjoy‖ means that everyone enjoys fair opportunity of healthcare and equal health outcome; the ―basic health service‖ refers to the health service that is compatible with the development of economy and can be afforded by the country, the society and the individuals. The public health, the rural basic-level health, the urban community health and traditional medicines constitute the important contents of this scheme. To achieve the above-mentioned goals, China‘s government plans to input 850 billion RMB from 2009 to 2011 to implement the new health reform scheme First, we need to understand the concepts that: 1) the 850 billion RMB will be the incremental funds that central and all levels of local governments plan to input in the health reform in 3 years, among which 39% or 331.8 billion will be input by central government; 2) the input will mainly focus on five aspects including the basic health insurance, the national essential drug system, the basic-level health service system, the equalization of basic public health service and reform pilots of public hospitals; 3) most of the funds will be used for basic-level health service. Second, we need to clarify the allocation of the funds: 1) it is the key point that 2/3 of the funds should be put into the demand side while 1/3 to the supply side; 2) the money put into the supply side should be used for improving the construction of basic-level medical service and public health; 3) priority should be given to the western region. The estimates of input is described in Figure 9-4.


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Column 9-1. The Emergency Medical Response to The Wenchuan

Earthquake At 14:28, May 12, 2008, an earthquake of 8.0 on the Richter scale shook the Wenchuan County in Sichuan Province, China and hit an area of 280,000 square kilometers in Sichuan, among which the harder-hit area had reached 125,000 square kilometers (25.8% of the size of Sichuan Province), and the hardest-hit area had reached 11 thousand square kilometers (2.3% of the size of Sichuan Province). The number of disaster-affected population had reached 29.61 million (33.6% of the population in Sichuan). Moreover, the mountain and valley in the harder-hit areas, the following suspension on transportation and communication, the choking rivers, the abominable weather and the failure for rescuers, materials, vehicles and large equipment to enter part of harder-hit areas in time all add to the difficulties of disaster relief. The health rescue for calamities and accidents is mainly proceeded in following three phases. The first phase is the emergency response. The Health Bureau of Sichuan province initiated the first-level emergency plan immediately after the earthquake. Within the first hour after the earthquake the first emergency mobilization order had been issued, and within the second, the health aid headquarter for disaster relief, which consisted of working groups for health rescue, the disease control, the supply of health devices, publicizing and reporting, the comprehensive coordination and the logistics support as well as the later-added transporting the injured and reconstruction, had been set up. The second phase is quick response. The best timing for rescuing and remedying the injured is within 72 hours after the earthquake. Most of the injured that were rescued and had received effective treatment in this period could survive and recover. China‘s government and health institutions took immediate actions. On May 12, the number of health workers who participated in the medical aid in the disaster-hit areas was 540; On May 13 it increased to 1676 and on May 14 to 4265. Until May 15th, the number of the health workers in the disasterhit area had reached 35880, among which 31000 (86.4% of the total) health workers were from Sichuan province. On the tenth day after the earthquake (May 22), as twenty health workers from Shanghai carrying first-aid medicine, equipment and satellite phones being parachuted by helicopters to the four villages in Wenchuan county, including Gengda, Sanjiang, Yinxin, Caopo, where health workers could not enter because of the traffic interruption, Sichuan‘s 11 cities,67 counties(districts) and 950 villages that suffered from the ―5.12‖earthquake had been fully covered by medical care (see Column Table 9.1.1) .

Column Table 9.1.1. The Statistics of Health Workers until May 30, 2008 Source of rescue team Total number Proportion From Sichuan province 41240 81.7% from other provinces 5969 11.8% From military troop 3048 6.0% From Hong Kong, 199 0.4% Macao and outside of China Total 50456 100% Source：Dai xiaozhou et, al. The Record of Actual Event of Sichuan‟s Rescue Work in Wenchuan Earthquake. Chinese Journal of Evidence-Based Medicine 2008, 8(10): 797-802.

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Source：http://finance.sina.com.cn/roll/20090213/02445850205.shtml Figure 9-4. The Prediction of the Input of 850 Billion RMB in the New Health Reform.

I. The Construction of Basic Health Insurance System From the later 1970s to the middle 1990s, the reforms of state-owned enterprises, the taxation reform and the fiscal decentralization all put the original labor insurance and government employee insurance system into difficulty. Besides, the rural reform of economic system had basically dissolved the cooperative medical system that based on collective economy. In 1997, the ―Health Insurance for Urban Employees‖ had replaced the former labor insurance and government employee insurance system that all the employees in cities and towns began to enjoy health insurance. In 2003, the ―New Rural Cooperative Medical Insurance‖ was implemented as a pilot program to solve the problem of health burdens for rural peasants. In 2007, the ―Health Insurance for Urban Residents‖ and the ―Urban and Rural Health Aids‖ was also piloted. Before the plans of health reform were promulgated in April 2009, the framework of the basic health insurance system had been basically established. During the period of 2009-2011, the authorities plan to realize the target that the health insurance covers all residents in the whole country with an enrollmentrate over 90%. In 2010, the amount of subsidyfrom all levels of government to the health insurance for urban residents and new rural cooperative medical insurance will be raised to 120 RMB per person each year. Thus, it can be calculated that the participant number of urban and rural basic health security system will reach one billion within 3 years, and the lowest subsidizing level of the government should be 120 billion per year. The government plans to invest 5 billion RMB to help minimum-wage employees to participate in the urban residents health insurance.RMB In 2007, 22.72 million urban residents and 41.73 million farmers benefited from the Livelihood Security System, and the sum of subsidy was 3.6 billion RMB, but 5 billion RMB will be needed if the health reform iincreases the benefit levels. In the 850 billion official funds, nearly 390 billion (46% of the total) will be used to construct the basic health insurance system; it is the focus of this scheme. (See Table 9-2)


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Table 9-2. The Evolution of China’s Basic Health Insurance System Period 1978middle1990

Phase The phase of planned economy The phase of transitional economy

Urban areas labor insurance and government employee insurancecontinued, but were impacted. In 1997, the health insurance for urban employees was experimented and gradually put into practice.

2007-2009

The phase of market economy

The basic health insurance for urban employees had been carried out, in 2007; the basic health insurance for urban residents was on the process of pilot program.

April, 2009

New health reform

The health insurance system had been basically set up: the basic health insurance for urban employees, the basic health security for urban residents, the urban medical assistance program.

1997-2000

Sub-urban areas Rural cooperative health care gradually collapsed In 2003，the new rural cooperative health care started as a pilot program 。 In 2008, the new rural cooperative health care had completely covered the rural areas. The new rural cooperative health care, the rural medical assistance program

Source: Gu Xin, Analysis on the Investment Direction of New Health Reform, 21st. Century Business Herald, February 13, 2009.

In this plan, the highest benefit of health insurance for urban employees and residents has been increased to six times as many as the local employees‘ average salary and the residents‘ disposable income; the benefit limit on new rural cooperative health care has also been raised to over six times as many as the local farmers‘ net income, four times higher than the present level. What‘s more, the plan has indicated that the surplus rate of the funds for new rural cooperative health care should not exceed 15% and the accumulated surplus not exceeding 25% of total insurance fund in that year. At the same time it plans to improve the level of fund administration. By 2011, the health insurance for urban employees and residents will realize municipal unified administration. The portable basic health insurance scheme was piloted in 2009. Take the 16 cities in the Yangtze River Delta for example; they plan to build an intra-region joint committee system of urban health insurance cooperation and launch substantial cooperative actions. At present, the healthcare cost settlement among Shanghai, Hangzhou, Jiaxin, Anji; and the cities of Hangzhou, Deqing, and Anji has been basically realized. The provinces of Hainan, Guangdong and Guizhou, together with the Guangxi Zhuang Autonomous Region have issued the Cooperative Agreement of Off-site Health Care Cost Settlement, striving to realize it in 20091. 1

Data sources: http://health.zjol.com.cn/05zjhealth/system/2009/03/29/015385069.shtml http://news.pharmnet.com.cn/news/2009/06/13/257098.html

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1. The Participating Situations of Health Insurance for Urban Employees and Residents in some Provinces and Municipalities Since the new health reform, the participating rates of urban employees and residents insurance have both reached an ideal level; especially the insurance for urban residents has been speedily expanded. Like Liaoning province, its participating rate boosted 84.8% than 2008 (see Table 9-3). Shaanxi province plans to make its participating rate for urban employees and residents reach 95% and 80% respectively, and Guangdong province‘s plan is to exceed 95% in 3 years2. Table 9-3. The Summary of the Latest Participating of Health Insurance for Urban Employees and Residents in Some Provinces and Municipalities in 2009 Province (municipality)

Health insurance for urban employees

Health insurance for urban residents

Participating number Beijing

8.72million

Increase from the previous year 11.4%

Participating rate

Participating number

Participating rate

1.47million

Increase from previous year 0.7%

93%

Liaoning province

12.68m

4.8%

90%

5.60m

84.8%

80%

Chengdu (the capital of Sichuan province)

3.02m

15.3%

NA

6.68m

NA

NA

Data source: http://beijing.qianlong.com/3825/2009/04/14/[email protected] http://health.newssc.org/system/2009/04/08/011769637.shtml http://health.syd.com.cn/html/xinwen/shenyangjianwen/2009/0812/31416.html

http://hainan.pprd.org.cn/hainannews/200906/t20090611_60629.htm 2 See 11.

90%


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2. The Participating Situations of the New Rural Cooperative Health Care in some Provinces and Municipalities To the end of September, 2008, 2729 counties (districts) have launched new rural cooperative health care. The number stood at 814 millions, and the participating rate reached 91.5%, approaching the target of ―universal coverage‖. After the new health reform, even the limited statistics indicates that no matter the remote provinces like Yunnan or Heilongjiang, or the large cities like Chongqing and Nanjing, the participating rate of new rural health cooperative in their territorial scope all reached 90%, demonstrating that the new system has covered China swiftly (See Table 9-4) .Jiangxi province has increase the highest benefit level of this system to that of 8 times as many as farmers‘ net income; Shaanxi province plans to reach the level of 90% of the participating rate; Shandong province and Guangdong province plan to reach 95% and 98% respectively3. Table 9-4. The Participating Situations of New Rural Cooperative Health Care in Some Provinces and Municipalities Province (municipality)

Participating rate

Hei Longjiang

94%

Yunnan

93%

Chongqing municipality

95%

Nanjing

99%

Data sources:

http://www.cnss.cn/xwzx/yiliaobx/zcss/200902/t20090203_205020.html http://city.cctv.com/html/chengshiyaowen/a68cf9e44e22586074ad46bfe6bb8147.html http://www.fdinfo.org/CL0054/61513.html

The subsidy level for participating farmers from the central government and local authorities has been increased from 40 RMB to 80 RMB, and individual premium payment will increase correspondingly. In the previous three quarters in 2009, the national total expenditure of new rural cooperative medical insurance was 42.91 billion RMB, the accumulated number of beneficiaries was 370 millions4 (14). It presents that the economic burdens of inpatient care have been relieved and the healthcare seeking rate, especially the inpatient care rate has risen.

3 4

See 11 http://www.gmw.cn/01gmrb/2009-08/24/content_968648.htm

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Column 9-2. A Case of New Rural Cooperative Medical Insurance in Lufeng

County, Yunnan Province 5

The cooperative health care is a cooperative system that rural residents participate voluntarily under the reasonable guidance of the government to enroll in health insurance covering mainly the serious illness of the enrollees. In this case, the situations in a pilot area of cooperative medical insurance, Lufeng county, is going to be introduced. Lufeng County is located in the southeast of Central Yunnan Plateau, with an area of 3536 square kilometers, and a population 415 thousand, 82.5%of them (93500) are farmers and ethinic minorities like Yi, Miao.. In 2003, the population newly fell below the poverty line is 28,434, and 12,476 people are impoverished by illness and medical cost, account for 43.9% of the total. As a pilot region of the new rural cooperative medical insurance-, 280 thousand people have participated in the program voluntarily by August, 2003. The participating rate was 87.1%; meanwhile, the participation rate of populations in extreme poverty was 100%. The central government subsidizes 10 RMB per person each year. The province, prefecture and county governments subsidize 10 RMB at the ratio of 4:3:3. Thus, there are 20 RMB from government subsidies at all levels. As for the collective input, it subsidizes 1 RMB per person each year, and each person should pay 10 RMB premium out-of-pocket. Therefore, subsidy from the government is the main source of new rural cooperative medical insurance, accounting for 64.5% of the total fund (See pie Figure 9.2.1).

Figure 9.2.1: Funding Sources of New Rural Cooperative Medical Insurance in Lufeng, Yunnan.

The reimbursement rate was categorized by different medical institutions and service types. (See the following Figure). The highest accumulated benefit quota (including inpatient and outpatient care) was 3000 RMB , the sum of for the new cooperative medical insurance fund in 2003 was 7.95 million RMB. By March 2004, 3.406 million RMB had been disbursed. (36.9% was for outpatient care, 63.1% was for inpatient care) (See Figure 9.2.2).

5

References: Asian Funds/Pfizer Pharmaceutical Company sponsored The Baseline Survey Report of New Rural Cooperative Health Care in Lufeng, Yunnan Province, Oct. 2004


259

50% 40% 30% 20% 10% 0% village health station

township health county hospital centre

the hospital above the county level

the reimbursement ratio for outpatient the reimbursement ratio for inpatient care

Figure 9.2.2. Regulations of Reimbursement Rate for New Rural Cooperative Medical Insurance in Lufeng.

After the new rural cooperative medical insurance has been carried out, the average prescription expenses in township health centers have risen 14.4% while the village health clinic increased 32.3%. Meanwhile, the outpatient expenses of participants are higher than that of who do not participate, and the expenses in village health clinics are higher than in township health centers. Besides, the expenses of inpatient care, medicine and surgery have increased to different extent. Therefore, it is important to control the medical expenditure, especially the surgery expenses and medicine expense in county hospitals. (See Figure 9.2.3).

30 20 10 0 village health station the average cost of cooperative medical the average cost of cooperative medical the ourpatient cost medical insurance the outpatient cost cooperative medical

township health centre

outpattient prescritpion before the new rural insurance outpatient prescritpion after the new rural insurance of the participants for new rural cooperative of the non participants for new rural insurance

Figure 9.2.3. The Comparison of Outpatient Prescription Expenses and Patients‘ Prescription Expenses Before and After the New Rural Cooperative Medical Insurance. Source: The Asia Foundation/Pfizer Pharmaceuticals supported, A Survey Report on the Basic Implementation of New Rural Cooperative Medical Insurance in Lufeng county, Yunnan Province,

October, 2004.

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II. Fairness in Access to Basic Public Health Services In the new health reform, every Chinese will receive 15 RMB of public health subsidy each year, and in 2011, it will not be less than 20 RMB. Calculating by the number of 1.32 billion people in 2007, 19.8 billion RMB is needed. If by the standard of 20 RMB, 26 billion RMB is needed. In that 60-80 billion RMB should be put into the public health funds. The central finance, on the other hand, subsidizes the poor-stricken areas through transferring payments, and by the end of August, 2009, 15.8 billion RMB had been provided to launch major items of public health services6. From the beginning of 2009, the medical records system of residents have been gradually established in nation-wide scope and been under standardized management. Elderly people over 65 will receive health check and children under 3 years old will receive development check at fixed intervals; the pregnant women will receive at least 5 times of prenatal examinations and 2 post partum visits; all the patients of hypertension, diabetes, psychological diseases, AIDS or tuberculosis will be provided appropriate treatments, and thus, the major items of public health such as prevention and control of serious illness, immunization programs and rural women‘s reproductive health programs will be implemented. According to the scheme, from 2009, the government will offer fundamental public health services to urban and rural residents for free. For instance, replanting HBV vaccine to the groups under 15 years old; eliminating the harm of coal-burning fluorosis; providing folic acid to the rural pregnant women to prevent birth defects; curing the poor cataract patients; and construction of sewer and toilet in countryside.

III. The Completing of Basic Health Service System In the 850 billion funds, at least 280 billion will be put into the supply side--the institutions providing health services. The sum of financial subsidy that all the public health institutions had received in 2007 was 111,855 million RMB, plus the subsidy from the higher authorities, the total number was 117,997million RMB7. Besides, the extra subsidies to health institutions in the new health reform are mainly used to improve the health services at the basic level. Moreover, the reform has increased the subsidy to Chinese traditional medicine in order to fully take advantage of its simple, safe, low cost characteristic to improve fundamental health and health services.

1. Urban Community Health Centers From 2009 to 2011, 3700 community health centers and 11000 health service stations will be built or remolded. Meanwhile, the authorities will give financial support to povertystricken areas to build 2400 community health centers and train 160,000 health working staff, and invest 24 billion RMB within 3 years.

6 7

See 11 The Ministry of Health: The Annals of Statistics on Chinese Health, College Press, July, 2009

Chinese Peking Union Health


261

By the end of 2008, all the cities above prefecture level and 98% districts under city administration had already launched community health services, 7232 community health centers and 21,895 community health service stations had been built; the emergency visits in some community centers had reached 30% of the outpatient care, releasing the pressure of emergency care for large hospitals to some extent8. A survey made by the Ministry of Health shows that the community health centers has become the top choice of people who has ailments, accounting for 71.4%9. The main reasons why residents choose community health centers is its convenience, good service, and cheap price. With the implementation of new health reform, the construction of social health service continues developing. For instance, Xi‘an (the capital of Shanxi province) raised 950 million RMB on the basis of sub-district administrative office and planned to build 73 community health centers and 78 health service stations. Up to August 2009, 70 community health centers and 67 health service stations had been completed respectively, 90% urban areas had been covered by the community health service system10. Zhengzhou, the capital of Henan province, formulated that every community health service centers should be equipped at least 6 general practitioners and 9 registered nurses11.

2. Basic Health service in the Countryside During the period of 2009-2011, the central finance will attach great importance on building 2000 hospitals at county level to reach the criteria that each county has at least one standard hospital. In 2009, the government supports to build 29 thousand township health centers and expand 5000 township health centers at the same time, to achieve the final goal that each county has one to three health centers. By 2011, every village would have a health station, especially in the remote villages and territories; and 360 thousand health workers for township health centers and 1.37 million for village health stations would be trained. In the next 3 years, it is estimated that the average investment into rural health institutions by the government each year may be 72 billion RMB. To complete the system that urban hospitals aids rural health institutions, every tertiarylevel urban hospital must build long-term cooperative relations with about 3 county hospitals (including some well-equipped township health centers). The project of ―Ten thousand doctors supporting rural health‖ will be continued in the next 3 years. From 2009, the government will pay for the tuition fee and educational loans of those medical graduates who voluntarily work in the township health centers in the Middle and West areas for 3 years.

IV. The Progress of Pilot Reform of Public Hospitals The pilot reform of public hospitals is the key and most difficult point. The plan encourages different forms of capital to take part in the reform of public hospitals, but to a reasonable extent. Although the government‘s input to common public hospitals may not 8

http://chab.org.cn/NewsDetail.asp?id=5024 http://www.cnr.cn/gundong/200908/t20090814_505430443.html 10 http://www.cnwest.com 11 http://hn.house.sina.com.cn/news/2007-03-02/08107079.html 9

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exceed 50 billion RMB, the public hospital still need to keep its principles of public welfare and social efficiency, and the ratio of special services offered should not exceed 10% of its whole services. The plan also emphasized that the three compensating channels of the public (service charge, sale of drugs and financial subsidy) should be gradually changed to two channels: service charge and financial subsidy. Moreover, private hospital is also allowed to enjoy the same status as public hospitals like contracting to be designated healthcare providers with basic health insurances, applying for medical research funds, assessing professional titles, and continuing education. The reform of public hospitals is going to be experimented in 2009 and gradually launched in 2011.

V. The Establishment of the Essential Drug System As the Implemental Opinions on the Establishment of National Essential Medicine List was issued in August 2009, the construction of essential medicine systemwas formally launched. The essential medicines fit the need of basic healthcare, the price are set at a reasonable level so that the public can obtain it fairly. The public health institutions at the basic level would completely use the basic medicines and other medical institutions would use it as required. The government would manage the choice, production, circulation, usage, pricing, reimbursement and supervision of the essential medicines. The Items of Essential Medicines revises once three years and all the basic medicines are included to the scope of reimbursement of health insurance with higher reimburse ratio. The National Committee of Development and Reform determines the retail prices of the medicines and the public hospitals must sale these medicines at the same prices. The 15% medicine markup held by the hospitals will be eliminated and will have significant effect on the prices of these essential drugs after the implementation. According to the relevant official estimation, the prices of these medicines have declined about 10% and the patients can save 25% of their money when they purchase medicine at basic-level health institutions12. The Items of Essential Medicines (stock and use at basic-level health institutions), which includes 307 categories of chemical and Chinese traditional medicines was publicized on August, 2009, and was formally in effect after 34 days. In 2009, the essential medicines will be completely stocked and sold at the prices regulated by the ―Items‖ in 30% public hospitals and health centers of every province (municipality, autonomous region); in 2011, the essential medicine system will be basically established; in 2020, the essential medicine system will completely cover the whole country.

12

http://www.beijing.net/html/89/n-3989.html


263

SECTION 4: THE PROBLEMS AND TARGETS OF THE NEW HEALTH REFORM SCHEME I. Problems Need to Make Further Definition in the New Health Reform Scheme Even the most carefully designed systems or action plans has some non-optimal aspects which need further discussion, but the merits of the plan itself cannot be denied. In the plans of new health reform, some points are still incomplete and need further practice and prove.

1. The Coordination between Government and Market’s Roles The responsibility of the government is emphasized in this new health reform, and the purposes of realizing the fairness of health system and supplying public health and medical services as public goods are also put forward to strengthen health administration‘s right of dominating resources. But meanwhile, the plans implied the expectations of the combining the functions of the government and the market, which is also a perennial topic for other countries. The government is clear about its dominant status in providing public health and basic medical services, and will ensure the public welfare of the public hospitals; but it has also announced that it will actively support the development of private health institutions and encourage different investment types and methods to participate in health services. It also encourages qualified private capitals to establish and operate non-profit hospitals. It indicates that the authorities expect to keep the market mechanism in the health system to improve or optimize the efficient allocation of health resources. However, how to distinguish concepts like public hospitals and private hospitals, for-profit- hospitals and non-profit hospitals? How many public hospitals should remain and how should they distribute? How to retain the competitiveness of the public hospitals and keep their public welfare at the same time? How should the basic health insurance pay for the health services produced by private hospitals? All these questions need to be considered in detail in the future. It is a critical issue of how to define the role of public hospitals in the coordination between government‘s dominance and the adjustment of the market; this issue is also a hot topic for the public. In the reform plans, the government will put more into this field; about 150 billion RMB will be injected to public hospitals for basic construction, equipment purchasing, key subjects developing, fees for retired staff, and the compensating of policyrelated losses. These are basically the same as before. In 2007, the gross income of stateowned hospitals was 375.4 billion RMB, and 28.5 billion came from the financial subsidy, which only took up 7.6% of the total13. Therefore, the additional 50 billion RMB, though helpful, cannot have substantive influence to the income structure and change the incentives of profit-generating of public hospitals. As the costs of staff and operation have not been dealt with in the reform plans, the main payer for public hospitals is the basic health insurance system. 13

The Ministry of Health: The Annals of Statistics on Chinese Health, Chinese Peking Union Health College Press, July, 2009

264


The aim of establishing essential medicine system and cancelling 15% markup of pharmaceuticals is to radically cure the problem of ―profiting through markup money on medicines‖. In the past, the income of medicines was the major source for public hospitals. In 2007, for example, the income from pharmaceuticals in public hospitals was as high as 200 billion RMB 14 . If the markup on medicine is cancelled, how should public hospitals be compensated? In improving the pilot reform of public hospitals and reducing the ratio of public healthcare providers, what principle should be the criteria, the geographic distribution or the economy of scale? What is the right proportion of public hospitals in the health system?

2. Private Village Clinics The biggest bright spot in this reform is that the government has determined to offer basic health services to the society as public goods. As the village health stations and its health staff undertake the rural public health services, they are the main providers of rural basic health services. The plans put forward that health reform in countryside can be realized in different ways, and every administrative village should have at least one health stations; the public health services it performs can be purchased by government. As for the commonly existed problem-the service quality in village health stations, the plans have not paid enough attention to it, and for the problem of private village doctors, the government would only deal part of it. Although the village health services are supplied by the government as public goods, whether the government will purchase them by category and number, or in other ways still need further practice. 3. The Financial Burden of Governments at Different Levels The government has realized that financing to basic health care from government tax is the guarantee of fairness of healthcare; and the financial support to public hospitals is the guarantee of public welfare. Moreover, the government‘s subsidy either to the supply side (health institutions) or to the demand side (the demand for health insurance) can reduce the health burden for individuals, thus, the effect of tax in maintaining the fairness of fundamental health care should be insisted. In the input from central and local government, the local government takes the main responsibility, but the central government will still take charge in coordination because the input from local finance varies in different regions. Though the input from central finance was emphasized in the reform plans, the input obligations of the central government were not announced specifically. As the regional disparity is obvious in China, the effect of central finance should be enforced in particular and it should undertake the obligations of paying for public health like immunization planning, severe infectious diseases preventing and controlling, fundamental health care for civilians and constructing public hospitals and so on, other responsibilities will be taken by the local governments. In the additional 850 billion inputs, the ratio of the central finance and local finance is 4:6, but in the period of 2006-2008, the ratio was 27:73, hence the input proportion from central government in the next 3 years is increasing.

14

See 11


265

4. The Proposal on General Practitioner and Referral System When referring to standardization of rural health practice, the plans put forward the idea that basic health institutions should have general practitioners; thus bring up the concept of general practitioner for the first time. What is clear is that general practitioners are the working staff in basic health institutions, but the criteria, regulation and rights have yet to be clarified. The referral system is the target of setting health institutions at different levels, and the breakthrough point in solving the unreasonable structure of health resource distribution. After the plans have been carried out, a system that keeps first diagnose in the basic level, then treatment in hospitals of different levels and bi-directional referral can be realized in cities from community service centre to general or specialty hospitals, in countryside from village health stations to township health centers and county hospitals. The plans also advocated guiding patients to seek healthcare at lower-level health institutions, and gradually realize the system mentioned above; but there were no specific regulations for countryside. There are 5 intermediate targets are expected in the health reform: quality, availability and accessibility of care; fairness of healthcare financing, efficiency and cost. Through the 5 targets, the aim is to realize the ultimate goals of improving people‘s health,preventing risks of diseases and enhance public satisfaction . In April, 2009, the new health reform plans publicized with large amount of affliated projects, though only half a year passed and it is too early to evaluate the effects, the direction of developmental of China‘s health system has basically been clearly designated. 5. Re-defining the role of Chinese Traditional Medicine In this health reform, the Chinese traditional medicine has been attached great importance; especially the prepared Chinese medicinal slices were completely brought into health insurance in the items of essential medicines. The policy purpose is to make use of the price advantage of Chinese traditional medicine to reduce people‘s health cost burdens. The advantages of ―safe, convenience, effective, and cheap‖ are much suitable for the need of community and rural health services. The characteristic of general practice of Chinese traditional medicine enable it to have unique advantages in changing the situation of lack of medicines and health care in rural areas. Its advantages are also reflected in the prevention and cure of severe infectious or chronic diseases, the health protection of older people, women and children, the establishment of the rehabilitation system of critical illness, and the health economics. Therefore, the health reform plans redefined the role of the Chinese traditional medicine, but the concrete plans still need specific research.

II. The Expected Goals of the New Health Reform Basic health services are universally accessible: the plans of the new health reform publicized in April, 2009 have clearly stated that everyone can enjoy basic health services by 2012. Universal accessibility and fairness of health care all underline fairness as a goal for the reform. The fairness of health financing: in the new health reform, 2/3 of the 850 billion RMB input is planned to invest in the demand side, namely the official subsidy for the basic health

266


insurance. It increases the public funds, especially the level of tax subsidy, and the insurance payment for health inpatient care and serious outpatient cases. Moreover, it accelerates expansion of health insurance coverage and improves the payment capability; thus, the individual out-of-pocket payment will decrease constantly, and the fairness of health financing will be guaranteed. The quality of health services has further improvement: the quality of health services is the major benchmark to measure whether the health reform is successful. To deepen the reform we should not only enlarge the scope of health insurance and increase the input from the government, but also attach importance on internal management and improve service quality. It is the essential aim of health reform. The new plan guarantees the fairness of health care system and the responsibility of offering healthcare as public goods, but it also encourages market competition to improve service quality and efficiency. The cost and efficiency are both considered: to balance the cost and efficiency is a common challenge for all the countries that undergo reform of health system. When the competition system is been brought in, the cost should be noticed too, because there are quite a few lessons from other countries. The generalized concept of national health has been established: the generalized concept of national health should leap out of the scope of medical care, and the health problems should not be treated in isolation; because health system is only one of the decisive factors, other factors including education, housing, water and sanitation, nutrition and transportation. the level and distribution of these factors all influence the conditions of national health , and this is the problem of balanced development of macro economy and the health system. Translators: Cai Yazhou (SUFE), Wu Shulin (SUFE) English Version Editors: Lv Mei (SUFE), Xu Ye (Harvard)

REFERENCES The statistic information centre of the Ministry of Health, December, 2004. the Special Study and Investigation on Health Reform：The Third Sociological Assessment Report of National Health Investigation. Chinese Peking Union Medical College Press. The CCP and central government, April, 2009. The Views on Deepening Health System Reform. The CCP and central government, April, 2009. The Implemental Plans on Deepening Health System Reform, 2009-2011. The Ministry of Health, July, 2009. The Annals of Statistics on Chinese Health, Chinese Peking Union Medical College Press. Cheng Tsung. M, 2008. China‘s Latest Health Reforms: A Conversation with Chinese Health Minister Chen Zhu, Health Affairs, Vol.27, No.4 (2008):1103-1110. Hsiao William.C and Maynard A., 2009.Foreword, Health Economics, Vol. 18, No S2, July 2009: 1-2.


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Wagstaff A., YW., Lindelow M. and Hsiao William.C, 2009. China‘s Health System and Its Reform: A Review of Recent Studies, Health Economics, Vol.18, No S2, July 2009: 723.




CHINA‟S HEALTHCARE REFORM: NEW BEGINNING AND NEW CHALLENGES Liu Yuanli* The paper by Wang et al on China‘s new round of healthcare reforms gives a comprehensive review of China‘s healthcare reform initiatives in the past, and provides an overview of the major contents of the State Council Decisions on Deepening Healthcare Reform as well as the Implementation Plan of Deepening Healthcare Reform for 2009-2011, both of which were announced by the Chinese central government in April 2009. In addition, Wang‘s paper also discusses some major unresolved issues including the proper roles of the government and market in healthcare, while offering an optimistic outlook of the potential impact of the reform measures. Although I share many of the views of the authors as well as their sense of optimism about the positive impact of the reform plan when it is successfully implemented, I like to point out that our sense of optimism is based on the assumption that the major decision makers will continue their efforts in sorting out major unsolved conceptual and practical issues, and face new challenges head on throughout the whole implementation and policy adjustment process. I usually use three criteria to evaluate ―quality‖ of a new public policy: a. measurability of the policy goals, b. operational feasibility, c. effectiveness in terms of the actual impact. Applying the framework to analyzing the five major policy provisions for the next three years of the reform plan, we can develop a set of different realistic expectations about the policies because five policies would score different points on the 3 accounts. For example, some policies (e.g. Establishing Essential Drug System) do not have quantifiable goals, thus it would be hard to judge the success of the policies. Nonetheless, I believe that the reform would stand a good chance of success, if the policy makers pay adequate attention to strengthening three aspects of China‘s healthcare system: capacity-building, incentive structure (making major-stake-holders motivated to do the job they are supposed to do), and accountability (holding major-stake-holders accountable for their actions). In the remainder of * Dr. Liu Yuanli teaches at Harvard School of Public Health as well as at Tsinghua School of Public Policy and Management.

270

Liu Yuanli

this short essay, I will use the above frameworks to analyzing 5 major questions facing China‘s next steps of healthcare reform. First, how to reform China‘s provider payment system? Fee-for-service is the predominant payment method currently used in China to pay providers. Under this system, doctors are paid more for doing more. In addition, the prices of medical services are set by the Chinese government rather low, relative to the costs. Meanwhile, doctors in China both prescribe and dispense drugs. Drug sales, where the mark-up are as high as 15-20%, account for about 45% of the total healthcare expenditure in China. Therefore, unless the payment system is reformed, China‘s healthcare cost escalation problem will continue to exist, in large party due to the strong financial incentive for the providers to over-prescribe. Of course, there are pros and cons with different alternative payment methods such as DRGs, capitation payment and so on. China needs to conduct some well designed and evaluated pilot projects to test out new payment systems that would work in China. Second, how to regulate uses of the ―essential drugs‖? If cost-effectiveness is used as the sole principle to select essential drugs, some drugs, even though they may be necessary for certain patients such as patients suffering stroke, may be excluded from the formulary because they are expensive. Since China has remarkable inter-regional disparities, implementing the ―Essential Drug System‖ uniformly across China may turn out to be difficult. Third, how to increase effective demand for the community health se4rvices? The Chinese planed to use about one third of the increased government investment in health sector (about US$125 billion over the next three years) to strengthen China‘s primary healthcare facilities. This would include building or refurbishing many community health centers. The idea is that once the ―quality‖ of community health centers is improved, people will start using them more. However, since community health centers currently do not have the kind of trust people have in big hospitals, the effective demand for community health services may not increase as significantly as the policy makers have imagined. So, the challenge is how to increase people‘s perceived quality of and trust in the reformed community health centers, so that people will choose them as their trusted source of care, rather than going directly to big hospitals. One way to do it is to develop vertically integrated healthcare systems. Policy makers can encourage such pilot initiatives to test their effectiveness in improving healthcare efficiency and quality. Fourth, how to strengthen the prevention and public health function of medical organizations. China‘s current healthcare reform plan includes a provision to strengthen China‘s CDC system. However, since hospitals and other healthcare organizations are places, where people interact with the system most frequently, they represent a particularly challenge as well as opportunity to carry out preventive strategies such as health education. Meanwhile, most of the clinical doctors have minimal training in public health and hospitals do not pay adequate attention to prevention and public health. Fifth, how to strengthen the social mission of China‘s public hospitals? Currently, China‘s public hospitals behave like a profit-maximizer, because government budget allocation only accounts for about 7% of their income and they have to generate revenue to pay doctors‘ salaries and bonuses etc. Therefore, public hospitals often welcome rich patients while turning away patients who cannot pay the bills. How to develop a social mechanism to finance the ―uncompensated care‖ remains a critical issue to be worked out.

China‘s Healthcare Reform: New Beginning and New Challenges

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In answering the above questions, government intervention and more regulation will be of course a major approach, especially when it comes to improving equity in healthcare. But in light of existing regulatory failures and government corruption etc, mechanisms of market competition can and should also be used to help increase efficiency, especially in the area of healthcare delivery. A better healthcare system is the one, where both government and market interventions play roles in areas, in which they must and can play an important role.

REFERENCES Wilensky GR. Healthcare reform: a work in progress. Healthc Financ Manage. 2009 Aug; 63(8):28, 30. Chen Z. Launch of the health-care reform plan in China. Lancet. 2009 Apr 18; 373(9672):1322-4. Yip W, Wagstaff A, Hsiao WC. Economic analysis of China's health care system: turning a new page. Health Econ. 2009 Jul;18 Suppl 2:S3-6. Wagstaff A, Yip W, Lindelow M, Hsiao WC. China's health system and its reform: a review of recent studies. Health Econ. 2009 Jul;18 Suppl 2:S7-23. Liu Y. The anatomy of China‘s public health system. In Freeman CW. Eds. China‘s capacity to manage infectious diseases. Center for Strategic and International Studies, Washington, DC: 2009. Liu Y. Reforming China‘s healthcare: for the people, by the people? Lancet 2009; Vol. 373; 281-283. Liu Y, Rao K, Wu J, Gakidou E. China‘s health system performance. Lancet, 2008; Vol. 372 No. 9653 pp 1914-1923. Hu S, Tang S, Liu Y, Zhao Y, Escobar M, De Ferenti D. Reforming how healthcare is financed and paid for in China: challenges and opportunities. Lancet, 2008; Vol. 372 No. 9652 pp 1846-1853.



Chapter 10

PILOT ZONES FOR SUPPORTING COMPREHENSIVE REFORMS: A NEW PLATFORM FOR FURTHER INSTITUTIONAL REFORMS 

Zhao Shaoqin＊, Fan Lina and Wang Xiwei In the process of reform and opening up during the past 30 years, explorations by ―experimental units‖ have played a key role in China. For major reforms, the Chinese government usually first experiment with projects and gradually expand to other areas only after gaining useful experience. This is the most valuable piece of experience that leads to the success of China‘s reform and opening up. As early as in 1980, the Chinese central government decided to develop Special Economic Zones (SEZs) on a trial basis, in specific areas in Shenzhen, Zhuhai, and Shantou in Guangdong province and Xiamen in Fujian province. Hereafter, from coastal areas to areas along the Yangtze River and boarder areas, from eastern areas to central and western areas, the level of China‘s reform and opening up has been ever deepening and the scope been ever widening. In 1980s and 1990s, China has launched two sessions of comprehensive supporting and coordinated reform trial programs in urban areas which speeded up the reform of economic structure in their areas and the whole country. Since the beginning of 21st century, China‘s reform of economic structure has entered a stage where critical problems need to be addressed. Carrying out comprehensive supporting reforms in areas which are typical, representative and with good economic foundation becomes a must for deepening the reform and opening up in the period. In June 2005, Chinese government approved the Shanghai Pudong New Area to carry out comprehensive supporting reform on a trial basis. In accordance with the principle of careful selection and strict control, the central government has selected certain regions in eastern,  This paper was completed with the guidance of Professor Li Xiaoxi--Dean of Research Institute of Economics and Resource Management, Beijing Normal University. In the writing process, Researcher Wang Jianing from Chongqing Academy of Social Science has offered ardent instruction and deliberation. Gratitude to them all. ＊ Dr. Zhao Shaoqin earned his PhD degree from the Institute of Economics and Resource Management of Beijing Normal University. Email: [email protected]

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central and western areas to launch pilot reforms of different types. In April 2006, the State Council released Proposals on Issues for Further Developing and Opening the Binhai New Area in Tianjin to prove the Tianjin Binhai New Area to be a National Comprehensive Supporting Reform Pilot Zone (CSRPZ). In June 2007, Chengdu and Chongqing were approved to build national CSRPZs for Balanced Urban and Rural Development have been approved. In December 2007, Wuhan city circle and Changsha, Zhuzhou and Xiangtan city cluster were approved to build national CSRPZs for Building a Resource-efficient and Environment-friendly Society have been approved. Shenzhen City, as a special economic zone, has been playing the role of a ―demonstrative window‖ for reform and opening up. In December 2008, the State Council officially confirmed Shenzhen as a aational CSRPZ by authorizing the Development Plan of reform in the Pearl River Delta (from 2008 to 2020). By now, the echelon distribution layout of 7 national CSRPZs from the eastern areas to the central and western areas has basically taken shape.

Tianjin Binhai New Area Wuhan city circle

Chengdu

Chongqing

Shanghai Pudong New Area

Changsha,Zhuzhou and Xiangtan city circle

Shenzhen

Figure 10-1. Distribution Sketch Map of the Seven National CSRPZs .

Representative domestic researches suggest that understandings of national CSRPZs can be from three levels: firstly, the ―national level‖ indicates that the trial zones should play an exemplary and leading role in the regional economic development of the country. Secondly, the ―comprehensive supporting reforms‖ suggests that the reforms are comprehensive and coordinated rather than some scattered single ones in order to realize multi-level and in-depth coordinated development. Thirdly, the ―pilot zone level‖ implies the head start of comprehensive coordinated reforms, which specific economic zones carry out trial reforms in

Pilot Zones for Supporting Comprehensive Reforms

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all respects concerned with social economics and lives. With a view to systematic innovation, 1 reforms will be promoted through overall systematic development. Chinese scholars usually divide the seven pilot zones into two types. One type is to assume responsibilities of comprehensive and all-round reforms, this type of zones include 2 Shanghai Pudong New Area, Tianjin Binhai New Area and Shenzhen . The other type is to shoulder reform responsibilities that are thematic and in key areas, such as Chongqing and Chengdu that aim at balanced urban and rural development, also Wuhan city circle and Changsha, Zhuzhou and Xiangtan city cluster that aim at systematic reform innovation related 3 to building of a resource-efficient and environment-friendly society.

SECTION 1: SHANGHAI PUDONG NEW AREA, TIANJIN NEW SEASHORE AREA AND SHENZHEN CITY--LEAD THE WAY IN BUILDING A SOCIALIST MARKET ECONOMIC SYSTEM China has a vast territory, so that it is hard for different regions‘s level of economic development to develop in line with each other, and the degree of systematic perfection are highly varied. Under such circumstances, it is necessary to choose some areas with good economic foundation to lead the way in overall reform and building a socialist market economic system. Shanghai Pudong New Area and Shenzhen as vanguards in China‘s economic development during the past 30 years, and Tianjin Binhai New Area which is greatly expected to be the ―future polar of economic increase‖ are appointed as national CSRPZ.

I. Shanghai Pudong New Area: Building a Core Area of International Financial and Shipping Center Shanghai Pudong New Area is located in the eastern part of Shanghai, near the mouth of the Yangtze River, and face the Shanghai downtown in distance. In April 1990, the Chinese government announced the reform and opening up of Shanghai Pudong New Area. In the short span of the last 19 years, earthshaking changes have taken place in this area. The State Council ratified Nanhui District is assimilated into Pudong New Area. The enlarged Pudong 1 Hao Shouyi, Gao Jintian: An Analysis of CSRPZ in issue 2, 2006 of China Opening Herald. See also Wang Jianing, Hu Xinhua: Management System Investigation of CSRPZ : Shanghai Pudong and Tianjin Binhai in issue 8, 2009 of Reform 2 Some scholars suggest that the reforms in Shenzhen are concentrated in administrative management thus they can‘t be listed in the first category. This paper considers that Shenzhen as a Special Economic Zone shoulders tasks of leading the way in completing socialist market economic system. The plan of Shenzhen comprehensive supporting reform involves the entire major reforms which elaborates efforts to make breakthroughs in public institution and foreign-related system reform besides administrative system reform. Thus this paper lists Shenzhen into the first category. 3 Some scholars suggest that the status and function of CSRPZ varies as the approval authorities are different. For example, the status and function of Shanghai Pudong New Area and Tianjin Binhai New Area which are approved by the State Council are higher than other Pilot Zones that are approved by the National Development and Reform Commission. This paper doesn‘t accept this kind of division.

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New Area covers an area of 1210 square meters with a resident population of 4.12 million, amounting to roughly a fifth that of Shanghai, and its GDP totaled RMB367.6 billion accounts for 26.8% of Shanghai. Since 2005, the Shanghai Pudong New Area have launched dozens of reforms in government administration system, financial system, technology system, social service, foreign economic relations, the urban-rural dichotomy and so on, significant progresses and breakthroughs have been achieved in some key areas and links. Especially after the annexation with Nanhui District, Pudong New Area ―starts a new undertaking‖ further intensifies reform, in a bid to build a core area of international financial and shipping center.

1. Positioning Objectives as “Small Government, Big Society, Big Service”, Serviceoriented Government Function is Highlighted. Shanghai Pudong New Area explores a new governance model with institutional framework establishment as the basis and ground floor as the reform unit. Pudong New Area takes systematic reforms in strengthening the administration and performance management, establishment of grass-roots accountability mechanisms and public oversight mechanisms, exploring new governance models in industry organizations and new type community-based organizations, optimizing the work of administrative examination and approval, eadministration Promotion. It is in a bid to realize the so-called ―two highs and one low‖— high administrative efficiency and transparency, with low charge. By establishing a ―1 plus 23‖public service system, which radiates across the whole district, consisting of a district level civic center and 23 community level service centers for accepting affairs, Pudong New Area promotes the functions of the street towards the provision of public services, monitoring the activities of government power.

2. Based on Financial Innovation, Making Efforts to Optimize the Financial Ecology The reform of the financial industry is a breakthrough in the overall comprehensive reform of Pudong New Area. With Lujiazui Financial and Trade Zone as the carrier, Pudong makes frequent "bright spots" in its financial reform. Shanghai Stock Exchange launched the Shanghai 50ETF fund products and warrants product; Shanghai Futures Exchange has also launched metallic zinc and gold futures products. The inter bank foreign exchange market maker system and the Shanghai Inter Bank Offered Rate (SHIBOR) have also been implemented. Podong‘s reforms put on stage a number of ―Firsts‖. Mainland China's first financial derivatives exchange was formally established in Pudong; Pudong New Area People's Court established the nation's first financial division. Besides, Hua‘an Fund Management Corporation was approved as the first domestic company to conduct pilot QDII fund. The financial ecological environment has been significantly optimized. People‘s Bank of China Shanghai headquarters and many other financial institutions, including the only two domestic currency brokerage company--Shanghai Guoli Currency Brokerage Company and Shanghai International Monetary brokerage Company--have settled in Pudong. The enactment of Measures for the Implementation of Pudong New Area Financial Professionals Gather facilitated the gathering of talents.


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Column 10-1. Shanghai Pilot of „Governance, Handling, Assessment‟ Reform

in Educational Sector 4

In June 2005, Shanghai Pudong New Area government signed Agreement of State-run Donggou High School‟s Management be Commissioned with Shanghai Victory Education Management Service Center (hereinafter referred to as Management Center)—a private–run education management institution locates in Puxin, raised the curtain of ―Governance, Handling, Assessment‖ gear reform in social affairs. According to the Agreement, during commissioned management period, the nature of the school, its subordinate relationship with the Bureau of New Area Social development, the grant from government and its other duties remain unchanged; students‘ education expense will not increase. The New Area government pays annual management fee to the Management Center for its government service. The Management Center practices self-management in appointing head teacher, adopting educational philosophy, innovating management model, training teachers, organizing teaching after its taking charge of Donggou High School. The Pudong New Area also establishes the Shanghai Pudong Development Education Assessment Center. Ultimately, the quality of the school is assessed by professional intermediaries assessment bodies rather than by the government or the Management Center One year later, the Assessment Center took the first assessment over Donggou High School which shows that great changes have been taken place in the school‘s teaching achievement compared with that before the mandatory administration. Anonymous survey indicates that teachers‘, students‘ and parents‘ degree of satisfaction towards the school‘s victorious education have reached 92.2%, 94.7%, 97.7% respectively. Donggou High School‘s taking lead of the ―Governance, Handling, and Assessment‖ comprehensive reform had a rather big impact in the education sector. The Ministry of Education sent staffs to appraise this model and gave it a high evaluation The core of the ―Governance, Handling, and Assessment‖ comprehensive reform is that it clarfies the relationships among government, school and society, crystallizes all sectors‘ functional positioning with the premise of transformation of government functions. Governance is no longer that the government takes on all things no matter big or small. Instead, the government implements macro-management through planning and guidance, policy design, supervision and inspection. Some detailed professional service and affair management are left to social professional bodies by buying their services. Handling means the schoolmaster is fully empowered in resources of human resource, capital, and material assets to run a school more freely which will fully motivate the initiative and creativity of a school. Assessment is to establish specialized non-governmental assessment organizations which remark impartially on educational decisions, teaching achievements and so on. Through the establishment of a ―Governance, Handling, Assessment‖ mechanism in which sectors are separated but coordinated, working potentials of government, school and society have completely been unleashed, and the enthusiasms from all parts have been motivated.

Source: Website of China Education Pioneer Net, http://www.ep-china.net/content/news/c/20070823104846.htm

4 Quote from related reports from PCPChina, http://www.ep-china.net/content/news/c/20070823104846.htm

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3. Trinity of “Financing, Services, Rights Protection”, the Park Formed a Delegation to Promote Scientific and Technological Innovation The Pudong New Area played its unique advantage and have built up a science and technology investment and financing mechanism. The government funds played a leading role in driving various types of social capital, entrepreneurial venture capital and bank credit to blend, thus created a venture investment guide fund, special funds for the pilot of intellectual property rights pledge financing, and the SME credit guarantee system for the building of special funds to support enterprises technological innovation. It has built a multi-level technology platform for public service consists of nonprofit, both nonprofit and operational and corporate-owned shared facilities. Currently, the Pudong New Area has owned the most intensive public service platform of technology, the highest level of technical services, and the greatest extent of shared public services. It has basically built up an integration of intellectual property rights protection mechanism for dispute resolution that is composed of judicial protection, administrative law enforcement and industry self-regulation. It has set up an intellectual property rights dispute settlement procedure, and established a trial model of ―Three Traditional Procedures be consolidated to One System‖; established an emergency mediation mechanism for disputes of intellectual property rights protection. The Area has set up an Intellectual Property Rights Protection Center and Association to continuously improve the intellectual property rights protection mechanism that is businessoriented and private self-regulated. ―Focus on Zhangjiang‖ is an act of co-partnership between industry, teaching and research. Six science and technology innovation Pilot Parks, including the National Torch innovative experiments in urban areas, National Hi-tech Standardization Pilot Park, and National Intellectual Property Pilot Park in Zhangjiang Hi-Tech Park, and 11 state-level industrial bases including National Base of Integrated Circuit Industry have entered Zhangjiang. In the past six months, 159 national key scientific and technological special projects with a total investment of over 7.7 billion, including Chinese-made large aircraft R&D Center, the National Broadband Center, the National Antibody Engineering Center, and Shanghai Synchrotron Radiation Facility took root in Pudong. 4. A Good Wind Relies on Outside Force; the Comprehensive Reforms Kindled a New Economic Impetus to Develop Open Economy. Pudong first carried out the pilot project of ―Nine Measures‖ in reform of multinational companies‘ foreign exchange management, and gave an effective solution to the knotty problem of multinational corporations‘ management in foreign exchange capital. Positively building a public service platform of outsourcing, Pudong founded the county‘s first national service outsourcing research center-- China Service Outsourcing Research Center. It has formed an industrial layout with information technology service as the lead, financial background service as the highlight, R&D design service as the speciality, and consultancy, logistics, human resource, finance, exhibition and other professional services as 5 complementarities. 5

Pudong Service and Innovation: Impetus from Service Outsourcing, Pudong Service Outsourcing Net, 2008.11


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Moreover, Pudong actively promote reform of the port management system, and constantly enhance the service functions and competitiveness of Pudong port. Take the combination of service outsourcing and customs reform as example. In 2009, the Pudong Area chose some biomedical R&D outsourcing companies in Zhangjiang Hi-Tech Park to carry out pilot measures for convenient customs clearance such as ―early customs and cargo clearance as soon as it arrives‖, ―24-hour reservation clearance‖. These measures have greatly speeded up the clearance of raw materials for pharmaceutical R&D. Table 10-1. Pilot Reforms List in Pudong Port Management Mode Sequence number 1 2 3

Content of Pilot Reforms Exploring the Pudong International Airport as a pilot to carry out ―three forms amalgamated into one‖, that is amalgamate the customs, border control, inspection and quarantine declaration form Promoting the ―one document for two customs declarations‖ in import and export of goods, and network monitoring, expanding the green channel of foreign trade Carrying out the pilot project of integrity enterprises in exempting 3C

Exploring inspection and quarantine supervision model innovation in service center and logistics center Innovating customs supervision model in exhibition industry. Based on Shanghai Pudong International Exhibits Monitoring Service Center, Pudong implement ―unified customs, unified storage, and unified supervision‖ to provide one-stop 5 service for the international exhibition in international exhibition record, customs clearance, inspection, leaving purchase, cancellation and other services. Carrying out reforms in popularizing paperless customs clearance and online filing system of international exhibitions Carrying reforms of inspection and quarantine of imported biological materials in 6 Zhangjiang Hi-Tech Park Source: Shanghai Customs of the People‘s Republic of China: http://shanghai.customs.gov.cn/publish/portal27/tab20382/module51836/info130022.htm 4

5. Making Efforts in Reforming Rural Management System, Coordinating Urban-rural Integration. In planning the layout, Pudong broke the situation of separated management between urban and rural areas, coordinated regional development planning and new town planning and construction; promoted the common development of urban and rural areas; actively promoted the ―village-owned separation‖, ―one branch of two committees‖, ―Union Village management‖ as the main content of reforming the rural management system, deepened the village collective asset management system, enhanced the management level in rural areas; promoted the merger of management system of urban and rural social undertakings and infrastructure investment integration. At present, elementary education has achieved standardization in four areas of allocation criteria, hardware equipment, information platform and teachers training.

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II. Tianjin Binhai New Area: Building into the Growth Pole in Northern China Binhai New Area is located in Tianjin‘s eastern coastal part, stands at the heart area of Bohai Rim Area, including 3 administrative districts of the Tanggu District, Hangu District, Dagang District and the Development Zone, the Bonded Area, Tianjin Port, and part of the Dongli District, Jinnan District, with a planned area of 2270 square kilometers and the resident population of 2.03 million. In accordance with the positioning by the State Council’s Proposals on Issues for Further Developing and Opening the Binhai New Area in Tianjin, the Binhai New Area will be based on Beijing, Tianjin and Hebei, serves Bohai Rim Area, radiates the ―Three North Region‖, and faces the Northeast Asia. It strives to build itself into a portal in opening up in northern China, a high level base of modern manufacturing and R&D transformation, the international shipping center and international logistics center in northern China, and gradually become a livable ecological new city with economic prosperity, social harmony and environmental beauty. In recent years, Tianjin Binhai New Area launched a series of important reform measures in finance, foreign affairs, science and technology, and land. It has made important progress in areas of expanding direct financing channels, promoting foreign exchange reform, improving the financial environment, management innovation in Dongjiang Bonded Port, service outsourcing base construction, promoting regional economic cooperation and technology platform construction, linkage of increase in urban construction land and reduction in rural construction land.

1. Financial Reform Docks Corporate Finance to Build a Platform for Financial Transactions Binhai New Area has organized ―China International Private Equity Forum‖ twice, and actively promoted the abutment of fund‘s equity investment and capital of corporate equity financing. In addition, Tianjin Equity Investment Fund Association and the Bohai Industrial Investment Fund were established. Moreover, Binhai New Area carried out Small and Medium Equity Fund pilot projects and preparation of the Shipbuilding Industry Investment Fund. Registered small and medium equity investment funds in Tianjin totaled 149 with the registered capital (contractual capital) of nearly RMB 40 billion. Binhai International Equity Exchange is conducting trial operation with 427 identified founding members, 183 enterprises applicants to lists for financing and 52 strategic cooperation agencies. Based on this platform, Binhai New Area has basically established a corporate equity market and private equity transaction market. Binhai New Area has preliminarily formed a comprehensive financial service system with banking and insurance as the body, including trust, leasing, funds, securities, futures, factoring. 2. With Port Construction as the Carrier, Innovating Port Management System In 2007, the world's largest artificial deep-water port--Tianjin Port built a 250,000-ton deep-water channel. Since then, Tianjin Binhai New Area has set up 10 inland ―non-water ports‖, opened an e-port and logistics information platform, and practiced 24-hour customs


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clearance system. Binhai New Area was the first in China launched the ―non-water port‖ regulatory approach. The companies only have to handle once the customs procedures in the ―non-water port‖; goods can be directly cleared through customs after their arrival. So, processing time of integrated customs clearance operations can be shortened from 60 hours to 2 hours. Dongjiang Bonded Port Area develops fast. The Port Area introduced accredited agencies like Customs, Inspection and Quarantine, Maritime, Border, Foreign Exchange, Taxation to form a Co-supervision Coordination Committee. With the former Dongjiang Bonded Area Administrative Committee, the port area is building an international logistic operation center that radiates and drives the “Three North” region, opens up to the domestic and overseas, and fully connects the Northeast Asia Economic Circle.

3. Actively Expanding Multilateral Cooperation, Promoting Contacts between Scientific and Technological Research and Industrial Investment Six science and technology innovation platform including National Biomedical Joint Research Institute, National Engineering Research Center of Cell Products has basically been completed and 20 provincial-level R&D Center for Conversion were put into operation. The Binhai New Area cooperated with the Ministry of Science and Technology and China National Offshore Oil Corporation to develop Binhai Hi-tech Zone and the National Bio-pharmaceutical Industry Demonstration Zone. It also carried out scientific and technological R&D cooperation with the Chinese Academy of Sciences, Tsinghua University and other well-known universities and national research institutes in Italy, United States, Sweden and other countries. Moreover, Binhai Area keeps close relations with big stateowned corporations to promote scientific and technological industrialization. Binhai New Area are exploring new business venture capital model, and have set up two venture capital guide funds. It has already attracted 10-plus famous venture capital organizations including National Science Ruihua and Redpoint Ventures and possesses a total volume of RMB17 billion in venture capital fund. 4. Implementing “Separation of Expropriation and Conversion” in Land Acquisition, Protecting the Rights of Farmers Whose Lands have been Expropriated. In 2008, l4 batches, 510 hectares of land have been expropriated under the model of ―Separation of Expropriation and Conversion‖. By implementing experiments of linkage of increase and reduction in urban and rural construction lands and carrying out two groups of pilot projects of homestead exchanged for commodity house, 100 thousand of farmers have moved into small towns. 5. Developing a Recycling Economy and Creating an Eco-city Binhai established six national recycling economy pilot projects including the Economic and Technological Development Zone, Lingang Industrial Zone and Beijiang Power Plants. Based on the conclusion of five kinds of recycling economy model--the Taida mode, Ziya mode, Lingang mode, Beijiang model, Huaming mode, the Binhai New Area promulgated Tianjin Energy Conservation Ordinance and issued Tianjin Energy Supervision and Testing Regulations and other supporting administrative regulations. The Binhai New Area set up the Eco-city Administrative Committee, promulgated the “China-Singapore Tianjin Eco-City

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regulations”, and formulated the eco-city index system, innovated operating mode of eco-city construction and management and established environment access mechanism and the environmental monitoring warning system. The Binhai New Area also supported business innovation of the Tianjin Emissions Exchange and carried out pilot projects of total amount control of pollutants and emissions trading.

III. Shenzhen: Creating New Advantages, Attaining a Higher Goal Shenzhen is located in the south of Guangdong, on the east bank of the Pearl River and is adjacent to Hong Kong. In 1979, the Chinese Central Government made the decision to establish the city of Shenzhen. In August 1980, the Standing Committee of the National People's Congress approved to set up Shenzhen Special Economic Zone. Shenzhen's total land area is 1952.84 square kilometers of which 395.81 square kilometers is the Shenzhen Special Economic Zone. By the end of 2007, Shenzhen has a permanent population of 8.6155 million of which the registered population is 2.1238 million and the non-permanent population is 6.4917 million. From a small South China Sea coastal town to co-building a world-class metropolis with Hong Kong, Shenzhen is the wonderful epitome of China's Reform and Opening up and modernization drive. As the best developed and the most influential Special Economic Zone, Shenzhen fully played the demonstrative role of ―window‖ and ―experimental field‖ of reform and opening up over the years, and made great contributions to the establishment and improvement of the socialist market economic system. In recent years, Shenzhen actively promoted comprehensive supporting reforms and continuously achieved new breakthroughs in key areas and key links. On December 31st, 2008, the State Council officially confirmed Shenzhen as a National Comprehensive Supporting Reform Pilot Zone by authorizing the Development Plan of reform in the Pearl River Delta (from 2008 to 2020). This indicates a new era of Shenzhen‘s comprehensive supporting reforms.

1. With Transforming the Government Functions as the Starting Point to Promote Administrative Reform Actively Explore Super-Ministry System Reforms In recent years, in accordance with the principle of functional unity, Shenzhen actively adjusted the functions of relevant departments and reasonably settled over overlappging duties among authorities, formed Urban Management Bureau, Communications Bureau, and Bureau of Agriculture, Forestry and Fisheries and other functional bureaus under the SuperMinistry System. Establish a Reasonable Division of the Urban Powers Through the clear allocation and division of powers in urban areas, basic-level government‘s social management functions have been strengthened, and center of social management have been downward shifted. In 2007, Shenzhen began to comprehensively implement the new system of streets law enforcement, 21 specific law enforcement tasks are


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handed to the street comprehensive enforcement unit to carry out. This has effectively solved the problems of weak enforcement and law enforcement involving authorities at various departments at the same level in the basic-level government, and greatly enhanced the efficiency of administrative law enforcement and urban management level.

Actively Carry Out Pilot Projects to Streamline the Administrative Hierarchy In 2006, Buji and Longhua Street were separated into 6 streets of Buji, Bantian, Nanwan, Longhua, Minzhi, and Dalang after which the street community‘s economic management function has gradually been weakened but its social management function has been strengthened. On June 1st, 2007, on the basis of Guangming Industrial Park, the Guangmin New District has been established and pilot projects to streamline the administrative hierarchy have been carried out. Actively Promote the Construction of a Society Under the Rule of Law In 2006, Shenzhen began the fourth round of the administrative examination and the approval of system reform. 697 non-administrative licensing examination and approval projects of 37 municipal government departments were thoroughly examined of which 348 projects were reserved, 98 projects were cancelled, and 251 other projects were pegged as non-administrative licensing examination and approval ones. Shenzhen took the lead in establishing the administrative examination and approval of electronic monitoring system to monitor the whole process of administrative approved items‘ acceptance, undertake, approval, completion, notification and other links. In the end of 2008 the State Council Legislative Affairs Office and Shenzhen Municipal Government signed a cooperation agreement to accelerate the building of a government under the rule of law, developed the construction index system and introduced a set of policy documents to speed up the building of a government the rule of law. Investigate to Further the Reform of the Civil Service Classification Management In August 2008, National Civil Service Agency formally approved and agreed to carry out the civil service classification management reforms in Shenzhen. At present, the relevant departments are studying programs of classified reforms, to work out coordinated management systems according to different characteristics and requirements of the three categories of civil servants for administration, administrative law enforcement and professional technology. Comprehensively Push Forward the Reform of Public Institutions In July 2006, Shenzhen began its classified reforms in public institutions. 124 enterprises and institutions are transformed to business units and 270 companies operated by government organs and institutions have been complete stripping and transference which involving 19000 staffs.

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2. With the Deepening of the Economic Reform as a Focal Point to Promote Transformation of Economic Growth Mode Deepening the Investment and Financing System Reform Shenzhen stipulated the ―government Investment Project Management Regulations and Implementation Details‖ to act as the Construction Agent for the Government's investment projects. The progress of major investment project approval is significantly shortened with the processing time compressed from 386 days to the current 100 days. Deepening State-Owned Enterprise Reform and Innovating the Classified Supervision System of State-Owned Assets Through deepening systematic reforms on labor, personnel and distribution of the municipal government-owned enterprises, standardization of payment distribution system, and the establishment of the performance evaluation system that suits to legal person management system, the healthy development of state-owned economy has been promoted. Through regulatory regime innovation, clear thinking of official performance, improvement of official performance system, adjustment of official performance institutions, improvement of official performance way and timely change in official performance focus, a complete set of new type of state-owned assets supervision and administration system has initially been formed. Strengthening Hong Kong- Shenzhen Financial Cooperation, Increasing the Opening of the Financial Sector In 2008, the Shenzhen Municipal People's Congress passed Regulations to Promote Financial Development in Shenzhen Special Economic Zone. Hong Kong and Shenzhen indepth cooperation in the monetary field, as well as the exploration of the possibility to establish oil and other commodities futures exchanges and other cooperatives were included in the Ordinance. By accelerating financial market integration between Shenzhen and Hong Kong, and expanding business cooperation scope between Shenzhen and Hong Kong financial institutions, the common prosperity and development in Hong Kong and Shenzhen‘s financial industries have been greatly promoted. 3. With Building a Modern Social Welfare and New Social Management System as its Focus, Shenzhen Continuously Deepened Reforms in the Field of Social Livelihood Shenzhen actively promoted and regulated the development of social organizations. In September 2009, Shenzhen issued Shenzhen City issued proposals on furthering and standardizing development of social organization of the city, explored direct registration of industrial and commercial, public welfare and social charity organizations, and tried community social organizations to implement a two-track system of registration and record management. Shenzhen innovated population and social organization management system. Since 2008, the full implementation of local residence permit laid solid foundation for strengthening dynamic management of a liquid population, promoting residential welfare of non-registered population, achieving coordinated development among population, society, economy,


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environment and resources, leading the way in realizing equal basic public services. By the end of 2008, accreditation of residence permit has passed 7 million. The city‘s comprehensive security system has constantly been improved. Through the improvement of city, district, street, community public employment service system, Shenzhen has established a multi-level network of public employment service system. Five major social insurance enrollment rates of residential workers is 98%, the number of children‘s health insured and co-ordinate medical insured people up to 517,000, and the number of labor workers health insurance enrollment reached 6.102 million. Shenzhen‘s Labor workers pension, the number of work-related injuries and health insured ranked first among large and medium cities.

4. With Promoting Implementation and Innovation of Functional Opening Up Areas as the Focal Point, Shenzhen Furthers Expansion of Opening-up and Domestic Cooperation Implementing and innovating functional opening up areas. Actively promote development and supervision mode transformation of the present bonded area, sea port and airport. By implementing development strategy of the ―One District with Two Wings‖, Shenzhen carried out ―zone-port interaction‖ with the eastern Yantian Port and western airport. Shenzhen straightened out the large industrial area management system to fully play the leading role of Export Processing Zone. Promote close cooperation between Hong Kong and Shenzhen. Under the framework of the nine Cooperation Programs with the memorandum of strengthening cooperation between Shenzhen and Hong Kong (referred to as "1 +8" Cooperation Agreement) as the general provisions, Shenzhen further push the Shenzhen-Hong Kong co-operation with the concept of ―learn from Hong Kong and serve Hong Kong‖. Shenzhen continuously refined the implementation of CEPA, through stipulating coordinated policies for infrastructure construction, port clearance, industrial cooperation, the Hetao area development, public investment and other fields.

SECTION 2: THE CITY OF CHONGQING AND CHENGDU - THE EXPLORATION OF THE NEW WAYS OF URBAN AND RURAL DEVELOPMENTAL COORDINATION Urban-rural dual structure has become a prominent conflict of China's comprehensive and coordinated development of economy and society. Although China has largely held the foundations and conditions of dismantling its urban-rural dual structure after years of development, systematical reform and innovation is still needed in order to fundamentally solve this problem and substantially change the institutional arrangements of emphasizing urban areas and ignoring rural ones when offering public resources and services. It is in this context that the state chooses the city of Chongqing and Chengdu due to their typical features in western regions to carry out the comprehensive reform experiment and to realize the national urban-rural harmonious development.

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I. The City of Chongqing: to Drive Large Rural Areas through Development of Large Urban One The city of Chongqing, located in the southwestern part of China‘s interior and the upper reaches of Changjiang River, is a multi-centered and delegation-styled city. In 1997, it became China's fourth directly governed city region. The whole city of Chongqing covers an area of 8.2 million square kilometers, 2.39 times that of Beijing, Shanghai and Tianjing in total, and has the largest jurisdiction cover in China‘s four directly governed cities. By the end of 2007, Chongqing has held a registrated population of 32.35 million. Chongqing is greatly featured by its large city, large country, large reservoir, big mountainous areas and minority- congregated regions, and features intense conflict because of its urban-rural dual structure. It is a microcosm of China's national conditions. Around the urban-rural harmonious development, Chongqing city has selected the region of Jiulongpo, Dianjiang county and Liangping county as experimental points due to the better conditions and the quality of representative, model and leading. Meanwhile, other districts and counties also practise positively, boldly and from their own reality. They start from fields they can afford and have made breakthroughs in the reforms of such domains as land systems, identity transformations of peasants, urban-rural integrations of basic public services and new rural constructions. Through these practices, they have explored some new ideas and initiatives to overcome institutional obstacles of coordinating urban and rural development.

1. Conducting Urban-rural Multi-level Programming and Building Comprehensive Systems of Programming and Management They take the "Master Plans of Chongqing Urban and Rural Areas‖ approved by the State Council as the guide, and make prominent efforts to complete the three-level programming systems of district and county, township and village. The planning departments collectively managed the planning of urban and rural areas, changed the status quo of separation, and accelerated the pace of extending planning and management functions to villages. They make amendment in guidelines of village planning, and initiate 105 municipal key towns to carry out authorizing plan work. Priority has been given to ―boosting villages of new rural construction‖ to conduct village authorizing plan experiment. In 6 districts and counties such as Jiulongpo and Jiangbei, ―four rules superimposed‖ experiment has been expanded in economic and social development, urban and rural construction, land use and environmental planning. 2. "Ring Wing" Interaction and Promoting the Economic and Social Integration of Urban and Rural Areas They built an economic circle taking the main city as the core and an hour's drive as radius and form the Chongqing North-East Region taking Wanzhou as the center and Chongqing Three Gorges reservoir area as the main zone. They set up a ―one ring, two wings‖ starting point taking Qianjiang as the center, including the minority segregated southeast poor zones. They established a helping relationship between districts and counties. Such measures as direct financial support, cadres sending, teachers exchange, medical training, science and research consultation, standard workshop building support have been taken to promote the countryside extension of city's quality public service resources. Mutual


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assistance mechanism has been established from the following 8 aspects: industrial linkage, employment transfer, mutual assistance on education, scientific and technological cooperation, health sharing, personnel exchanges, financing support and poverty alleviation and development .In 2008 the first batch of 10 demonstration projects to extend the city resources into countryside was confirmed.

3. Multi-field Coordination in Administration, Employment, Social Insurance, Targeting the Implementation of Integrated Strategies They have reasonably divided the administrative rights of the three level governments of city, county, and township, and integrated the agriculture-related sectors of municipal governments to establish Agriculture Commission. According to the principle of match of financial and power, they established a public financial institutional framework integrating the urban and rural areas, and ensured that 75 percent of financials is used upon the development of districts, counties and villages. They launch the rule of ―village financials is managed by county but used for villages‖ and gradually resolve the historical debts of grass roots governments. The original policy to help ―three kinds of persons‖, that is, emigrants of Three Gorges reservoir area, retired soldiers and children of poor families in rural areas to enter secondary vocational technical schools, has been extended cover ―five kinds of persons‖ adding two other types: school-age children of the state‘s welfare institutions and minimal insurance persons of cities and towns. The average years of education rises from 7.7 in 2002 to the current 8.4, and they have firstly paid off the debt of ―universal nine-year compulsory education‖ for1.96 billion RMB. They have opened up a ―green passage‖ through which peasant workers can transfer their household registration into cities and towns. Qualified migrant peasants and workers are encouraged to settle their whole families into cities and towns. The National Labor Ecommerce Platform, the country‘s largest labor information platform for peasants and workers, has also been built up. By the end of 2008, it has signed employment service contracts with 7000 enterprises in total, through which 450,000 peasant workers have registered with information, and 55,000 peasant workers have found employment. As for urban and rural cooperative medical insurance, the rule of "a platform, two sets of standards" has been reached, that is, the contribution menu has just two levels of 100 and 200 RMB in all, which people can choose voluntarily which one to pay. Two kinds of people, that is, 587,000 urban- transferred peasants whose lands have been acquired and 109,000 residents who have worked under urban employers but exceeded statutory retirement age, have been brought into the system of urban old-age insurance. Urban-rural minimal insurance regulations has been promulgated, through which all people in urban and rural areas are covered, the urban-rural linkage adjustment mechanism has been set up, and the ratio of minimal insurance between urban and rural areas has been narrowed to 2:1. 4. Combining Farmland Transfer and Scale Management, and Standardizing the Management of Urban and Rural Construction Lands They have established three-level land transfer service agencies including county, township and village to guide and standardize the farmer and rural collective economic organizations to transfer lands legally, voluntarily and with compensations. Some

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complementary measures to support scale operation have also been implemented, for example, to support major producers of grain by 15% of direct subsidy funds for grains, to subsidy major and households specializing in standardized breeding with 1 to 8 million RMB. By the end of 2008, scale operation rate upon farming lands in Chongqing city has amounted to 17%, while scale breeding rate reached 40%. While maintaining the basic amount of arable lands and ensuring the self-sufficiency of grains, they have developed reform experimental point such as a steady increase or decrease in linking urban and rural construction land and rural land exchange. By August 2009, rural land exchange point has held five trading land tickets with a total of 5800 acres in lands and 400 million RMB in turnover.

Column 10-2. „Land Ticket‟ Trade in Chongqing 6 Since the establishment of Rural Land Exchange in Chongqing, much public attention has been attracted. It has been commented as "China's rural land reform initiative" and "as important as the once-established Stock Exchange." Chongqing Rural Land Exchange mainly includes barter exchange and land ticket exchange. Barter mainly refers to the exchange of the use right and contractual operational right of arable land, forest land and other agricultural land. Land ticket transaction is a major trading type of land exchange and an important innovation. The so-called ―land ticket‖ mainly deals with such types of lands: the land that people recultivate on the spared rural homestead and the ancillary facility, the land of township and village enterprises, the land occupied by rural public facilities and public welfare undertakings, and other rural collective construction lands. Those lands have been turned into lands available for planting crops. After strict examinations of land management departments, they are transferred as construction land index, certificates are issued by homeland and house management sector of the city. This certificate is called "land ticket". There are 4 steps for the usage of a land ticket: Re-cultivation. People re-cultivate the spared rural homestead and the ancillary facility land, the land of township and village enterprises, the land occupied by rural public facilities and public welfare undertakings, and other rural collective construction lands. Examination. After strict examinations of land management departments, they are transferred as construction land index. The ―land ticket‖ is issued by the municipal land administrative departments to persons who have land use rights according to the corresponding areas. Exchange. Chongqing Rural Land Exchange is established to carry out ―land ticket‖ transactions. All legal persons and natural persons with independent civil capacity can buy land tickets through a public bid. Land ticket transaction volume is regulated and controlled by the principle of not exceeding 10% of the state-assigned increased construction land plan of that year. Use. While it is used in urban areas, the land ticket can be brought into newly increased construction land plan. They can increase the same amount of urban construction land and offset the added construction land use-compensated fees and farmland reclamation fees. However, it has to comply with the overall layout of land use and urban-rural overall plans. Expropriation and transfer procedures have to be handled and compensation and resettlement of farmers has to be

6 Source: Dengli, Chongqing Starts „land ticket‟ exchange towards rural lands, online website about ―rural area, agriculture and farmers‖. http://www.farmer.com.cn/news/nyxw/200904/t20090423_441133.htm


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completed. While lands are levied as state-owned, people have to obtain land use right via legal procedures of ―tender, auction and publicity‖ Legally ensuring peasants` rights of possessing, using and proceeding towards lands is the focusing point of Chongqing Rural Land Exchange while they are designing schemes. Comprehensive designs have been made in this aspect: The process of applying for land reclamation: farmers who apply for homestead land reclamation must have other stable housing. Besides, they must have stable jobs and sources of livelihood. Other rules are as follows: newly added arable lands through re-cultivation and settlement continue to be contracted and operated by original homestead peasants, and those who give up running can acquire corresponding incomes through the lands` next transfer. The process of price assessment: after a comprehensive consideration of reclamation fee, added construction land use-compensated fees and other factors, Chongqing Municipal Government has constituted a unified price norm upon the urban-rural construction land-linked index exchange for traders to consult. The process of income distribution: in addition to paying a small amount of taxes, the vast majority of "land ticket" transaction proceedings are distributed to peasants. All the transaction income of the right of contraction and operation towards arable lands and forest lands belongs to peasant families. The land income obtained by rural collective economic organizations is mainly used as peasants` social insurance and new rural construction. The implementation of ―land ticket‖ promotes arable land protection. The land using model of ―occupying first‖ was substituted for ―compensating first‖. The long-distance and large-scale transfer between rural collective construction land and urban construction land has largely raised the rural land values of remote areas. It has realized the objective of city nurturing rural areas and developed areas supporting backward ones, contributing to the establishment of uniform land markets between urban and rural areas. The reach of change linkage of urban and rural construction land, the establishment of urban-rural unified land markets and the drive of rural factor market nurturing have significantly promoted the construction of rural capital, technology and other factor markets. The peasants` income increase through land ticket exchange has enhanced their social insurance level and development potential after their entering into urban areas.

II.The City of Chengdu: The Pioneer of Urban-rural Coordination Chengdu is the capital of Sichuan province, with a total area of 12,390 square kilometers, the downtown area of which is 283.86 square kilometers. It is located in southwest of China, the heart area of Chengdu Plain. It has a history of more than 2300 years, and has been playing a significant role since ancient times. In 2007, Chengdu city's household registration population was 11.123 million, while the resident population 12.579 million. In recent years, Chengdu city has taken the following measures as the main contents of urban and rural coordination reform and path designing, encompassing the reform of rural land property right system, the innovation of rural grass-roots government structure and the establishment of the urban-rural integrations of public service system. They strive to boost Chengdu experimental area as the pilot pattern of reform deepening and urban-rural developmental coordination of the whole country, the model window of harmonious society construction and the successful example of post-disaster reconstruction.

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1. The Breakthrough of Rural Property Right Reform In order to establish a modern rural property rights system, featured by clear ownership, clear rights and responsibilities, strict protection and smooth transfer, and to form dynamic rural factor markets, Chengdu city officially launched the pilot reform of rural property right system in early 2008. The Innovation of Arable Land Protection Mechanism Chengdu has established the farmland protection fund by using new construction land use-compensated fees and part of land transfer fees and issued the ―Use and Management Methods of Chengdu Farmland Protection Funds (for Trial)‖. Those peasants who take responsibility for farmland protection are provided with old-age insurance subsidies in accordance with following standards: 400yuan for every Mu of basic farmland per year while 300RMB for common arable land. As such, the peasants` enthusiasm of protecting farmland has been mobilized, the protection quality has been enhanced and the comprehensive production capability of farmland has been raised. The Completion of the Rural System of Property Right-Related Policies Chengdu municipal committee and government have issued the "Advices on Strengthening the Farmland Protection to Further Reform and Perfect the System of Rural Land and Housing Property Rights (for Trial)". a series of other supplementary files have also been set, including "Checks and Registrations of Chengdu Collective Land Ownership Interim Provisions", " Registration and Management Methods of Contraction and Operation Rights of Chengdu Rural Lands (Trial) "," Checks and Registrations of Chengdu Collective Construction Land Access Interim Provisions(Trial)‖. Reform of property rights in rural areas has effectively boosted the tenor of post-earthquake reconstruction. In 2008, 10315 households of those peasants who has selected self-construction in Dujiangyan City, Pengzhou City, Chongzhou City, Dayi County, Qionglai county and other damaged counties and cities has finished check of rights and award of certificates. 5225 rural quake-damaged households have acquired 204million loan via pledge and assurance of the homestead right certificates while they were self-building houses after the calamity. 1.714 billion RMB of social capital has been introduced through the collective focus on the use of construction land. The Establishment of the Service Systems of the Rural Property Right Transfer Through the right check and certificate award of rural property right, the platform of rural property right transfer has been formed, while the rules constituted. Besides, a series of files have been issued such as the ―Management Methods of Chengdu Rural Land Contraction and Operation Right Transfer (for Trial)‖. The rural property right exchange has initially been built up in Chengdu, while the rural property rights exchange branches have been set up in district(city) and county and the service stations of the rural property right exchange has also been established in village and township. As a result, the city, county and village three-level property right transfer service system has been preliminarily formed. It has created conditions for the rural collective construction land use rights, the land contracting and management rights and the smooth transfer of the forest rights and house ownerships.


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2. The New Achievements of “Three Concentration” Boost Since 2003, Chengdu has achieved remarkable results in promoting urban and rural integration and boosting ―Three Concentration‖ (industry concentrate towards parks, peasants concentrate towards cities and towns, and farmlands concentrate towards scale-operation). In 2008, Chengdu issued another two files: "advices on Further improving the quality of farmers` living together" and "advices on promoting the transfer of the migrant rural workers to urban residents " , to further improve the systematic mechanism of the ―Three Concentration‖ boost. Vigorously Promote the Shift of Industry to Focusing Development Zones Adhering to the new industrialization road, Chengdu has been improving the industrial layout and development planning, and continuously optimizing the industrial structure. 116 development zones of the whole city have been integrated as 21 industry-centered development zones. 9 industry-centered points of key towns with preferable industrial foundations and resource conditions have also been layed out. It has nailed down the spatial scale and industry positioning of the industry-centered development zones and the industrycentered points of key towns. It is required that the newly added projects, technical transformation and land expansion projects have to be brought into industry-centered development zones in principle, and fundamentally change the situation of ―every village ignites (in a factory), and every household emits smokes‖, which has laid foundations upon the centralized and intensive development of Chengdu industry. By the end of 2008, the settled scaled industrial enterprises amount to 1775, with industrial concentration rate around 68.2% and added value 87.164 billion RMB. The heavily earthquake-hit areas positively carry on the industrial transfers of their aiding counterparts. Chuan- min Industrial Garden‖ has been programmed and established in Pengzhou industry-centered development zone to carry on the industrial transfer from the aiding province Fujian; ―Chuan-su Science and Technology Industrial Garden‖ in Dujiangyan industry-centered development zone has brought a batch of enterprises to settle down such as Pushi Ning Jiang, Hua Han and Huimin Building Material. The Encouragement and Guide Towards Farmers to Gather into Cities and Towns Chengdu sticks to the road of new urbanization and follows the principle of "local adaptation, farmer self-determination, paid in accordance with law and steadily push forward". Peasants are guided into cities and towns orderly and sequentially, and adapted to live together in accordance with local conditions. A city and town system including 1 megacity,8 medium-sized cities, 30 key towns, 60 new cities and towns and 2000 rural new types of communities has been programmed and established. In the downtown of the city, they carry out the complete combination of rural and urban community, set up new types of communities according to the criteria of urban ones and boost the shift of farmers to urban residents; They take county seat and key towns as focusing point to build up new types of township communities according to the criteria of urban ones. They crack the housing problems of the rural migrant workers and those whose lands have been levied and boost the peasants` transformation to urban residents. In rural areas, they set up new houses according to the principle of ―concentrate where it is suitable, scatter where it is suitable‖. In 2008, Chengdu farmers` per capita net income reached 6178 RMB, with an increase of 9.5%. The

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area of the ―new housing projects‖ and ―new community‖ that has been started reaches 4.12 million square meters, and the urbanization rate has increased to 63.5%.

Positive Promotion of Lands‟ Scale Operation Adhere to the path of agricultural modernization with Chinese characteristics, and the basis of stabilizing rural household contraction and management, according to the principle of ―being lawful, voluntary and compensatory‖, Chengdu steadily boost the lands to center upon the agricultural leading enterprises, rural collective economic organizations and farmers specialized and cooperative economic organizations and great growers. Following the requirement of ―Three Concentration‖ boost and modern agricultural development, Chengdu has constituted and completed the industrial development layout of agriculture. Around such confirmed competitive industries as grain and oil, livestock and poultry, fruit and vegetable, flower and nursery stock, tea and mulberry, bamboo and forest, aquatic products, they have established large-scale base of competitive agricultural products. In the outskirt of the city, they strive to promote the land-based scale business mainly containing biology, leisure and tourism. In the outer suburbs of Plain areas, efforts have been made to promote land-based scale business mainly containing high-quality grain and oil, vegetables, flowers and nursery stock .In the outer suburbs of uplands and Basin-surrounded mountainous areas, efforts have been made to promote high-quality fruits, vegetables, teas, mulberry, upland crops, authentic Chinese medicinal herbs, forests, bamboos, and aquatic products. At the same time, they focus upon the improvement of the processing level of advantageous agricultural products, actively develop modern agricultural logistics and convert the model of agricultural development. In 2008, the scaled agricultural leading enterprises have reached 657, and the dragging area of agricultural industrialization has amounted to 66.7%. 3. Balanced Development of Urban-rural Public Service Construction In 2008, Chengdu issued the "Advices on Deepening the Urban and Rural Integration and Further Enhancing the Level of Public Services and Social Management at Village Level (Trial)." They set up the target of supply classification, financial security, facility construction integration, democratic management and personnel improvement towards village-level public services and social management. They systematically put forward the contents embraced in village-level public services and social management, and clearly defined the responsibilities of government, village-level autonomy organizations in public services and social management.; The outlay of village-level basic public services and social management has been brought under financial budget at all levels. There is a clear stipulation saying: ―based in 2008, the annual increase in governmental investment at all levels upon the construction of public utilities and infrastructure should be mainly used in rural areas, until the urban and rural public service basically reached parity‖, which has comprehensively improved the financial security level of village-level public services and social management. Peasants can practice democratic appraisal, democratic decision-making and democratic supervision as for the implementation of village-level public services and social management. The government should fully respect the will of farmers and safeguard the rights of them, and enhance the efficiency of public services and social management. At present, experimental reforms of village-level public service and social management are held in 10 districts (city) and counties such as Qingyang district, Wenjiang district, Pixian,


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Qionglai city. After it achieves effects and experience, the reform will be pushed through in the city-wide.

4. Further In-depth Boost of Standardized Service-type Government Construction Since 2003, Chengdu launched the deepening of administrative reform, and promote the construction of standardized and service-oriented government comprehensively, which aims to speed up the process of administrative reform, explore innovations of government management and promote the coordinated development of urban and rural areas. After the approval of pilot zone, the construction of standardized and service-type government goes indepth. The Establishment of Major-Sector Management System to Coordinate Urban and Rural Development With an eye to the coverage and spread of public management and services to rural areas, the integration of departmental functions and the establishment of major-sector management system to coordinate urban and rural development, the administrative systems of more than 30 departments such as planning, agriculture, water supply, finance, transportation, gardening and forestry has successively been reformed and adjusted, which has formed the preliminary establishment of administrative system to coordinate the urban and rural development. The Reform of Administrative Approval System They carefully clean up and simplify the projects and procedures of administrative approval. 845 approval items have been adjusted and cancelled and 74 business links and53 declaring materials have been eliminated, 6665 working days of processing time has been compressed. They have explored and established a parallel approving mode containing ―consent foretelling, service forward shift, one window acceptance, internal operation, parallel processing, time limited, monitoring evaluation‖ and a centralized processing mode principled by ―one window processing, one room auditing, one leader approving and one seal ending‖. The Establishment and Completion of Decision-Making Mechanism and the Implementation of Scientific and Democratic Decision-Making ―Publicizing and Hearing Methods of Chengdu Major Administrative Decision-making Matters‖ and ―Expert Consultation and Reasoning Methods of Chengdu Major Administrative Decision-making Matters‖ has been successively constituted, which has formed the preliminary establishment of ―three combination" scientific and democratic decision-making mechanism linking public participation, expert demonstration, and legal determination of government. The municipal government has established a policy advisory committee .900 experts advisory reserves have been set up. Those departments with policymaking functions and strong quality of specialization have set up their own expert advisory reserves. Significant decisions made by the municipal committee and government and major affairs of departments all need consulting and debate of related experts. Local laws and draft regulations which are closely related to public interests are all processed by inviting the public to participate in the hearing, publicity, discussion, online counseling and other means to extensively solicit views of the community. At present, over 100 price adjusting programs,

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more than 10 drafts of local laws and regulations as well as IC card of bus have been publicly heard.

SECTION 3: WUHAN CITY CIRCLE AND CHANGSHA, ZHUZHOU AND XIANGTAN CITY CLUSTER The establishment of a resource-saving and environment-friendly society is an inevitable choice to fundamentally convert the mode of economic development, take a new industrialization road, radically ease the resource constraints, alleviate the environmental pressure, strengthen the overall quality and competitiveness of the national economy and realize the goal of comprehensive well-off society construction. Especially for the central and western regions which are undertaking the eastern industrial transfer accelerating the industrialization process, the old path of "pollution first, treatment later" can no longer be followed. With a view to this, Chinese Government choose the Wuhan city circle and the CZX city group to carry out comprehensive and supplementary experimental reform in allusion to the resource-saving and environment-friendly society construction.

I．Wuhan City Circle: 1 Plus 8 > 9 The so-called Wuhan City Circle refers to the urban community with Wuhan as the center and 100 km as the radius, including Wuhan and Huangshi, Ezhou, Xiaogan, Huanggang, Xianning, Xiantao, Qianjiang, Tianmen, etc. 8 surrounding cities. The circle accounts for 33% of the land in Hubei province and 51.6% of the population. It has a high urban density level, a favorable economic foundation and a preferable environmental and natural condition. It is the biggest city domain of not only the Hubei province, but also the mid-Yangtze River region. The entry point of the experimental reform of Wuhan city circle lies in energy resources saving and ecological environmental protection. It aims to take a new way to develop industrialization and urbanization which distinguish itself with traditional mode via reform and innovation of systematical mechanism and transformation of developmental model.

1. Simultaneously Push “9 Innovative Mechanisms” and Jointly Build the "Twooriented Society" System Platform According to the overall reform program, the circle will prosecute the following 6 mechanism innovations, including resource conservation, environmental protection, science and technology, optimization and upgrading of industrial structure ,urban and rural developmental integration and conservative and intensive land use. Another 3 systematical innovation including financials and taxation, inward and outward opening-up and administrative management will also be supplementarily boosted.


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Figure 10-2. The Sketch Map of Wuhan City Circle.

2. First Push of Investment, Financing and Public Infrastructure Construction to Lay a Solid Foundation of Reform In September 2008, Wuhan city circle set up the Hubei Province Joint Development and Investment Corporation, the registered capital of the company is 3.2 billion RMB. It is positioned as the Wuhan city circle cross-regional investment and financing platform and also China's first regional government-enterprise co-investment and financing platform. It is composed of 16 shareholders, and all the 9 city members of the circle infuse capital and form shareholders, the other four are Wuhan-located central government‘s enterprises. The largest shareholder is the SASAC, Hubei Province, investing 1.3 billion RMB and accounting for 40.63% shares. In order to integrate the financial resources of the circle, Wuhan city circle embarks upon the built-up of regional banks to form a unified financial market. In 2007, Wuhan Commercial Bank changed its name to Air Bank and became a regional bank, attracting attentions of the background centers of the country‘s 9 major banks. It lays a solid foundation for the raising of financing function. On December 26, 2007, the 5th Yangtze River Bridge was completed and brought into use. The 7 urban freeways connecting the circle members have also basically finished. 9 cities in the circle can be accessible within 1 hour, achieving the geographical city integration and barriers eliminated.

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3. To Start Compiling Five Special Plans, Focusing on the Promotion of "Five Integration" In 2009, Wuhan City Circle is prepared for the compiling and implementation of five special plans including space, integrated transport, industrial development, social undertakings and ecological environment. In addition, the "five integration" including the optimization and reasonable transfer of industries, linkage sharing of social resources, fastspeed access of circles and domains, industrialization of modern agriculture, chain management of commence is the focus of this year's work. 4. To Promote Co-operation between Ministries and the Province and to Set up Policy Support Platform for the City Circle Construction. Joint establishment between Ministries and province is an important strategic initiative to promote ―Resource-efficient and environment -friendly society‖ construction of Wuhan City Circle. Hubei province has taken a number of forms to push the establishment of ministryprovince cooperation mechanism in order to let national ministries and units carry out pilot projects and coordination on some important reforms, items and policies in Wuhan city circle. By now, up to 47 national ministries and units have signed cooperative agreements and memorandums with Hubei provincial government.

II．Changsha, Zhuzhou and Xiangtan City Cluster: Building a New Platform of Regional Integration The Changsha, Zhuzhou and Xiangtan City Cluster is situated in the northeast of Hunan Province. The spatial distribution of the three cities Changsha, Zhuzhou, Xiangtan takes on the form of the Chinese character―品‖(the form of an equilateral triangle) . The distance between every two cities is less than 40 kilometers with a compact structure. From history‘s perspective, the urban agglomeration, as a national old industrial base and economic center of Hunan Province, has long been influenced by the concept of ―superior development but inferior governance‖ and the structural pollution has been comparatively conspicuous. The City Cluster, as the country's comprehensive and supplementary reform pilot area of "Resource-efficient and environment -friendly society" establishment, focuses upon the exploration of the new roads of industrialization and urbanization.

1. Striving to Reform the Feasibility of Policy, and Pursue the Trend of “High End” upon Programming Through the combination of administrative and professional level, the comprehensive, thorough and long-term planning towards the reform and construction of pilot areas has been performed. They sum up and draw the international experience, and provincial and municipal departments perform their own duties respectively: the provincial departments have conducted 12 specific reform programs and the authorizing promotion work of 14 regional specific planning. Changsha, Zhuzhou and Xiangtan are responsible for overall reform of authorization work, implementing programs of 12 specific reforms, and 42 city-level specific programming. The surrounding 5 cities, Yueyang, Changde, Yiyang, Hengyang and Loudi


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respond positively and perform active docking from aspects of planning, infrastructure and industries. The program will be divided into three phases of reform :the first phase is scheduled during the years of 2008-2010 with the task of preliminary establishment of "two-type" social framework and form of regional economic integration inducting the harmonious development of the formation of Changzhutan harmonious development of Changsha, Zhuzhou, Xiangtan and the surrounding cities. The second phase is scheduled during the years of 2011-2015 with the task of the preliminary set-up of "two-type" society‘s industrial structure, increasing mode and consumption patterns. The third phase is schemed during the years of 2016-2020 aiming to finish the reform task and form the mechanism of "two type‖ society and the development pattern of new-type industrialization and urbanization.

2. Taking Environmental Simultaneous Management as the Guide and Unveiling the Purdah of Urban Fusion 2008 is the starting year of the City Cluster‘s "Resource-efficient and environment friendly society" construction. The regional coordination mechanism construction first unveiled the curtain in the implementation of all measures of environmental simultaneous management. In the reform of environmental protection, resource conservation ,the Ministry of Land Resources carry out intensive and economical use of land in the Changsha, Zhuzhou and Xiangtan Urban Agglomeration and has preliminarily formed four patterns of intensive economical use of land. ―Collaboration Agreement upon Joint Push of the ‗Resource-efficient and environment -friendly society‘ establishment in Changsha, Zhuzhou and Xiangtan City Cluster‖ has been signed between the Ministry of Environmental Protection and Hunan province. The Xiangjiang River and Dongting Lake has been brought under the system of water pollution prevention and planning of Yangtze medium-east water basin. The Changsha, Zhuzhou and Xiangtan City Cluster has been wholly brought in the national water-saving-city pilot project. Hunan Provincial Government has established the system of duty assessment and supervision towards energy-saving and emission-reduction targets and started scientific and technological support of energy-saving and emission-reduction. In June 2008, the "Long Xiangjiang Clean Water Action" has started the tough battle of comprehensive environmental renovation upon Xiangjiang River. It is budgeted that 17.4 billion capitals will be injected within 3years to improve production quality. Those industries will be banned-off, washedout, closed, deadline-managed, or moved away. New projects with heavy pollutions are strictly prohibited to build within 10 km from two sides of Xiangjiang River. 18 heavily polluting enterprises or production lines in Qingshuitang area of Zhuzhou city has been shut down within one year. 73 enterprises of Xiangtan city has been renovated and 17 heavily polluted enterprises has been closed down via the "Blue Sky Green Water" project. Environmental protection departments of Changsha, Zhuzhou and Xiangtan will carry out joint efforts to implement linkage mechanism of pollution handling in the emergency state of Xiangjiang dry season. Those key pollution sources would be managed by measures of being shut down, limiting production or emission-limited in the state of emergency.

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3. The Implementation of Multi-dimensional Push and the Joint Establishment of Regional Integration The coming period will be a new phase of city cluster construction. Regional integration reform will be centered upon five mechanism innovation of resource conservation, environmental protection, industrial optimization, technological innovation and land management. Investing and financing, external development, finance and taxation, urban and rural co-ordination and administrative management will be supplementarily promoted. Hunan Provincial Government has specially funded the establishment of the "two-type" social construction, concentrating upon the cross-regional infrastructure construction, the "two-type" industrial development, ecological environmental management and other tasks. Provincial Land Capital Operation Company has been reorganized as the Hunan Development and Investment Group Co., Ltd. to build the main platform for provincial investing and financing. As for infrastructure construction, telephone area-code of the three cities has been incorporated and upgraded. China Mobile, China Telecom and the provincial government have signed a strategic cooperation agreement. Among them, China Telecom and the provincial government jointly push the "Ten Information Engineering"; The core area of the urban agglomeration will focus on building the "seven vertical and seven horizontal" intercity main roads to form the inter-city traffic framework. ―2 rings and 6 radials‖ highway network established as keys in the ―3 plus 5‖ urban agglomerations will set up the urban agglomeration traffic framework. As for the construction of the "two-type" industry, in the coming 2 or 3 years, the City Cluster will initially form a "two-type" industrial system taking high-tech and modern service industry as the leader, advanced manufacturing as the base, circular economy as the characteristic. According to the plan, by 2010, the urban agglomeration will form two leading industries of equipment manufacturing and light industry and a batch of pillar industry groups. It will produce 10 high-tech leading enterprises with the sales income of each over 10 billion RMB and 20 enterprises over 5 billion RMB. They will strive to set up the ―one city six bases‖ including Changsha engineering machinery city, rail transportation, wind power equipment and other bases. The proportion of the added value of high-tech industries over GDP is expected to exceed 20%. Regional port crossing reforms will also be pushed step by step, form a clearing model of interior and inter-port "declaration at origin and inspection in port" and establish the fasttransit access of "Hunan, Guangdong and Hong Kong Express" for custom clearance.

CONCLUSION Through experimental units to further reforms is not only a piece of experience for success in China‘s 30 years‘ reform and opening up but also a natural choice for accomplishing key tasks in reforms. By initially experimenting locally and gaining useful experience and then gradually expand and further reforms can effectively control risks and prevent deviations. What is more, it is conducive to mobilize the grass root and all sources in the society to reform and innovate with initiative and motivation. At present, besides the


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seven National CSRPZs, many provinces have carried out provincial experiments of comprehensive supporting reforms. Here, one point should be mentioned. In recent years, the Chinese government has established and implemented several economic zones‘ regional plans which involve Guanzhong-Tianshui Economic Belt, Guangxi Beibu Gulf Economic Zone, Fujian West Taiwan Strait Economic Zone, Jiangsu Coastal Economic Belt, Liaoning Coastal Economic Belt and so on. These economic zones‘ regional plans mostly aim at solving problems in development direction, space planning, priority industry, supporting policies and the like. Although furthering reforms is needed in the implement process of these plans, these economic zones are not National CSRPZs. It can be predicted that, through the implementation of comprehensive supporting reforms experiments which combines solving regional problems and exploring overall common challenges, realizing key breakthroughs and overall innovation, economic systematic reforms and other aspects, we can carry out reforms safely, smoothly and orderly, and can conclude and popularize the continuous new achievements and experiences. This will greatly advance the process of improving socialist market-oriented economic systems nationwide. Translators: zhu Jun (SUFE), Ma Mingchao (SUFE) English Version Editors: Lv Mei (SUFE), Chen Mo (Harvard)

REFERENCES Hao Shouyi, 2008(9). Researches on Comprehensive Supporting Reform Pilot Zones [M], Science Press. Kong Jingyuan, 2009(9). Report on China‘s Economic System Reform in 2008 [M], People‘s Press. Wang Jianing, Hu Xinhua, 2009(8). Study on Administrative System of Comprehensive Supporting Reform Pilot Zones: Shanghai Pudong New Area and Tianjin Binhai New Area [J]. Reform. Li Jiaxiang, Dai Chao, 2008(6). On Hot Issues in Comprehensive Supporting Reform Pilot Zones [J]. China Opening Herald. Li Jiaixiang, 2007(1). Theoretical Value and Stage Characteristic on China‘s Comprehensive Supporting Reform Pilot Zones [J]. Economic Perspectives. Yang Jianwen, Hu Xiaopeng, 2007(3). Comprehensive Supporting Reform: On Comparative Researches of Tianjin, Shanghai and Shenzhen [J]. Shanghai Economic Review. Shi Hongxing, 2007(2). Systematic Design of Reform in Comprehensive Supporting Reform Pilot Zones [J]. China Opening Herald. Hao Shouyi, Gao Jintian, 2006(2). On State Pilot Zone for Overall Reform [J]. China Opening Herald. Chen Zhenming, Li Deguo, 2008(11). Practical Exploration and Developmental Trends in the State Comprehensive Supporting Reforms Pilot Area [J]. Chinese Public Administration.

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Zhang Huanzhao, Hao Shouyi, 2007(1). National Pilot Zone for Overall Reform and Spatial Evolution Analysis of Institution [J]. Journal of Finance and Economics. Niu Lichao, 2008(6). Reform and Innovation: Adaptive Evolution of Government Administration System—Comparative Analysis of Binhai New Area, Shenzhen Special Economic Zone and Pudong New Area [J]. Journal of Tianjin Administration Institute. Zhao Xiuchun, 2007(4). State Comprehensive Supporting Reforms Pilot Area is a Major Step to Follow a Scientific Approach of Development [J]. China Reform. Website of National Development and Reform Commission: tgs.ndrc.gov.cn. Website of Shanghai Pudong New Area: www.pudong.gov.cn. Website of Tianjin Binhai New Area: www.bh.gov.cn. Shenzhen Government Online: www.sz.gov.cn. Website of Chongqing Development and Reform Commission: www.cqdpc.gov.cn Website of Chengdu Municipal Government: www.chengdu.gov.cn. Website of Wuhan City Cluster: www.whcsq.gov.cn. Dedicated Homepage of CSRPZ for Building a Resource-efficient and Environment-friendly Society in Changsha-Zhuzhou-Xiangtan City Cluster in the Website of Hunan Provincial Government: http://www.hunan.gov.cn/zhuanti/cztlxsh/bjjs/gk/




ON THE SETTING-UP AND CONSTRUCTION OF THE PILOT ZONES FOR SUPPORTING COMPREHENSIVE REFORMS Huang Lin  Promotion after experiment is the usual practice for Chinese government to conduct social and economic reform. Several Special Economic Zones (SEZs) established in the early period of the country‘s reform and opening up have not only achieved substantial economic and social progress, but also accumulated significant experience for the whole country‘s reform. Although the success of SEZs gives Chinese government more ambitions to enlarge the reform based on the trial and experimental approach, many other side effects start to show, which includes: the backward administration system restricting further economic and social reform, the unbalanced economic development introduced by the limited marketization reform between experimental and other areas, the long-standing dual economic structure between the rural and urban economy, over-extensive use of natural resources during economy development and the problem of environmental damages, and so on. In order to continue gaining rational identification from the society for the current institutional arrangement, the preferred way is to expand the economic experiment scale and to further economic and social reform. The State Council has set up various comprehensive supporting reform pilot zones (CSRPZs), which is another important attempt in this regard. These new experiment platforms, based on their own distinct characteristics and region-specific purpose of development ， shall in the first place carry on some overall significantly, in-depth economic and social policies, accumulate new experiences in reform pattern, and explore new development methodology for the country in the new era. Since 2005, China has set up three national multiple-targeted CSRPZs (m-CSRPZs) in Shanghai Pudong new district, Tianjin Binhai new area, Shenzhen city respectively, and established four special–targeted CSRPZs (s-CSRPZs), which are ―Comprehensive  Huang Lin, PHD, University of Essex, Associate Professor, Research Institute of Economics and Management, Southwestern University of Finance and Economics. Email:[email protected].

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Supporting Reform Pilot Zone for Balanced Urban and Rural Development‖ in Chengdu and Chongqing, and ―Comprehensive Supporting Reform Pilot Zone for Building a Resourceefficient and Environment-friendly Society‖ in Wuhan and Changsha-Zhuzhou-Xiangtan city cluster. The basic distinction between the first three m-CSRPZs and the rest four s-CSRPZs is on the range of reform. Those m-CSRPZs enjoy the capability with full horizon of reforms, while s-CSRPZs are subject-specified reform area. From the purpose of those CSRPZs, Shanghai Pudong, Tianjin Binhai and Shenzhen aim at radiating the reform to the Yangtze River Delta, Pan-Bohai and Pearl River Delta respectively. All m-CSRPZs focus on how to break the institutional defects impeding the full realization of market function. They are designed to perfect the market economic system. Their functions include many aspects such as the construction of modern market institution, market administration system, financial system, legal regulations on the emerging markets, etc. All those aspects directly relate to the question of how to deepen the reform to construct a free market system that closely interconnected with the global market, to fit the international rules and to become the important part of the world economy system. Furthermore, through the experiment of the three m-CSRPZs, the experiences and knowledge should be accumulated not only to assist to build an ideal market system with coordinated institutional reform, but also to probe new development pattern for other areas. The s-CSRPZs in Chengdu and Chongqing city mainly focus on unifying the development of urban and rural area to fundamentally solve the development problems of ―rural area, agriculture and farmers‖ and to promote the urban – rural integration, especially on the construction of a modern rural market to narrow the economic and social gap between the urban and the rural. Setting-up s-CSRPZs in Wuhan and Changsha-Zhuzhou-Xiangtan city clusters is an important measure in implementing ―the Rise of the Central Region‖ strategy of the Central Government. They are designed to build the capacity for a long term development path mainly through the innovation of new-type industrialization, new-type urbanization, endogenous and scientific development with features of energy-and-resource-saving and environmental-and-ecological friendly. By optimizing industrial structure and transformation of developmental mode, these two s-CSRPZs are expected to build an efficient and sustainable development mechanism and to become the growth engines for the Central Rise and new growth pole of the state. Above all, these seven comprehensive supporting reform pilot zones are set-up so that China will establish comprehensive reform experimental fields from economy to society, to administration, and to environment, covering different typical area across the east, the west and the central area. These CSRPZs share two common features which are comprehensive and complementary, that is, on the one hand the reforms require coordination and inter-conditioning in various fields; on the other hand, the reforms require mutual supporting between different reform measures. The setting structure of CSRPZs reflects the macro layout of the Chinese government‘s effects to deepen reform, and if those experiments succeed, it will directly encourage the administrative authority to efficiently make relevant policies and complete necessary legislation. However, since the setting-up of CSRPZs is a large scale economic and social experiment, some problems are needed to pay attentions to when planning CSRPZs‘ reform. First, the border issue of the ―Trial Right‖ or ―Pilot Power‖ of CSRPZs. Pilot power refers to a special right authorized by the state, based on the needs of reform, to set regulation by their own standards in certain areas before the unified provisions made by the national level legislation. It is worth notifying that the pilot power is not a statutory right, it is just a

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practical method to carry on the breakthrough and the innovation to the national routine policy making process in the area that lack of the superior legislation. Exercising the trial right must comply with the law priority doctrine. Due to the non-legislation nature of the trial right, it is unavoidable that some local piloting polices may conflict with the law. For example, Chongqing Municipality in 2007 introduced the measure "with regard to comprehensively implement the spirit of the third party congress in Chongqing, the implementation opinion on serving the comprehensive development balancing the urban and rural (Chongqing Gong Sang Fa (2007) No.17) ", which allowed the farmers to contribute shares to a limited company using land contractual rights. However, the land shares of a limited company may be transferred to a person or entity other than the member of the rural collective. Moreover, if the limited company was in bankruptcy, the land in shares may be liquidated, and the farmers who hold the contractual right could be forced to lose their land. This potential risk will endanger the basic living condition of the farmers, and possibly undermine the stability of rural economic system. In review of the aforesaid, the central authority suspended the implementation of this practice. Although the pilot power is not an explicitly statutory right, the State Council in fact transfer some policy-making privileges to CSRPZs, which eventually expand CSRPZs autonomous power in certain areas. The CSRPZs may misuse or overuse the increased power of policy-making to design the new policy which conflicts with the statutory law, and may lead to unexpected consequence that violate the policy orientation of the whole country. To avoid such conflicts or consequence, firstly, the CSRPZs should be familiar with the relative laws and keep a close relationship with the central administrative authorities from which to gain the supports. Secondly, while the expansion of regulatory rights facilitates CSRPZs to access in-depth reform, the improper use of such rights may stimulate greater risks. The CSRPZs should be very cautious in implementing new polices beyond the scope of existing regulations. Before the state introduce formal legislation on the content and border of such pilot power, the CSRPZs need pay special attention to legal risks that may arise during the reforming process. Second, the issue of the unbalanced development introduced by the setting of various CSRPZs. The trial rights of CSRPZs not only bring a greater and more flexible policy space and policy supporting given by the central government, but also facilitate themselves to attract more types of external resource inflows such as capital, high-profile intelligent, information, international attention, etc. It is the very reason that local governments are enthusiastic about applying to be CSRPZs. Those factors helpfully upgrade CSRPZs into at least a regional development center. One obvious result is that the granted trial right and relatively preferential reform policies render an advantage for CSRPZs at start point. While the setting-up of CSRPZs give these areas new development opportunities, but from the country's overall view, the inequality in policy-making sphere among different regions will inevitably induce gaps in regional development, which is contrary to the principle of equitable development opportunity between different regions in the state. Therefore, the next reasonable question raised is why to set up so many CSRPZs with very large geographic coverage. This is mainly the result of interest-seeking games between regions. There are many officials and scholars have discussed the benefits from setting up comprehensive pilot zones, less people think of the adverse effects of this trial approach. In fact, if the number of CSRPZs exceeds a reasonable scope, different CSRPZs may undertake the same kind of polices and reform approach, the experimental results may converge and

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they will lose their experimental value. To some extent, the setting up of CSRPZs will discourage these regions that failed in the game of chasing the member of CSRPZs. Thridly, the cost issue of CSRPZs. One feature of China's reform is characterized by its gradual nature. The gradual reform is likely to cause unequal opportunity in the possession of capital, resources, and unequal access to markets among different groups or individuals. This inequality will virtually form a variety of interest groups which gradually become the barrier to the reform. Comprehensive supporting reform is undoubtedly a systematic project covered a wide range of social levels. It needs to break the long-established pattern of interest groups and will inevitably encounter resistance from them. For example, one reform strategy in Chengdu to foster rural growth and break the urban-rural gap is to identify and certificate the property rights of rural lands and real estates to secure the interests of farmers and rural collectives. Those active measures will help to promote the establishment of clear land ownership in rural areas and capitalize the rural assets. For years China‘s local fiscal revenue heavily depends on the land transfer income, which means that to increase the local government fiscal position, it has to enlarge the scope of land acquisition. If the farmers are given the clear identification of the property right of land and homestead, it will raise the cost of local government to requisition land from rural collectives. It will also increase the cost of leaders of rural collectives that usually benefiting from the illegal deprivation of the property right of farmer‘s land to collude with the government in land acquisition. Therefore the local officials and leaders of rural collectives are reluctant to kindly implement such reform policies. Till now, many reform measures in CSRPZs start out with a bang and end with a whimper. The government enthusiastically advocates the reform, while the grass-roots who are in desperate need of support encounter various resistances. If reform program could not gain enough support from grass-roots and establish a corresponding institutional foundation, the reform will be hardly to promote and face the risk of reinventing the wheel. The specific reform program, its foundation, promoting schedule, all are needed to be carefully, scientifically evaluated and planned. If we say the special economic zone is a kind of Pareto-marginal increasing reform, the comprehensive supporting reform is a more difficult undertaking and may bring more interest bargaining. It needs reasonable adjustment to interests of all vested groups. This challenge will undoubtedly be a new test to the reform planners and promoters.

REFERENCES [1] [2] [3]

[4]

Annual Report on Chengdu Balanced Rural and Urban Development Comprehensive (2007-2008), Research Institute on Scientific Development, Sichuan University, 2009 (in Chinese). Brandt, Loren, Scott Rozelle, and Matthew Turner, Local Government Behavior and Property Rights Formation in Rural China, UC Davis Working Paper No. 02-004, 2002. Bromley, Daniel and Yang Yao (2006), Understanding China‘s Economic Transformation: Are There Lessons for the Developing World? World Economics Volume 7, Issue 2, Pages 73-96. Kong, Jingyuan (2008), Thirty years in China‘s Comprehensive Reform Experiment, Liao Wang, Issue 10 (in Chinese).

On the Setting-Up and Construction of the Pilot Zones ... [5] [6] [7]

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Li, Guo, Scott Rozelle and Loren Brandt (1998), Tenure, Land Rights, and Farmer Investment Incentives in China, Agricultural Economics, Volume 19, Issues 1-2, Pages 63-71. Lin, Yifu and Yang Yao eds. (2005), China‘s Miracle: Retrospect and Prospect, Peking University Press (in Chinese). Niu, Wenyuan eds. (2009), The Report on China‘s New Urbanization, Science Publishing House (in Chinese).



Chapter 11

NEW STAGE: CURRENT ECONOMIC DEVELOPMENTS AND PROSPECTS IN ETHNIC REGIONS Zhang Wenguang*, Zhang Qing’an, Dong Xiaoyu and Wang Ying In this chapter, we will first introduce the economic development status quo in Chinese ethnic regions and the economic development since the reform and opening-up policy thirty years ago. Especially the western development in the last ten years will be comprehensively described. On this basis, the characteristics of the economic development in ethnic regions under current financial crisis will be analyzed. In the second part, great emphases will be put on analyzing and summarizing the systems and effects of ethnic economic policy. In the third part, an outlook will be made on the economic development and policy of ethnic regions.

SECTION 1: STATUS QUO OF ECONOMIC DEVELOPMENT IN REGIONS INHABITED BY ETHNIC GROUPS Since reform and opening-up policy in China thirty years ago, people in Chinese ethnic regions have overcome the influence of geographic disadvantages and macroeconomic policy of unbalanced development, given full play to the initiative and enthusiasm in ethnic regions, steadily carried out and deepened each system changes, resolutely promoted the opening to both the inside and outside world, held on to regional system of ethnic minorities, coped with the relationship between help provided by the country and self-help, constantly adjusted and upgraded industrial structure. In this way, they have gained significant achievements in socialist modernization drive and realized the historic leap from starvation to an overall welloff life. Under the influence of global financial crisis, China‘s economic growth has been slowed down since 2008. But in the second quarter in 2009, the economy started to rebound, because *Dr. Zhang Wenguang is associate professor of School of Management, Beijing Normal University. Email: [email protected]

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the industrial structure in ethnic regions is less export-oriented, the impact of financial crisis is limited and GDP keeps increasing significantly.

I. The Overall Characteristics of Economic Growth in Ethnic Regions The overall characteristics of economic growth in ethnic regions are the bases for us to understand the economic status quo here. Since advancement in the development of the western region ten years ago, the economic power in ethnic regions is obviously strengthened. The economic structure is more optimized. The economic benefit is greatly increased and the status in national economy has raised a lot to catch up with the more developed regions. New progress has been made in building a well-off society. Economy in ethnic regions refers to economy in certain regions inhabited by ethnic groups in multinational country. In China, the economy in ethnic regions is the same with economy in regions inhabited by ethnic groups, which refers to economy in minority autonomous areas and in areas inhabited by relatively more minorities. They are special economic areas with homogeneous characteristics. China‘s ethnic regions have clear administrative divisions. Most of them are in the western, southwestern and northern border areas, comprised of five autonomous regions which are Xizang, Xinjiang, Inner Mongolia, Guangxi and Ningxia and three provinces which are Qinghai, Guizhou and Yunnan.

1. The Economy in Ethnic Regions Grows Continuously, Steadily and Quickly with Surpassing Tendency. Since the reform and opening-up policy, the economy in ethnic regions have rapidly improved. GDP has increased from 32.4 billion in 1978 to 2476.8 billion in 2007 with a 15.2 times of comparable price increase and an average annual increase of speed of 10.1%. Compared with the 841.1 billion in 2000 when began to carry out western development, GDP in ethnic regions has increased 1.4 times in comparable price with an average annual increase of speed of 11.7%. After the GDP breakthrough of 100 billion in ethnic regions in 1994, people in ethnic regions took ten years to achieve the breakthrough of 200 billion in GDP increase in 2004, two years to 300 billion in 2006 and one year to 400 billion in 2007. As one of the greatest growth poles in ethnic regions, the development of Inner Mongolia autonomous region explains the process of great-leap-forward development in ethnic regions in the 30 years of reform and opening-up. Now the economic aggregate of Inner Mongolia has ranked among the middle level all over the country and the GDP per capita has been in the very front of the country. In 1978, the total output value of Inner Mongolia is 5.804 billion, ranking the 25th in the country. In 2007, the total output value is 609.1 billion, ranking the 16th. The rise in speed of region total output value in Inner Mongolia has been the top all over the country for six years. Until the end of 2007, the GDP per capita calculated by permanent population has firstly exceeded 3000 dollars, which marks the golden period of economic development of Inner Mongolia and the strength of the economy has increased stability.

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Table 11-1. GDP in Ethnic Regions 1998-2008 Unit: 100 million Yuan Region Guizhou Yunnan Tibet Qinghai Ningxia Xinjiang Inner Mongolia Guangxi Ethnic regions Proportion in the country

1998 841.9 1793.9 91.2 220.2 227.5 1116.7 1192.3 1903.0 7386.7 8.75%

2000 993.5 1955.1 117.5 263.6 265.6 1364.4 1401.0 2050.1 8410.8 8.48%

2002 1185 2232.3 161.4 341.1 329.3 1598.3 1734.3 2437.2 10018.9 8.33%

2004 1677.8 3081.9 220.3 466.1 537.1 2248.8 3020.0 3433.5 14685.5 9.19%

2006 2267.43 4001.87 290.05 641.05 706.98 3018.98 4790.00 4801.98 20518.34 9.68%

2008 3333.40 5700.1 395.91 961.53 1098.51 4203.41 7761.80 7171.58 30626.24 10.19%

Source: data of up to 2006 are from China Statistic Yearbook in each year，data of 2008 are from the statistical bulletin of each province in 2009.

The above table shows that the proportion of total output value in ethnic regions accounting for domestic GDP increases from 8.75% in 1998 to 10.19% in 2008. Thus, the fact of constant disparity between the eastern part since the reform and opening-up policy has been reversed and reduced. The economy in ethnic regions grows with a tendency to surpass the other regions.

2. The Revenue in Ethnic Regions Greatly Increases, the Social Undertakings Continuously Develops and the Ecological Construction Achieves First-stage Success. Since the reform and opening-up 30 years ago, the revenue in ethnic regions has been greatly increased. Local finance general budget revenue has been increased from 5.2 billion in 1978 to 212.4 billion in 2007 with an increase of 39.6 times and an average annual growth rate of 13.6%. The revenue per capita in ethnic regions has been increased from 40 in 1978 to 1110 in 2007 with an increase of 26.8 folds. In Guangxi, for example, the fiscal income had been broken through 10 billion in 1994, 20 billion in 1999 and from then on got a new level in each year. In 2007, the fiscal income in Guangxi reached 70.4 billion with an increase of 49 times comparing with that of the early reform and opening-up. The increasing amount exceeded 10 billion for the first time. The local financial capability in ethnic regions continuously grows so as to improve the ability of local government in regulating economy and lay a solid foundation for improving people‘s livelihood and constructing infrastructure. The social undertakings in ethnic regions have been continuously developed. The ―two basics‖ program 1 has been completed on schedule. The population coverage rate of ―two 1

―Two basics‖ refers to popularizing nine-year compulsory education basically and eliminating illiteracy among young and middle-aged people basically. It is proposed by the Ministry of Education of the state. To implement Decisions of the State Council on Further Strengthening the Work of Rural Education (Promulgated by the State Council [2003], No.13),promote the Western Development, realize the objectives of popularizing nine-year compulsory education basically and eliminating illiteracy among young and middle-

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basics‖ has been raised from 77% in 2003 to 99%. The population rate of illiterate and halfilliterate over 15 years old has been decreased from 9% to below 5%. The ―two exemptions and one allowance‖ policy helps 0.15 billion students and poor boarding school students from 780 families. The new system of rural cooperative medical and health care services has been improved constantly. The ecological construction and environmental conservation have achieved gratifying results. Since the western development, the total control of water loss and soil erosion is 16 million hectares, the area of ecological and natural restoration is 28 million hectares, the total area of returning land for farming to forestry is 5.26 million hectares, the area of forestation in waste mountains and lands is 7.65 million hectares, the area of returning husbandry to grassland is 19.33 million hectares and the population that has been moved is 1.2 million. With the implementation of returning land for farming to forestry, forestation in waste mountains and lands, returning husbandry to grassland, natural forest protection, Beijing and Tianjin sandstorm-source control, ecological protection at river source and so on, gratifying achievements have been gained in ecological protecting and constructing in ethnic regions. Table 11-2. The proportions of major industrial and agricultural products in ethnic regions accounting for the country’s output in 2006 Product Name

Unit

Output

Cotton Sugar Materials Cured Tobacco Turpentine Tungoiltree Seed Mutton Milk Wool

(10 thousand ton) (10 thousand ton) (10 thousand ton) (10 thousand ton) (10 thousand ton) (10 thousand ton) (10 thousand ton) (10 thousand ton)

219 8399 111 50 16 203 1206 22

The Proportion in the Country(%) 32.5 76.1 44.7 55.6 43.0 43.2 37.8 57.3

Cashmere

（ton）

9576

58.4

Sugar Cigarette Run Coal Crude Oil

(10 thousand ton) (100 million) (100 million ton) (100 million ton)

776 5132 5.8 2701

81.7 25.4 24.4 14.6

Natural Gas

(100 million m³)

189

32.3

Output of Plant

(100 million kwh)

4718

16.5

Electrolytic Aluminium

(10 thousand ton)

338

36.4

Alumina

(10 thousand ton)

205

26.4

Source of data：sorted out from the materials provided by the State Ethnic Affairs Commission. aged people basically in western area, “two basics” Plan in Western Area (2004-2007) is formulated especially.


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3. The Industrial Structure in Ethnic Regions has been Constantly improved, and Distinctive Agricultural and Industrial Systems have seen initial achievement. The added value from the industries of energy, metallurgy, chemical engineering, equipment manufacturing, agricultural and animal products processing, high and new technology in Inner Mongolia accounts for over 90% of the total added value produced in the whole autonomous region. The eight pillar industries of machinery, sugar manufacturing, metallurgy, food, petrifaction, nonferrous metal, electrical power, and building materials of Guangxi produce 70% of the total added value of the autonomous region. In Yunnan a multipillar industry has been formed, breaking down the previous industrial structure which excessively depends on resources. The contribution rate to the industrial growth of the four major industries -- electrical power, metallurgy, nonferrous metal, wine, and tobacco-- of Guizhou is 57.7%, among which the electricity industry has contributed 24.3%. The industries of mine, green drink processing, Tibetan medicine, national handicrafts, and building and materials have improved steadily in Tibet. The saline chemical engineering, electrical power, petroleum, gas and nonferrous metal industries in Qinghai have been further strengthened. A distinctive industry group has been formed in Xinjiang which is dominated by petroleum and petrochemical industry and supported by spinning, steel, nonferrous metal, building materials and food industries. 4. The Poverty Reduction is Remarkable, the Population Below the Poverty Line Declines Steadily, and the Standard of Living Has Been Improved Significantly Since the economic reform took in place 30 years ago, the population below the poverty line has steadily declined. The country has made more efforts on poverty reduction, strengthened poverty related policies and measures. In this way, the extremely poor population has reduced from 100 million in 1978 to 7.74 million now. During 1994 to 2000, the ―87‖ anti-poverty project resolved the problem of food and clothing of 36 million people. The poverty reduction has entered into a new phase in 2000. The State Council issued and implemented China Rural Poverty Reduction and Development Program (2001-2010), in which it is decided to intensify the poverty reduction. It has set the poor villages as primary targets, and paid close attention to those extremely poor. At the end of the year 2007, 9.13 million people in these autonomous regions have been able to meet their basic need. The standard of living has been improved remarkably. A historic leap from starvation to overall well-off society has been achieved. The disposable income per capita of urban residents has increased from 414 in 1980 to 11490 in 2007 with an increase of 26.8 times. The net income per capita of rural residents has increased from 168 in 1980 to 2937 in 2007 with an increase of 16.5 times. The GDP per capita in ethnic regions has increased from 248 in 1978 to 12954 in 2007 with an average annual increase of 14.6%. It exceeded 1000 dollars in 2005 for the first time. The consumption of foodstuffs per capita in ethnic regions increased from 288kg in 1980 to 407kg in 2006. 5. The Fixed Assets Investment Grows Rapidly, and the Basic Industry and Infrastructure have been Further Improved Since the opening-up reform, the fixed assets investment in ethnic regions have grown rapidly. The fixed assets of the whole society in ethnic regions increased from 7.7 billion in 1978 to 1470.6 billion in 2007 with an increase of 192 times and an average annual increase

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rate of 19.9%. Especially since the western development plan implemented, the ethnic regions have become the new priority of investment destination gradually. Only from 2000 to 2005 has the country implemented 70 major projects which include Qinghai-Tibet railway, westeast natural gas transmission, west-east electricity transmission and so on with a total amount over 970 billion. In 2005, projects of western main and branch line airport, the second phase of Inner Mongolia Yimin electric power plant, western major coal mine, rebuilding and adding an extension of Xinjiang Dushanzi petrifaction, the safety of drinking water in rural areas and so on begun to be implemented. The infrastructure projects in traffic, water conservancy, energy, communication and so on have achieved substantive progress in ethnic regions. The infrastructure in farming and pastoral area has been significantly strengthened. The production and living conditions of people in farming and pastoral area have been greatly improved. In Tibet, for example, the comprehensive system of transport has shown an initial shape marked by the opening of Qinghai-Tibet railway. This comprehensive system is composed of three airports in Gongga, Bangda and Linzhi and two airports in Rikaze and Elikunsha which are under construction. The highway distance has reached 49,000km with an increase of 33,000km compared with that in 1978. The total postal and telecommunications service has reached 3.1 billion customers with an increase of over 140 times compared with that in 1978. The number of landline and mobile phone users has reached 1.44 million with an increase of over 300 times compared with that in 1978. The objective of connecting every village with optical cable and connecting every county with telephones had been achieved in 2004. The cultural infrastructure constructions such as ―Tibet-Xinjiang Project‖, ―Every Village Connection Project‖, rural movie ―2131 Project‖ and so on have been fullfilled. The population coverage of broadcast and TV has reached 88% and 89% respectively.

6. A Big Gap Still Remains between the Average Level of the Country and the Ethnic Regions The overall level of development in ethnic regions is still backward. The proportion of GDP gross in ethnic regions accounted for 10.19% of the whole country. The sum of the gross GDP of the eight provinces is even smaller than that of Guangdong province. The GDP per capita of ethnic regions is 66.73% of the average level of the whole country. The absolute gap has expanded from 3204 RMB in 2000 to 8577 RMB in 2008. The income level of urban and rural residents in ethnic regions is relatively low. In 2008, the net income per capita of rural residents in ethnic regions was 89% of the average level of the whole country with an absolute gap of 512 RMB. The financial system of the ethnic regions is still weak and the problems of livelihood are relatively more frequent than other places. In 1993, the fiscal revenue per capita in ethnic regions was 97.8% of the whole country and the local fiscal revenue covered the 80.0% of the expense. In 2007, the fiscal revenue per capita in ethnic regions was only 63.5% of the whole country and the local fiscal revenue only met the 38.1% of the expense. The ratio of fiscal revenue in ethnic regions to the whole country was declined from 14% in 1933 to 9.4% in 2007. The other problems of livelihood consists mostly in education, health, culture and so on. There are still 42 towns which haven‘t fulfilled the ―Two Basics‖ objective. The area of dilapidated school building accounts for over 80% of that of the whole country. Many administrative villages are lack of medical center, doctors and medicine. About 60% of the health clinics in towns and townships need to change conventional equipment. About 25 thousand towns and townships are lack of cultural stations all over the country, drinking


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water of 2500 billion peasants is lack of safety, nearly one hundred towns and townships don‘t have highway, and about 2 million household of rural population don't have access to electrical power. These problems concentrate in ethnic regions.

Figure 11-1. Comparison of per capita total output value between ethnic regions and the whole country.

Data source: China Statistical Yearbook 2000, China Statistical Communiqué 2008.

II. The Economy in Ethnic Regions under the International Financial Crisis Since early 2008, the financial crisis originated in America has constantly spread and made important influence on China‘s economy. The growth rate of China‘s GDP has declined from 10.6% of the first quarter in 2008 to 6.1% of the first quarter in 2009. In order to deal properly with the negative influence, Chinese government has released several measures comprising 4000 billion rescue package of investment, ten programs of industrial invigoration and so on. According to the macro economic data of the second quarter in 2009 published by Chinese government, Chinese economy begins to stop dropping and go upward. The growth of GDP in the second quarter reached 7.9% and until then the GDP of first half of had increased 7.1% compared with the previous year. From January to July, the industrial added value above nationwide scale grew 7.5% compared with the previous yeas, accelerating by 0.5% than the first half. The momentum of recovering and stabilizing the economy was very clear. In this macro context, the economic development of ethnic regions showed not exactly the same trend as the overall economic situation, mainly in the following areas.

1. GDP Grows on a High Level in Ethnic Regions, Which is Higher than the National Average, but will slow down. From the fundamental perspective, the impact of financial crisis on the economic development of ethnic regions in western area is limited. From 2008, the national GDP grows

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by 9% of the previous year, while the average rate of economic growth in ethnic regions is 12.15%. The rate in some regions such as Inner Mongolia is as high as 17.2% and in Tibet is 10%. However, most research institutions forecast that the growth rate of China's economy in 2009 will further decrease to about 8%, which is a severe test for the economic growth in ethnic regions.

2. The Investment in Fixed Assets in Ethnic Regions Maintains Rapid Growth. The structural adjustment of China‘s economic stimulus program of 4 trillion shows the following main features: first, increase the investment in fundamental industry, infrastructure and social works in order to lay the foundation for future economic development. Second, increase scientific and technological innovation and investment to enhance the competitiveness of enterprises. Third, accelerate the development of recycling economy and promote energy-saving and emission-reduction action. Fourth, increase investment in central and western areas and promote coordinated development among regions. It is clear that the western area belonging to ethnic regions is one important composition in this economic stimulus program. According to the latest statistics, the gross investment in fixed asset of Tibet in 2008 was 30.333 billion with an increase of 12.5% over the previous year, the gross investment in fixed asset of Inner Mongolia in 2008 was 559.645 billion with an increase of 27.1% over the previous year,that of Guangxi in 2008 was 377.81 billion with an increase of 27.2% over the previous year, that of Xinjiang in 2008 was 231.4 billion with an increase of 25.0% over the previous year, and that of Guizhou in 2008 was 185.832 billion with an increase of 24.8% over the previous year. 3. The Import and Export Maintain Steady Growth in Ethnic Regions In the financial crisis, the foreign import and export maintain steady growth in ethnic regions. In 2008, the total trade volume in ethnic regions achieved 60.75 billion dollars with an increase of nearly 37% compared with that in 2007, and it was higher than the national growth rate. Along the 22,000 kilometers of China‘s boundary, 135 boundary counties, banners, cities are located, among which 107 belong to ethnic autonomous regions. Since the opening–up reform, the State Council opened 13 border trade centers including Manzhouli City in the Inner Mongolia Autonomous Region, Yining City in Xinjiang Uygur Autonomous Region, Ruili City in Yunnan, Pingxiang City in Guangxi Zhuang Autonomous Region and so on. Preferential policies are given there and trade in the border areas rapidly developed. 4. The Consumer Demand in Ethnic Regions Maintains Growing From 2008, the consumer demand in ethnic regions continuously grows. The consumption structure shows positive changes. The consumption of vehicle, housing, interior design and so on has been expanded constantly, and the upgrades of household electrical appliances and communication goods have been accelerated. The total retail sales of consumer goods in the Inner Mongolia in 2008 was 236.333 billion with an increase of 24.1% over the previous year with 4.7 percentage points higher than the previous year. The value of retail sales of vehicle increased 28.8% and that of household electrical appliances and sound appliances increased 19.8%. Inner Mongolia‘s consumer market in rural and pastoral areas has been effectively boosted due to the pilot program of ―home appliances to the


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countryside‖. Throughout the year, the value of retail sales of towns and townships achieved growth of 22.3% with 5.1 percentage increase over the previous year.

SECTION 2: THE ECONOMIC POLICY IN ETHNIC REGIONS Thanks to the economic policy implemented in ethnic regions by Chinese government, balanced development is taking place among regions,. The Chinese government has always set the ethnic issue as an important component in the national development strategy. In addition to consistent adherence to the policy of regional autonomy of ethnic minorities, the Chinese government formulates various corresponding and specific ethnic policies according to the reality and characteristics of ethnic regions with the objective to sincerely help minority develop economy. Economic policies in ethnic minority areas highlight economic development as the main task of current ethnic affairs and implementing government supportive policy of regional autonomy of ethnic minorities as the core. With the increasing national comprehensive power, the Chinese government will strengthen its efforst to supporting economic and social development of minorities in ethnic regions. Economic policies in ethnic regions at this stage can be divided into several aspects. First, with the system of regional autonomy of ethnic minorities as the core, conscientiously implement specific plans will promote fast development of economy and society of ethnic regions. Second, uphold development as the fundamental way to resolve ethnic problems. Persist in handling the relationship between national aid and self-reliance and handle the relationship among reform development and stability. Third, keep insisting on the principle of opening to the domestic market and the outside world and steadily promote the action of ―vitalizing border areas and enriching the people‘s life‖. Fourth, adhere to the principles of ―taking actions that fit local circumstances‖, ―taking actions that meet ethnic groups‘ demand‖ and ―adapting different guidance to different areas‖. Implement a variety of preferential and supportive policies and strengthen the support on minority nationalities with relatively less population. Fifth, implement preferential policies for commerce and goods in ethnic regions and cultivate market competitiveness of manufacturing enterprises in ethnic regions.

I. Set the Autonomous Administration of Ethinic Regions as the Core Since the opening-up 30 years ago, the Chinese government has always insisted on upholding and improving the autonomous system of ethnic regions to promote economic and social development in ethnic regions and enhance national unity. Deng Xiaoping pointed out that, ―China solves the ethnic problem with the autonomous administration of ethnic regions instead of federal system. We believe that this system is better suited to the situation in China.‖ Countries in the world vary in geography, history and ethnic composition. Ethnic relations and ethnic issues are different, so there is a great variety of policies toward ethnic issue with specific features. But they can be summed up in four types, namely, restricting development, laissez-faire, passive protection and positive promotion. The positive promotion

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policy toward ethnicity applied by China is to help ethnic minorities develop society, economy and culture in an all-round way, make all the ethnicities harmonious, realize the real equality of ethnic minorities in the politics, economy and culture; eliminate the development gap among various ethnic groups; promote modernization process in areas inhabited by the minorities; respect the cultural traditions religious beliefs and customs of various ethnic minorities in order to effectively safeguard national integrity and unity; ensure common prosperity, progress and development of all nationalities. In addition to consistent adherence to the autonomous administration of ethnic regions, China formulates several specific national policies according to the reality and characteristics of each ethnicity in order to help them develop economy and culture. The formation and evolution of these national policies have gone through four phases with the influences of international environment of different periods and specific domestic politics, economy and culture in different historical stages. These four phases are initial formation phase (1949-1957), tortuous development phase (1958-1965), stagnating and wandering phase (1966-1976) and restoring and optimizing phase (1977present). 2 Formulating and implementing specific policies and measures from the reality of ethnic regions are basic experiences of Chinese policy on ethnic issues. Compared with the whole country, China‘s ethnic regions have differences in natural conditions and economic development stages, and characteristics in cultural traditions and spiritual life. Chinese government constantly studies and formulates preferential policies, specific policies and specific plans according to these realities in order to accelerate development in ethnic regions. Chinese government implements specific fiscal systems which is different from other provinces and cities in the five autonomous regions of Inner Mongolia, Xinjiang, Tibet, Guangxi and Ningxia and three multi-national provinces of Yunnan, Guizhou and Qinghai. Chinese government also establishes special funds as ―subsidy to ethnic regions‖, ―minorities education subsidies‖, ―frontier construction subsidies‖, ―infrastructure subsidies in ethnic regions‖, ―development fund for supporting the economically underdeveloped areas‖, ―food and clothing fund for impoverished ethnic minority area‖, ―fixed fiscal subsidy‖ and so on.

II. Development as the Fundamental Way to Solve Ethnic Problems The core issue of upholding and improving the autonomous system of ethnic regions is to promote the comprehensive, coordinated and sustainable development of ethnic autonomy areas. Hu Jintao stressed that, ―the difficulties and problems of ethnic areas should be solved by development‖; ―We must fully understand the extreme importance of accelerating development in ethnic areas from the global and strategic perspective‖. Development is the fundamental need and way to solve the current ethnic problems. Only by accelerating the development of economy and society of minorities groups can national unity and social harmony achieve a solid foundation. Since the opening up reform 30 years ago, ethnic regions have always focused on the major task of economic construction. On the one hand, persist in 2

National Situation Analysis and Research Group in Chinese Academy of Sciences, The Seventh Report on National Conditions Research: Ethnic Groups and Development—Research on Accelerating the Social and Economic Development in the Central and Western Areas, Liaoning People‘s Press, June, 2000.


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formulating various policies and measures with the standard of productivity development. On the other hand, give full consideration to the economic development of the real situation, choose priorities, find the direction and depth of development based on different locations, and make efforts to promote the comprehensive, coordinated and sustainable development of economy and society.

Column 11-1. China‟s Important Policies for Supporting Economic

Development of Ethnic Regions in Recent Years For the past few years, Chinese government has issued a number of policy documents to support development of ethnic regions, such as Chinese Communist Party Central Committee and the State Council‟s Decision on Further Strengthening the National Work, Accelerating Economic and Social Development of Ethnic Minorities and Ethnic regions, and Provisions for the Implementation of the Law on Ethnic Regional Autonomy by the State Council. The State Council has also issued and implemented three special plans, which are Development Plan on Supporting Ethnic Minorities with Less Population (2005-2010), the Eleventh-Five Plan on Ethnic Affaurss, and the Eleventh-Five Plan on the Action of “Vitalizing Border Areas and Enrich the People Living there”. The State Council has studied and formulated regional economic policies for accelerating development in ethnic autonomous areas. Since the opening reform, the Party has held four Tibet conferences, formulated policies for Tibetan development, and promulgated Opinions on Resent Support for Development of Tibetan Economy and Society. In recent years, the State Council and related departments have also formulated A Number of Opinions on Further Promotion of Development of Xinjiang Economy and Society ((Promulgated by the State Council [2008]), Opinions on Support for Yunnan‟s Project of Vitalizing Border Areas and Enriching the People Living there (Development and Reform Commission [2008] No. 2327), and are now formulating opinions on support for development of Tibetan areas in Qinghai Province, etc. In the early 2008, the State formally approved the implementation of Development Planning on the Northern Gulf Economic Zone in Guangxi, which marked that the development of the northern gulf economic zone had been formally included in the national development strategy. It laid a foundation for the development with historic leap in Guangxi. The northern gulf economic zone in Guangxi has gradually become an essential strategic highland to driven and support the western development and a new pole of China‘s coastal development.

Accelerating the development of ethnic regions can not live without the strong support and help from the country. Since the reform and opening-up 30 years ago, China has continuously increased the strength of transferring payment from the exchequer and special financial support, and the distribution of each fund has been tilted to the ethnic regions. In the medium-term and long-term plan and program, China has always attached importance and support to accelerate development in ethnic regions, given full consideration to the special difficulties of ethnic regions, set the ethnic regions as priority, and continuously strengthened support. But more important things are enthusiasm, creativity, self-reliance, hard work in ethnic regions which will constantly enhance their self-development ability. Since the reform and opening-up 30 years ago, people in ethnic regions persist in combining national aid with giving full play to the enthusiasm and creativity of ethnic people, combining national aid with

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strengthening the internal vitality and self-development ability of ethnic people, combining government‘s major policies and principles with specific realities of ethnic regions, opening mind, breaking with the conventional ideas, innovating ideas, and constantly promoting the comprehensive, coordinated and sustainable development of economy and society in ethnic regions. In the 30 years of reform and opening up, people in minority areas have always persisted in taking economic construction as the core, and unswervingly pushing forward the each reform course. Reform is to liberate and develop labor force. Reform can not only stimulate the enthusiasm and creativity of the masses to provide strong power for development, but also provide a favorable system and institutional guarantee for the fast economic development. Reform is a powerful driving force for economy development and the only way to build up a powerful nation and making the people rich. To speed up the economic and social development in ethnic areas, we must adhere to the policy of promoting development through reform, constantly deepen reform, and insist on expanding opening up policy. In the 30 years of reform and opening up, the reform and opening-up in ethnic regions has always been active and steady, step by step, and combined with local circumstances. Stability is the basic prerequisite for reform and development. People in ethnic regions persist in steady development. In the developing process, people in ethnic regions actively and safely handle the relationship among ―reform, development and stability‖. Not only development should be accelerated and each reform be promoted properly, but also should balance the strength and deepness of the reform with maintaining the stability as a priority.

III. Adherence to the Basic Policy of Opening to the Internal and External World In the 30 years of reform and opening up, people in minority areas have always persisted in opening to the domestic market and outside world, giving play to the geographical advantages of abutting on border, constantly deepening open areas and promoting economic development. They have formulated flexible open-door policies which created more favorable investment environment, constantly expanded foreign trade contracts and economic and technical cooperation, introduced foreign capital and advanced technology and management experiences. It promoted the opening to outside world to a higher level and wider areas. Ethnic regions are horizontally joined with coastal and inland developed cities in order to realize complementary advantages, mutual benefit and common prosperity. With the implementation of opening-up strategy which is promoted in trapezoid from the coastal to the border, along the Yangtze River, along the railway lines and inland provincial capital cities, the opening-up level of ethnic regions is constantly advanced, the opening-up areas continuously expande and the opening-up level deepened. Since the 1980s, there having been established one coastal open city, 14 river-shore open cities, 7 testing places of reform and opening-up in ethnic regions, 14 border economic cooperation zones and 71 national first-grade ports in China‘s ethnic regions and border areas. China is bounded by 14 countries and most of the border areas are regions inhabited by ethnic groups. Of 22,000 kilometers of boundary line, 19,000 kilometers are in the ethnic autonomous area. The border area is 2.12 million square kilometers and the ethnic area account for 92%. There are 135 border countries and 107 of them are minority autonomous


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areas. The total population of border area is 22.65 million, in which the ethnic minority population accounts of 10.67 million. To promote the comprehensive development of economy and society in border areas, China makes great efforts to implement the project of ―vitalizing border areas and enriching the people‘s life‖, aiming at accelerating development in border areas and promoting the well-off living standards. To support this project, ―vitalizing border areas and enriching the people‘s life‖ project fund is set up in the ethnic minority development fund by the central government; help and support are provided to the pilot and key towns and townships; a set of ―vitalizing border areas and enriching the people‘s life‖ programs are implemented; and social funds are secured for the project. The funding has gradually increased from 15 million in 2000 to 180 million in 2007 and 360 million in 2008. From 2000 to 2008, the total action fund of ―vitalizing border areas and enriching the people‘s live‖ is 1.025 billion. At the same time, a large number of social funds have been driven and attracted to the border areas. In this way, a great many of programs for resolving special difficulties of people‘s work and life have been set up, including in the field of economic and social development, that of infrastructure, agricultural industry, ecological construction, cultural education and so on. Favorable economic benefit and social benefit have been taken place. This project has become ―work to the people‘s heart‖ and ―benevolent governance project‖ in border areas. After the implementation of ―vitalizing border areas and enriching the people‘s life‖ project, people in border areas seize the opportunity to accelerate development. At the end of 2006, the total output value of 135 border countries had reached 229.3 billion with an increase of 145% of 93.5 billion in 2000. The total output value per capita had reached 10126 with an increase of 122% of 4563 in 2000. The local fiscal revenue has been 13 billion with an increase of 65% of 7.9 billion in 2000. The large-scale industrial output value had been 104.1 billion with an increase of 213% of 33.3 billion in 2000.

IV. Adherence to the Principles of “Taking Actions that Fit Local Circumstances, Taking Actions that Fit Ethnic Groups and Apply Different Guidance to Different Types of Areas” The actual situations in ethnic regions vary widely and the mode and pattern of development are different, so the policy formulation and implementation shouldn‘t be uniform in all cases. People should act properly based on the reality, considering the advantages, avoid weakness, and develop agriculture and industry in proper areas at proper rate, so as to promote the healthy and stable development of minority regions. Since the reform and opening up 30 years ago, the supporting policy for ethnic regions has always adhered to the principles of ―taking actions that fit local circumstance, taking actions that fit ethnic groups and apply different guidance to different types of areas‖ For ethnic regions with more difficulties in production and daily life, policy regarding tax relief is implemented which is appropriate, for recuperating and reconstruction. The procurement prices of agricultural, husbandry, sideline and local products in ethnic regions are adjusted and raised, the areas implementing ―three preferences‖ policy are expanded, and village fair trade and border trade are opened for peasants and herdsmen to sell their own products. Supplies are provided and price fixing policy is carried out for the capital goods and living goods which are closely related to the production and life of ethnic minorities. The

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policies of low-interest fund, tax relief and special investment are carried out for enterprises which produce ethnic goods. Preferential policy is also given to industrial enterprises both domestic and foreign joint-venture. Preferential treatment is applied in foreign exchange retention ratio of exporting product of Inner Mongolia, Guangxi, Xinjiang, Ningxia, Tibet, Qinghai, Yunnan and Guizhou, as well as retention ratio of earning from foreign exchange by export product in each autonomous region. Economically developed provinces and cities are organized to give counterpart support to ethnic regions, and experienced managers and technical experts are sent to ethnic regions to carry out the program of ―aiding the border areas with intellectual forces‖. In arranging production layout and formulating long-term economic development plans, the reality in ethnic regions is taken into consideration from the national strategic objective. In order to help ethnic areas formulate economic and social development plans. A number of development experimental zones are established in ethnic regions as examples of construction and open of ethnic regions. Of China‘s 55 ethnic minorities, 22 are with population below 100,000. The total population of ethnic minorities is 630,000 (according to the fourth census in 1990) and all of them are called minority groups. After the founding of People‘s Republic of China, although the politics, economy and society of these minoritis have developed sustainably, the development level is still relatively low and the poverty problems are still outstanding. The country has implemented development plan for supporting ethnic groups with relatively small population (2005-2010), adopted special policies and measures in order to concentrate strength on helping these ethnic groups with relatively small population to accelerate the pace of development, change the backwardness and achieve common prosperity. From 2002-2008, a total of 2.133 billion RMB funding has been put into supporting ethnic groups with smaller population, including 0.775 billion RMB of special construction funding for development of minority groups, 0.805 billion RMB of special development fund for ethnic groups with smaller population arranged by ethnic minority development fund, 0.329 billion RMB of special or matching fund at provincial level, and 0.224 billion RMB of central government poverty reduction fund, counterpart helping fund, international cooperation fund and so on. At present, of 640 villages inhabited by ethnic groups with smaller population, 260 have reached inspecting criterion and achieved the objective of ―four getting through, five possessing, three reaching‖ in advance. A favorable situation of production developing, living standard improving and national unity is presented in areas of ethnic groups with smaller population.

V. Implementation of Preferential Policy on Trade and Product in Ethnic Regions The special support policy implemented by the country to the ethnic trade and enterprises of producing ethnic commodities advances them in management reform and technological transformation. It can enhance their market competitiveness, increase the service ability for ethnic minorities, meet the special needs and daily supply of all ethnic groups, promote the commodity circulation and market boom in ethnic minority areas, and achieve favorable economic and social benefits. The policies enjoyed by ethnic trade and ethnic commodity production enterprises have been perfected constantly. According to the survey, in the ―Tenth-Five‖ period, the three


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preferential policies for ethnic trade were implemented properly. The ethnic trade enterprises above the township level enjoyed value-added tax refunded 50% which amounts to 1.2 billion, the ethnic trade enterprises below the township level exempted from value-added tax of about 1 billion, and the dark tea enterprises exempted from value-added tax of about 50 million nationwide. The ethnic trade and specially designated enterprises of ethnic commodity production enjoyed a total of about 2.2 billion of preferential lending rate. The discount loan fund of 14.45 million was arranged by the central government for constructing ethnic trade network and technological transforming of ethnic commodity production enterprises. The development of ethnic commodity production and the commercial distribution activeness with ethnic trade enterprises as the main channel ensure a basic balance commodity supply in ethnic regions, and the problem of ―hard buying and selling‖ which is caused by poor commodity circulation channel is resolved in most areas. Particularly in recent years, related department of the government has strengthened the support in important goods of Moslem food, dark tea, ethnic galosh and so on. Therefore, ethnic people can have ―quality-assured meat‖, ―quality-assured tea‖ and ―quality-assured shoes‖. Their rights and interests can be protected. And the stable supply of production and daily life necessities in ethnic regions can be secured. The implementation of preferential policy on ethnic trade greatly eases the difficulty of capital turnover of ethnic trade and production enterprises, reduces the production and operation costs of enterprises, and enhances enterprise competitiveness. The development of ethnic trade enterprises shows three distinct trends. First, a set of medium and large sized commercial enterprises with comprehensive competitiveness are gradually formed, such as Guizhou Hualian Group, Tianchi Department Store in Yanbian, Jilin, and so on. Second, a set of regional specialized markets are gradually developed which radiate more and more widely and of greater and greater driving force for ethnic people. It helps casting off poverty, such as Sanjiaji Tea and Livestock Market in Guanghe, Gansu, Ningxia Laoheqiao Market, and so on. Third, the operating procedure of ethnic trade becomes closer to the production and livelihood of peasants and herdsmen. Chain-store operations and uniform distribution extend to remote rural and pastoral areas, such as Xingxing Ethnic Trade Company in Tongliao, Inner Mongolia, Jilin Yanbian International Trade Company and so on. Meanwhile, the enterprises producing ethnic goods with special needs continuously grow. With the improvement of productive force in ethnic regions and living standard of ethnic groups, new types of ethnic products with special needs which suit people‘s consuming fashion and create healthy lifestyle are constantly emerged. Technology content and ethnic culture taste are improved step by step, such as ethnic language software, solar electrical energy generation equipment used in pasturing area, sprinkler irrigation equipment for home using and so on. A group of enterprises producing ethnic goods with special needs, such as Changchun Haoyue, Grassland Xingfa and so on becomes to develop multi-operational management and specialize in production with industrial chains constantly spreading. The development of ethnic trade and production of ethnic commodity with special needs activate the circulation, expand domestic demand and accelerate the development pace of individual and private economy in ethnic regions. It also becomes the essential channel for accumulating private capital, the major industry of individual and private economic development and new economic growth opportunities in ethnic regions. It helps more and more greatly in promoting national economic development in ethnic regions, driving the

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growth of other related industries, arranging for employment of ethnic people and leading ethnic people to get rich. For example, in Hefeng Country, Enshi in Hubei Province, there are 9 ethnic trade and commodity enterprises. They got 280 million of loan with preferential interest rates, 8.19 million discount loans, accounting for 28% of the total credit of the country in 2004. During the ―Tenth-Five‖ period, the nine ethnic trade and commodity enterprises achieved a net increase of 240 billion in total output value, accounting for 63% of the country‘s net increase. The annual average growth was as high as 14% and the contribution rate of the country‘s tax revenue growth was 38%. 38,000 peasant households benefited from them, accounting for 66% of the country‘s peasant households.

SECTION 3: AN OUTLOOK OF ECONOMIC DEVELOPMENT IN ETHNIC REGIONS At present, we should pay much attention on the continuing implementation of ethnic cause in the 11th ―Five-Year Plan‖, strongly promoting the equalization of public services, focusing on solving major problems and difficulties among ethnic minorities and in ethnic regions, an effort to achieve an overall, coordinated and sustainable development in ethnic regions.

I. Improved System of Ethnic Policy In the early founding days of the New China, Chinese government established an ethnic policy with ethnic equality, unity, regional autonomy and common prosperity as the core purpose. The reform and opening-up put forward new demands for China‘s ethnic policy and created social conditions for development of ethnic policy. After the 60-years‘ continuous development and improvement, especially the development of 30-years‘ reform and openness, China has formed an ethnic policy system with Chinese characteristics which is well tailored for the country‘s realities. China‘s ethnic policy includes politics, economy, culture, society and other aspects in terms of content, including policies formulated by the central government, related departments and local government down the hierarchy. The cornerstone of China‘s ethnic policy is ethnic equality. The basic contents are maintaining national unity and country unification, carrying out ethnic regional autonomy, developing economy and preserving cultures, training various talented persons of minority, and respecting the religious beliefs and customs of ethnic minorities. And the staring point and goal are achieving common prosperity of all ethnic groups. China‘s ethnic policies are based on the actual conditions. China takes full account of both the basic fact that ethnic groups take the socialist route and that differences of development levels, culture and customs among 56 ethnic groups; not only summaries the historical experience and lessons dealing with the ethnic issues deeply, but also draws lessons from other counties; not only maintains the stability, consistency and continuity of basic contents, but also enriches and improves policies constantly with social development and plenty practice. In this way, the policies are endowed with historical and realistic scientific basis.


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For a long period into the future, the Chinese government will continue developing and perfecting ethnic economic policy based upon the present ethnic policy system. The related departments of central government will continue policies fostering investment, finance, taxation, price, land, mineral resources, foreign trade and so on in ethnic regions. The government will formulate the special planning and development ideas of corresponding areas, in order to promote the development of economy in ethnic regions. To act in concert with the western development strategy and provide further support on the development of ethnic areas, special funding was implemented by central government in ethnic regions since 2000 to resolve special difficulties there. Considering the special expense in ethnic regions, the central government also implements policy of subsidy, such as increasing the subsidy magnitude and amount in ethnic regions and so on. The main objective of general transfer payment is to realize equalization of basic public services without setting specific purpose. It is arranged by local government and is a typical balanced fund. From 2000 to 2007, the central Ministry of Finance totally arranged 209.683 billion of general transfer payment in eight ethnic provinces. The increasing strength on transfer payment shows that the central government pays great attention on the development of ethnic regions. According to the assumption of reforming transfer payment system, the financial transfer payment will be more inclined to the central and western areas, especially the western and ethnic areas, in order to improve the capacity of public service in central and western areas and make all people share the reform and development outcomes. The plan of ―vitalizing border areas and enriching the people living there‖ will be promoted continuously. Various departments will be coordinated according to the Action of Vitalizing Border Areas and Enriching the People Living There in the Eleventh Five-YearPlan. The infrastructure and ecological construction in border areas should be strengthened. We should improve producing and living conditions of people living on the border, especially solvng the poverty problem, widening channels for increasing income, strongly promoting the development of border trade and regional economic cooperation, greatly developing the education, health and culture structures in border areas, strengthen national unity, and maintain stability in border areas.

II. Comprehensive and Coordinated Development of Ethnic regions and Other Parts of the Country Since the implementation of western development, to promote the interaction between the east and the west, Chinese government enhances various economic subjects in various areas to achieve production factors flowing across administrative regions in accordance with rules of market economy. With the support of various departments of the State Council, the eastern and western regions work together to build platforms of inter-provincial support, Western China International Economy and Trade Fair and so on, find a scientific new way of ―government guided, free market, corporate oriented, social participation‖ for promoting interaction between the east and west. The interaction between the east and west shows a favorable trend of constantly expanding scale, widening areas, innovating mechanism and growing benefit. As the important area of the Western Development, ethnic regions are ushered a strategic opportunity period for overtaking and developing in the strategy of coordinating regional

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economic development in east-west interaction. On the basis of current achievement in eastwest interaction, people in ethnic regions will see a lot of industry transfers from the east, introducing advanced technology, ideas and management experience, so as to effectively expand the scale of economic growth and accelerate the quality and efficiency of development. People in ethnic regions should develop themselves, root out the potential value, and strengthen cooperation in the fields of infrastructure, competitive industry with distinguishing features, economic and trade contact, etc. The initiative and enthusiasm of east-west interaction will also be improved. People in ethnic regions will continue to optimize the environmental development to improve the level of technological innovation, optimize industrial layout, obey demand of the main functional areas, start from the reality, take actions that suit local circumstances, maximize favorable factors and minimize unfavorable ones, guide the industries to transfer to important economic zones, central cities, resource-rich areas and important port cities in ethnic regions, promote industrial concentration distribution, intensive land use, resource conservation use and comprehensive environmental improvement, and enhance industrial cluster development. In the new historical period of east-west interaction, the guiding function of the government must be strengthened. The government will also improve the development framework and policies of east-west interaction, strengthening the driving force in examination and approval of project and land, fiscal and financial support and so on, guiding enterprises for higher competitiveness through cross-region reorganization, and promote the mature development of east-west interaction mechanism. The scale of interaction should be expanded, the areas should be broadened, and the level should be improved.

III. Promoting Industrialization in Ethnic Regions by Specialty Industries In recent years, the proportion of primary industry in ethnic regions decreases greatly, the proportion of secondary and tertiary industries increases stably, and the industrialization develops rapidly. In the whole western area, the proportion of primary industry accounting for GDP decreased from 25.45% in 1998 to 15.97% with a decline of nearly 10 percentage points. The output values of secondary and tertiary industries grew by 5.3 and 4.16 percentage points. The paces of industrial restructuring and urbanization have been accelerated, positive changes have appeared in economic restructuring, and the coordination among regions, between city and countryside, and among industrial development have been further strengthened. Economic development has pulled tens million of ethnic people out of poverty. The net income of peasants and herdsmen in the Tibet Autonomous Regions has maintained a double-digit growth for three years. The secondary industry in ethnic regions has a rising trend except for Guangxi and Yunnan. The proportion of tertiary industry also rises in general. With the preference and guidance of national related policies, the resource advantages of ethnic regions have gradually transformed into economic advantages. A number of distinctive industries grow with a strong momentum. First, characteristic agricultural bases are formed. The duration of sunshine in ethnic regions is long, the temperature difference is big, and the grassland is large. In this way, ethnic regions are ideal areas for development of green industry, animal husbandry and dry land agriculture. At present, the dairy product, beef, mutton and other industries in Xinjiang, Qinghai, Inner Mongolia and Ningxia have begun to


325

take shape. A large number of well-known enterprises and high quality products have entered domestic and international markets. Second, characteristic industry has been formed. Inner Mongolia and Xinjiang which are rich in coal, oil and natural gas resources have become national bases of energy and heavy chemical industry. The industries of tobacco, bio-products and hydroelectric power in Yunnan and Guizhou, the industries of nonferrous metal and sugar in Guangxi, and the national carpet industry in Qinghai, etc. have become industrial clusters with leading enterprises. The industrial division level has been improving and the industrial value chain has been extending constantly. It is learned that in the next five years, China will adopt preferential policies to accelerate the development of infrastructure and basic industry in ethnic regions, an effort to optimize industrial structure, and narrow the gap between ethnic regions and the relatively more developed regions.

IV. Improving the Enterprises Competitiveness in Ethnic Regions People in ethnic regions will continue to earnestly implement the national trade preferences, improve the industrialization level and market competitiveness of enterprises, and complete the ethnic trade system and commodity producing system of national products, and the service level for the minority people. First, the regulation and guidance roles of ethnic trade preferential policies should be given full play of. People should strengthen the publicity of ethnic trade preferential policies, to combine the policies with the local realities creatively, to formulate and detail management practices, standardize procedures, to make good, sufficient and flexible use of policies and to strengthen the supervision and inspection of policies to ensure the their strict implementation. Second, the market order of commodities with national special needs should be safeguarded. People should persist on ―stress on both hands‖—one hand is on policy supporting of ethnic trade and ethnic commodities enterprises, and the other one hand is on supervision of respect paid by the enterprises for the ethnic life and customs. People should also standardize the market order by law, strike counterfeit and shoddy products, guide the enterprises to combine economic benefit with better service and better products and effectively protect the consumer rights of ethnic minorities. And the government will implement dynamic and hierarchical management on ethnic trade and ethnic commodities enterprises, support the superior and eliminate the inferior, manage strictly, actively support the guild to regulate business competition by law, and maintain a normal market economic order. Third, enterprises should be promoted to transfer growth mode. People should improve the quality, science and technology content and national culture grade of commodities with national special needs through supporting technological transformation of enterprises, attracting more private capital into ethnic trade and producing of commodities with national special needs through the guiding role of preferential policies toward capital movements. Fourth, a group of commodity firms matched with national special needs should be made stronger and larger. Moslem food, ethnic medicine, dark tea and ethnic handicrafts are the most important industries with good industrial base, large market capacity and broad development prospect. People should carefully review the development effect and experience of the four industries, encouraging enterprises to move toward the market, supporting a number of key enterprises towards upper scale, creating brands by technological improvement

326


and introduction of advanced management experience. People should also drive the development of four industries by relying on the brand-name enterprises, so as to revitalize the national economy. Translator: Yu Xuxiang (SUFE) English Version Editors: Lv Mei (SUFE), Zhang Jingyi (Harvard)

REFERENCES [1]

Provisions for the Implementation of the Law on Ethnic Regional Autonomy by the State Council. [2] The Eleventh-Five Plan on Ethnic Undertakings. [3] The Eleventh-Five Plan on Action of Vitalizing Border Areas and Enriching the People Living there. [4] Development Plan on Supporting Ethnic Minorities with Less Population. [5] China Statistic Yearbook (2000-2008). The Ethnic Publishing House. [6] Zhao Xianren, Ge Zhongxing. Action of Vitalizing Border Areas and Enriching the People Living there (from the first to the fourth volume), The Ethnic Publishing House. [7] The Ethnic Problem Researching Center of the State Nationalities Affairs Commission, Development Assessment Report on China‟s Ethnic Autonomous Areas, The Ethnic Publishing House. [8] Tie Muer, Zhao Xianren. Statistical Analysis and Strategy Research on China‟s Ethnic Villages, The Ethnic Publishing House. [9] National Situation Analysis and Research Group in Chinese Academy of Science, June, 2000The Seventh Report on National Conditions Research: Ethnic Groups and Development—Research on Accelerating the Social and Economic Development in the Central and Western Areas, Liaoning People‘s Press. [10] China‟s Statistical Summary in 2009. China Statistical Publishing House.




LET ONE HUNDRED FLOWERS BLOOM: THE ECONOMIC DEVELOPMENT IN THE ETHNIC REGIONS OF CHINA Yuan Jing’an* The topic of ethnic regions in China is still a strange concept to most Westerners; therefore, it is necessary to give a brief introduction here first.

Contrary to most Westerners‘ belief, China is not an ethnically homogeneous nation. In China, there are as many as 55 officially recognized ethnic minority groups. Minority refers to all ethnic groups other than Han. There are significant ethnic and cultural differences among these minorities. For example, millions of Koreans live in the northeast of China, which shares the border with North Korea. They are Chinese citizens, but usually they can speak both Chinese and Korean fluently. In the northwest of China, which shares border with Central Asian countries, nine million Hui people live in the regions such as Xinjiang, Gansu, and Ningxia. They are Muslims, and visit Mosques regularly. The minority group that has the largest population is Zhuang: they live in various places in China, and have a total population of over 16 million. In total, the population of all minorities in China is 132 million, which accounts for 9.4% of the total population in China. Different from many other countries, in China most minorities have lived with Han people for more than two thousand years and have long-term mutual influences on each other. Although there have been conflicts now and then in the past thousands of years, in general, during most of the time the minorities accepted the administration of the central government of China (the emperor and royal court), and the communications among all ethnic groups has never stopped. During a few dynasties, minorities even took control of the central government and were the administrators of the whole China. The most influential one was the Qing dynasty, which was founded by Manchu, one of the minorities. It governed the entire China, * Yuan Jing‘an, PHD, University of Alabama， Associate Professor Southwestern University of Economics and Finance.

328

Yuan Jing‘an

including the current Mongolia, Taiwan, and part of Siberia, for 268 years from 1644 to 1912. Due to the characteristics mentioned above, the minorities in China have played an important role in Chinese history. Also because of the long-term co-existence of all the ethnic groups, both the dominant Han people and the minority people identify themselves as ―Chinese‖. After the founding of the People‘s Republic of China in 1949, the Chinese government followed the Soviet Union government's doctrine and set up five ethnic minority autonomous regions in the areas where large number of minority people live, and named the regions after the dominant minority groups. Those five ethnic minority autonomous regions are, Xinjiang Uyghur Autonomous Region, Tibet Autonomous Region, Inner Mongolia Autonomous Region, Ningxia Hui Autonomous Region and Guangxi Zhuang Autonomous Region. The political status of these autonomous regions is equal to that of provinces or municipalities, or states in the U.S. The total land area of the five autonomous regions accounts for three fifth of the total land area of China. In these autonomous regions, at least the Vice Governors must be from the minority group. But actually, the population of Han people accounts for more than half of the total population in four out of those five autonomous regions. For a long time, the minorities in China have received preferential treatment by national policies and enjoyed more privileges than Han people. For example, when minorities compete for government positions or seats at People's Congress, they have priorities; the descendants of minorities‘ can be admitted into universities with lower scores than Han students‘. It is also worth mentioning that even though the Constitution of China sets strict ―One Child Policy‖, this policy does not apply to minority people. Therefore, the proportion of minorities in the total population of China has an increasing tendency. In the regions where minority and Han people live together, like most areas in Yunnan province, the existence of minorities provides a variety of thriving cultures. The Lijiang Ancient City, which has a prestigious position among American and European tourists, is located in this province. Lijiang has a history of over 800 years and is well known for its abundant architectural styles and music of Naxi ethnic group. It is on the list of UNESCO World Heritage. For backpackers, this kind of place is even more attractive than those sparkling big cities like Beijing and Shanghai. In fact, there are many other ancient cities like Lijiang in Yunnan province and they make Yunnan a major tourism destination in China. These activities have greatly pushed Yunnan‘s economic development up. In provinces like this, the minorities and Han people get along with each other very well. In some other regions like Xinjiang and Tibet, the available natural resources are very limited. The area of Xinjiang Autonomous Region accounts for one sixth of the land area of China, but most of this region is disserts and only a small part is arable land. For a long time, people‘s living standard was very low. After the founding of the People‘s Republic of China, the central government has invested large amount of fund to build highways and railroads, and to develop agriculture and oil industry in this autonomous region. Since the reform-and-open policy was adopted in China in 1979, as mentioned in Chapter 11, the millions of Muslims living in Xinjiang Autonomous Region took advantage of their natural connections with the Muslims in Central Asia, and created tight business and trade relations. In fact, because Xinjiang has better infrastructure than most Central Asian countries, like Pakistan, Afghanistan and Turkmenistan, it has become an important business center in this area, and the old Silk Road is revived. Certainly, the rapid development of Xinjiang took place only in the past decades and its accumulation of wealth still lags behind compared to other areas which have developed

The Economic Development in the Ethnic Regions of China

329

prosperously for hundreds or even thousands of years. However, this area has its unique strategic importance. As mentioned above, Xinjiang shares thousands of kilometers' borders with Central Asian countries like Afghanistan and Pakistan. The influences of the extremists of Muslim (fundamentalists) enter Xinjiang unavoidably. In today‘s world, when most countries are pursuing peace and development, and when any form of terrorism is resolutely opposed, developing the economy in areas like Xinjiang is especially important. The Chinese government has realized long ago that cutting the connections with the rest of the world is not the way to solve problems, and that the minority areas especially need to strengthen and extend their communications with other areas in China and the world. Only in this way can the different ethnic groups understand each other, learn from each other and develop together. In Chapter 11, the authors, from the perspectives of economists and with the support of a large number of statistic data, conduct a detailed review of the economic development of ethnic regions in China for the past thirty years after the open policy was established. This chapter analyzes in details the income per capita, government‘s financial income and expenditure, the structure of industries, infrastructure, and the efforts that are made to eliminate poverty, and summarizes the great achievements and progress in the economic development in these ethnic regions. Meanwhile, this chapter points out that these ethnic regions are still lagging behind. Furthermore, this chapter analyzes the economic development in these ethnic regions during the Financial Crisis of 2008-2009 and describes the relatively fast developments in economic growth rate, investment in fixed assets, import and export, and consumption. This chapter also proposes constructive comments and suggestions for the future. Then from the policy perspective, this chapter illustrates in details the reason behind the rapid economic development in the ethnic regions in China in the past decades. That includes: the political structure which takes "autonomous regions" system as the core, and the fundamental economic approach which focuses on comprehensive, coordinated and sustainable development. The economic policy in ethnic regions should follow the basic principle of insisting open policy internally and externally and the principles of ―Adapt to local conditions, use different measures according to different ethnic groups' needs and provide guidance in accordance with different needs‖. Also, preferential and supportive policies should be implemented to the trade and commodity-producing industry in ethnic regions to accelerate their development. In the end, this chapter proposes specific suggestions on how to perfect the policy system of the ethnic regions, how to enhance the connections between ethnic regions and the rest of the country, how to improve the competitiveness of businesses in ethnic regions, and how to develop featured industries of each region. This chapter also expresses confidence in the future of ethnic regions' economic development.

REFERENCES [1]

Transnational Linkages and Development Initiatives in Ethnic Korean Yanbian, Northeast China: "Sweet and Sour" Capital Transfers. (2009). Pacific Affairs V. 82 No. 3 (Fall 2009) P. 427-46, 82(3), 427-446.

330 [2] [3] [4] [5] [6] [7]

Yuan Jing‘an Li, L. (2009). A Garden of Growing Imams. Beijing Review V. 52 No. 20 (May 21 2009) P. 42, 52(20), 42. Hartley, L. (2008). [On the Margins of Tibet]. History of Religions V. 48 No. 1 (August 2008) P. 77-9, 48(1), 77-79. Market Watch. (2007). Beijing Review V. 50 No. 45 (November 8 2007) P. 42-3, 50(45), 42-43. Winkler, D. (2008). Yartsa Gunbu (Cordyceps Sinensis) and the Fungal Commodification of Tibet's Rural Economy. Economic Botany V. 62 No. 3 (November 2008) P. 291-305, 62(3), 291-305. Davis, E. (2008). Uyghur Muslim Ethnic Separatism in Xinjiang, China. Asian Affairs (New York) V. 35 No. 1 (Spring 2008) P. 15-29, 35(1), 15-29. Torode, G., & Dubai, R. (2009). Al-Qaeda Leader Targets China Terrorist Group Calls for Jihad in Xinjiang. South China Morning Post; Hong Kong, (October 08 2009) P. 1.



Chapter 12

THE NEW MEASURES: HONG KONG AND MACAO TACKLING THE FINANCIAL CRISIS Zheng Yanting*, Zhao Zheng, Wu Wenshi and Du Yamin In September 2008, the global financial crisis worsened, which made Hong Kong and Macao‘s sustained strong economic growth of many years screeched to a halt. In the first quarter of 2009, various economic indicators were in overall negative growth. Subsequently, Hong Kong and Macao Special Administrative Region Governments have issued a number of measures ranging from financial support to policies concerning people‘s basic needs in order to weather the financial crisis. Meanwhile, the central government also supported Hong Kong and Macao‘s economy in many ways. Many economic indicators have signified that these countermeasures have achieved positive results. It is believed that with the mainland's economy rebounding to stabilization and the global economy gradually showing signs of recovery, the resumption of Hong Kong and Macao‘s economic growth is just around the corner. This chapter begins with the analysis of the impact of financial crisis on Hong Kong and Macao‘s economy from two aspects: the overall economy and representative industries, and then summarizes the measures that Hong Kong and Macao adopted to deal with the financial crisis, as well as the central government‘s supporting policies to Hong Kong and Macao.

SECTION 1: THE IMPACT OF FINANCIAL CRISIS ON HONG KONG AND MACAO‟S ECONOMY Since the beginning of the new century, relying on the mainland's preferential policies, Hong Kong and Macao are in rapid economic growth. Since CEPA (―Closer Economic Partnership Arrangement‖) was signed six years ago in 2003, Hong Kong‘s GDP has an average annual growth of 6.3%. Since the opening up of betting rights in 2002, driven by the gaming industry, Macao‘s economy realized double digit annual GDP growth except the 6.9% growth in 2005. * Zheng Yanting is lecturer of the Institute of Economics and Resource Management, Beijing Normal University, who earned her PhD degree from the Department of Geography, the University of Hong Kong. Email: [email protected]

332

Zheng Yanting, Zhao Zheng, Wu Wenshi, et al.

However, in September 2008, with the bankruptcy of the fourth-largest U.S. investment bank Lehman Brothers, there has been a serious turmoil in global financial markets. Nowadays, with rapid international capital flows and transmission of information, the rapid spread of the financial crisis in the United States triggered the global financial crisis. Hong Kong and Macao, which are highly export-oriented, are inevitably influenced by the financial crisis.

I. The Impact of Financial Crisis on Hong Kong and Macao‟s Overall Economy Due to the global financial crisis, Hong Kong and Macao‘s economy shows a downward trend. Imports and exports suffer a heavy blow, consumption turned to be weak, investment sentiment went down, and unemployment rate increases. This section analyzes how the GDP of Hong Kong and Macao and their major expenditure components changed from 2006 to the first half of 2009, seeking to reveal the impact of global financial crisis on Hong Kong and Macao‘s economy. Data show that there were already downward signs of Hong Kong‘s economy in the second quarter of 2008 (see Table 12-1). In the second quarter, while gross domestic product increased by 4.1% compared with the same period of 2007, the seasonally adjusted gross domestic product decreased by 1% compared with the previous quarter. In the third quarter, GDP continued to decline, only increased by 1.5% over the same period of the previous year, and fell by 0.8% sequentially compared with the previous quarter. The fourth quarter, when compared with same period of the previous year, showed the first negative growth (-2.6%), and fell by 9% compared with the previous quarter. In the first quarter of 2009, recent economic downturn reached the maximum amplitude, decreased by 7.8% compared with the same period of the previous year, and fell by 4.3% compared with the previous quarter. As the international economic situation stabilized, in the second quarter of 2009, the drop range was narrower (-3.8%). In view of seasonal comparisons, the economy of the second quarter is better than that in the first quarter, with an increase of 3.3%. Through the comparison of gross domestic product by the change of major expenditure components, we can make a more in-depth analysis of economic changes. In the first quarter of 2009, the reasons of the accelerated decline of Hong Kong‘s economy mainly involved: 1) Exports of goods fell sharply. Exports decreased 145.7 billion Hong Kong dollars compared with the same quarter of the previous year, with a decrease of 22.7%. Among these, more than 90% are re-exports, while the vast majority of re-exports were from the Pearl River Delta. Thus, to a large extent, the impact of weak consumption caused by financial crisis on the manufacturing sector of the Pearl River Delta region was also a blow to Hong Kong's economy. 2) The apparent decline in private consumption expenditure. Since the third quarter of 2008, Hong Kong‘s economy showed a gradual decline in private consumption expenditure. In the first quarter of 2009, the decline even reached as much as -6% with a decrease of 14.74 billion Hong Kong dollars in comparison with the same period of the previous year. Its contribution to the GDP drop is more than 50%, reflecting general public‘s lack of confidence in the economy in the first quarter of 2009. 3) Fixed capital formation continued to fall. Since the fourth quarter of 2008, fixed capital formation continued to fall at lower than -10% and the decrease lasted until the second quarter of 2009, when the local business climate remained poor.

Table 12-1. Hong Kong's GDP and its major expenditure components, 2006-2009Q2 (100 million Hong Kong dollars) Year Quarter GDP* Annual change rate (%) Private consumption expenditure Annual change rate (%) Government consumption expenditure Annual change rate (%) Gross domestic fixed capital formation Annual change rate (%) Exports of goods Annual change rate (%) Exports of services Annual change rate (%)

2006

2007

2008

15185.41 7.0

16154.31 6.4

16536.36 2.4

2008 2 3978.47 4.1(-1.0)

3 4228.09 1.5(-0.8)

4 4245.26 -2.6(-1.9)

2009 1 3765.93 -7.8(-4.3)

2 3826.09 -3.8(3.3)

8955.54

9720.27

9863.17

2500.10

2430.17

2476.41

2309.07

2474.29

5.9 1266.33

8.5 1303.98

1.5 1326.69

3.0 313.95

-0.2 324.60

-4.1 335.65

-6.0 357.59

-1.0 319.09

0.3

3.0

1.7

3.1

1.6

1.8

1.4

1.6

3145.34

3253.49

3238.20

859.53

832.76

716.28

716.29

739.50

7.1 2,5216.81

3.4 26988.50

-0.5 27511.40

5.1 6889.19

2.9 7303.66

-17.8 6897.08

-13.7 4964.77

-14.0 6032.41

9.3 5792.55

7.0 6607.28

1.9 6981.41

4.4 1618.79

1.3 1849.52

-4.9 1805.36

-22.7 1599.47

-12.4 1527.02

10.1

14.1

5.7

8.4

4.8

0.4

-6.3

-5.7

Table 12-1. (Continued) Year Quarter Imports of goods Annual change rate (%) Imports of services Annual change rate (%)

2006

2007

2008

2,6213.51

28525.22

29049.64

2008 2 7406.92

3 7641.96

4 7192.65

2009 1 5352.71

2 6463.98

9.2 2963.83

8.8 3322.40

1.8 3430.60

4.8 825.60

2.0 899.58

-6.4 837.81

-21.4 784.29

-12.7 779.63

8.1

12.1

3.3

3.8

2.2

-3.4

-9.6

-5.6

* Measured in chain volume of 2007. # The figures in brackets are the percentage changes of seasonally adjusted GDP compared with the previous quarter. The seasonally adjusted GDP series have been removed in terms of statistical methods due to seasonal effects. Therefore the figures connecting two quarters could make a more meaningful comparison. The annual change figures of original series of GDP and the connected change figures of quarterly GDP which are adjusted seasonally are analyzed together, so we can see more clearly the trend of GDP, especially at the economic turning points. Source: Hong Kong SAR Census and Statistics Department - Hong Kong statistics.

The New Measures: Hong Kong and Macao Tackling the Financial Crisis

335

Data show rebound of Hong Kong‘s economy in the second quarter of 2009, mainly due to: 1) Decrease in exports of goods narrowed down. Export of goods in the second quarter of 2009 decreased 85.7 billion Hong Kong dollars compared with the same period of the previous year, which is greatly reduced compared with the previous quarter's drop of 145.7 billion Hong Kong dollars, and the rate of decline narrowed from -22.7% to -12.4%. 2) Recovery in private consumption expenditure. Compared with the first quarter which had a decline of 14.7 billion Hong Kong dollars, the decline narrowed down to only 2.58 billion Hong Kong dollars, which shows that Hong Kong people gradually restored confidence in the economy. 3) Government investment was in sustained growth. In the first and second quarter of 2009, government consumption expenditure each increased by 5 billion compared with the same quarter of the previous year. Therefore, the local government‘s increasing investment, and implementation of measures which stimulated consumption in the Mainland, as well as the global economy which picked up, all gave impetus to Hong Kong's economic recovery while enhancing Hong Kong people's confidence in the economy. However, it is worth noting that despite the rebound of economy in the second quarter, the prospects for Hong Kong's real economy is still worrisome. The drop of gross fixed capital formation over the same period of the previous year expanded from 11.3 billion Hong Kong dollars in the first quarter to 12.0 billion Hong Kong dollars. This shows that it might take a long time for Hong Kong's economy to move out of the financial crisis completely. Since the second half of 2008, Macao's economy has taken a downward trend (see Table 12-2). Compared with the same period of the previous year, in 2008, GDP of the first quarter grew 32.5%; this rate dropped to 22.4% in the second quarter; in the third quarter it dropped to 10.4%; and in the fourth quarter, GDP growth started to fall by 7.6%. In the first quarter of 2009, the rate of decline even extends to -11.9%. Unlike Hong Kong, in the second quarter of 2009, Macao's GDP growth continued to decline and the rate further expanded to reach 13.7% which is different from Hong Kong‘s. It can be shown that Macao's economy has not recovered due to benefits from the current external economic upturn. As for Macao, about 90% of GDP comes from export of services, while the majority of exports of services are gaming revenues. Therefore, exports of services can be broadly equivalent to gaming revenues. In the fourth quarter of 2008, exports of services had a 5.5% negative growth for the first time in the past five years. The drop rate in the first quarter of 2009 expanded to -14.6% and in the second quarter continued to drop by 14.6%. In the second quarter, exports of services decreased by 5 billion compared with the first quarter, which narrowed compared with the decrease of 5.24 billion in the first quarter. In comparison, exports of goods fell even more rapidly. Since the fourth quarter of 2008, the rate of decline has been close to 50%. In the second quarter of 2009 it decreased by 2.57 billion Macao patacas, which is 6 billion more compared with the first quarter of 1.94 billion. Similar to the previously described situation in Hong Kong, re-exports of goods from Guangdong province accounted for the major part of exports of goods in Macao. Therefore, in addition to a decline in gaming revenues, another main reason for Macao economy‘s continued slide in the second quarter is that the export had not been restored. Furthermore, rate of decline in gross fixed capital formation has remained at about 20% since the second quarter of 2008, which even exceeded 30% in the first quarter of 2009 and continued to decline in the second quarter. In response to the financial crisis, Macao‘s government spending in the first and second quarter of 2009 both continued to increase over the previous year by 15.8% and 6.2%, respectively. To summarize, since the second quarter of 2009, Macao's economy is still not

Table 12-2. Macao's GDP and its main expenditure components, 2006-2009Q2 (100 million Macao patacas) Year Quarter GDP* Annual change rate (%) Private consumption expenditure Annual change rate (%) Government consumption expenditure Annual change rate (%) Gross domestic fixed capital formation Annual change rate (%) Exports of goods Annual change rate (%) Exports of services Annual change rate (%)

2006

2007

2008 1407.49 13.2

2008 2 376.53 22.4

3 338.55 10.4

4 324.09 -7.6

2009 1 324.41 -11.9

2 324.76 -13.7

992.45 16.5

1243.21 25.3

264.35

295.07

317.30

78.76

80.94

81.01

81.00

79.28

8.2

11.6

7.5

7.0

5.1

9.4

5.8

0.7

81.16

91.65

91.45

23.74

19.42

32.31

18.50

25.20

3.8

12.9

-0.2

6.1

-7.8

-4.4

15.8

6.2

267.29

333.58

271.12

72.46

69.69

67.67

42.17

52.63

44.5

24.8

-18.7

-19.4

-25.0

-15.1

-31.2

-27.4

204.03

204.99

152.91

44.14

39.35

30.41

19.56

18.43

2.8

0.5

-25.4

-16.0

-26.6

-44.6

-49.9

-58.3

782.23

1057.90

1304.34

343.34

313.45

290.08

305.11

293.21

18.7

35.2

23.3

38.5

20.0

-5.5

-14.6

-14.6

Table 12-2. (Continued) Year Quarter Imports of goods Annual change rate (%) Imports of services Annual change rate (%)

2006

2007

2008

2008 2

3

4

2009 1

2

458.01

522.12

468.96

116.25

118.26

117.34

90.91

90.24

18.3

14.0

-10.2

-8.1

-16.5

-14.3

-22.4

-22.4

157.34

225.54

267.10

71.31

67.67

61.59

52.22

54.96

19.2

43.3

18.4

31.6

14.0

-3.1

-21.6

-22.9

* Estimated based on constant (2002) prices. Source: Macau Statistics and Census Service

338


optimistic. Goods and services exports are still declining, consumer confidence has been affected, and further deterioration is taking place in the business environment. In addition, the financial crisis also affected employment in Hong Kong and Macao to different extents. In the second quarter of 2008, unemployment rate in Hong Kong and Macao continued to rise (see Table 12-3). In Hong Kong, in the second quarter of 2009, the number of unemployed exceeded 200,000, which reached 214,000 during the period from May to July. In the fourth quarter of 2008, the unemployment rate exceeded 4%, 0.8% up compared with the third quarter. In the first quarter of 2009, the unemployment rate was more than 5%, with an increase of as much as 1.1%. In the second quarter of 2009, the latest data showed the unemployment rate continued to rise to 5.4%, but the upward trend slowed down. Similarly, in the third quarter of 2008, Macao's unemployment rate increased from 2.8% of the previous quarter to 3.1%, and then rose to 3.8% in the first quarter of 2009. Different from which in Hong Kong, Macao's unemployment rate remained at 4% or less, and in the second quarter of 2009, the unemployment rate began to decline. Table 12-3. Unemployment rate in Hong Kong and Macao, 2008-2009 (%) Year 2008

2009

Quarter 1 2 3 4 1 2

Hong Kong *

Macao

3.3 3.3 3.4 4.1 5.2 5.4

2.9 2.8 3.1 3.3 3.8 3.6

* The seasonally adjusted unemployment rate Source: Census and Statistics Department of Hong Kong, Macau Statistics and Census Service.

To sum up, since the second half of 2008, with the extension of the global financial crisis, Hong Kong and Macao‘s overall economy has been greatly affected. This effect in the first quarter of 2009 is the most serious. Since the second quarter of 2009, with the improvement of external economic situation as well as implementation of various local response measures, downward trend in Hong Kong‘s economy has slowed down, supported by goods exports, private consumption recovery, and sustained growth in investments from Hong Kong Government. However, as for Macao, due to the impact of the economic decline of the goods, service exports and fixed investment in 2009, the downward trend of economy in the second quarter continues.

II. The Impact of Financial Crisis on Major Sectors of Hong Kong and Macao While the financial crises affected the overall economy of Hong Kong and Macao, it also made certain impact on local industries. This section makes an analysis of the impact of financial crisis on major sectors in Hong Kong and Macao since the second half of 2008.


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1. The Impact of Financial Crisis on Hong Kong's Major Businesses The impact of financial crisis on Hong Kong's main industry, which began from the banking sector, also spread to other industries. As Table 12-4 shows, in the second quarter of 2008, the financial crisis first hit the banking sector and led to its decline of 6.8%. In the third quarter, the banking sector decline rate expanded to 13.1%; in the fourth quarter, decline furthered to 45.5%. Sharp drop occurred in the performance of the financial sectors, and the employment situation of the industry was severe. HSBC, Citigroup, Standard Chartered, DBS and other major Hong Kong banks announced lay-offs. Among them, HSBC has cut more 1 than 500 employees . In the third quarter of 2008, in addition to banks, other financial industries have been affected with amplitude (-27.2%) exceeding that of the banking sector. Decline in other financial sectors reached -57.6%, and the financial markets and asset management industry had a decline of as high as 60.9%. The influence of the financial crisis also spread to other industries. The real estate sector was particularly obvious. In the fourth quarter of 2008, the real estate revenue index fell by 26.9%. As one of the pillars of economy, real estate accounted for more than 20% of GDP, which is the economy's "barometer." The financial crisis makes the volume of Hong Kong's real estate industry decline rapidly, and the real estate price declines have hit record highs. The statistics released by Hong Kong Land Registry shows that in October 2008 sale and purchase agreements for all types of building accounted for a total of 6,054, down by 17.8% compared with September, and the annual decrease was 54.2%. In October, sale and purchase contract was worth 18.9 billion, reduced by 19.6% on a monthly basis, and down by 62.6% on a yearly basis. November's volume was only 5,000 or so, close to May 2003 which was the SARS period. At the same time, the drop of property market turnover brought down the selling prices and rental prices. Hong Kong residential rents were also lower in late October 2 and the number of negative equity in late November showed an upward trend. In the aspect of transportation, the long distance water and air transportations are affected much more severely than land transportation, showing that water and air transportations are mainly affected and burdened by the external economic environment. Logistics industry has also suffered a rare cold snap. Statistics indicates that compared to the same period of 2008, in the first quarter of 2009, the turnover of Hong Kong logistics companies declined by nearly 40%. More than 300 small logistics companies have been shut down, and the operation rate of the survived logistics company was very low Drivers of some companies only worked 10 days in one month and many vehicles were out of operation. At the same time, according to the statistics released by Hong Kong Container Trucks Transportation Employees General Union, the number of Guangdong-Hong Kong cross-boundary freight traffic reduced from 16,500 in July 2008 to 12,500 in March of 2009, with 4,000 truck outages during the 8-month 3 period, which are 24.2% of the total number. Huangpu Port also lost its usual busy scenes and fell into a business depression. 1

Source: Xinhua - "by the global financial crisis began to affect Hong Kong's financial industry layoffs" http://www.sc.xinhuanet.com/content/2008-11/21/content_14979529.htm 2 Source: Hexun - "the financial crisis hit Hong Kong property market, the Pearl River Delta has been selling real estate" http://money.hexun.com/2008-12-01/111834402.html 3 China News Net - "cross-border logistics industry has been severe influenced by the financial crisis with outage of 4000 trucks"http://www.chinanews.com.cn/ga/fzsj/news/2009/03-23/1613608.shtml

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In the first quarter of 2009, with the continous support of Hong Kong government on the local banks, the decline rate of banking sector narrowed to -15.5%; while the other financial sectors continued to decline (-46.9%). Among these, the financial markets and asset management industry, which achieved rapid growth of 49% and 71%in 2006 and 2007 respectively, declined in the first quarter by as much as -51.8%. Insurance (-10.3%) and real estate industry (-13.2%), which are closely related to the financial sector, had slightly reduced their rates of decline. But this time, the economic decline began to spread to other nonfinancial sectors. For example, imports and exports recorded a 23.1% decline, -25.7% for wholesale trade, and -22.8% for transportation. With the exception of catering services, telecommunications and other industry related to basic needs of people's lives, all other sectors fell. So far, the impact of this financial crisis has involved all aspects of the Hong Kong society. In the second quarter of 2009, Hong Kong business income indices for service industries show that the performance of various sectors in Hong Kong has fully recovered. The most impressive is the financial industry (except banking) with an increase of 39.2%; the financial markets and asset management industry rebounds by 45.9%. Driven by the warming external environment, all the export-oriented industries have resumed growth, including import and export trade appreciation rate of 20.1%; wholesale increased by 22.1%; goods and warehouses grew by 9.6% compared with the same period of the previous year; long distance transportation (water transport increased by 4.4% and air transportation increased by 1.4%) and express industry (15.1%) have also increased. The above analysis shows that in the second quarter of 2009, against the background of a gradual warming external environment, the shadow that the financial crisis casted on Hong Kong is being wiped out. In addition, the financial crisis also created a huge influence on the development of Hong Kong tourist industry and business and trade sectors. According to Hong Kong Tourism Board statistics, visitor arrivals in 2008 reached 29.5 million, increased by 4.7 compared with last year's 28.16 million, which is lower than forecasted tourist‘s visits level of 30 million at the beginning of the year. In February 2009, mainland tourists visiting Hong Kong in the form of personal tours reached a total of 773,145 passengers, and the number declined by 9.6% from a year earlier. Visitor arrivals from most major regional markets declined compared with the same period of last year; Taiwanese tourist arrivals declined most severely, by more than 17%. Arrivals from North Asia decreased by more than 14%, while arrivals from Europe, Africa and the Middle East fell by more than 11%. Affected by the financial crisis, along with the overall weakness in the consumer market, Hong Kong‘s commerce industry also fell into a depression. Some old large chain stores had operating difficulties, and companies including the listed company "Youhui" operating "U-right" clothing chain management, "Tai-Lin" which is a 62-year-old electronics chain stores, and "Hejun Group " which is one of the world's largest toy factory, closed down one after another. Many commercial enterprises have begun advancing the holiday sales and introduced a number of activities to promote the price reduction for instant cash.


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Table 12-4. Rate of change of profitability indices of Hong Kong service industries / different business domains (%) Year 2006 2007 2008 2008 2009 Quarter 2 3 4 1 2 Import and export 10.3 8.1 7.4 14.4 9.6 -5.8 -23.1 trade Wholesale 7.9 10.4 6.3 14 10 -6.9 -25.7 Retail 7.2 12.8 10.6 14.3 10.5 0.9 -3.9 Transportation 10 10.5 4.4 12 6.1 -10.3 -22.8 Of which: Land 4.3 3.7 2.2 5.1 1.2 -2.2 -2.9 transport Water transport 16.4 16.8 6.1 14.8 4.5 -10.3 -24.7 Air Transport 6.8 7.3 3.5 11.4 8.8 -12.3 -26.7 Goods and warehouse 10.2 15.9 6.6 3.8 7.1 5.7 -10.1 Express 6.9 5.5 2.1 8.8 7.1 -10.8 -20.1 Accommodation 13.8 15.2 3.8 9.6 5.9 -6.5 -18.1 Catering services 9.6 13.4 13.1 15.7 13.2 8.2 1.5 Information and 6.1 8.4 6.6 7.9 5.4 2.5 -4.6 Communication Of which: -0.7 11 9.8 14.5 9.5 3.6 6.4 Telecommunications Movies 1.7 6.1 -0.7 5.9 1.2 -10.7 -18.4 Banks 19.5 38.3 -16.9 -6.8 -13.1 -45.5 -15.8 Finance (except 47.9 68.8 -19.4 4.7 -27.2 -57.6 -46.9 banking) Of which: Financial 49.3 71.7 -20 7.4 -29.2 -60.9 -51.8 markets and asset management Of which: Asset 51.8 56.8 -5.2 21.5 -15.2 -45.9 -48.1 Management 21.3 28.8 12.1 -0.4 -22.4 -10.3 Insurance — Properties -0.3 39.5 -3.7 10.1 -1.8 -26.9 -13.2 Professional, 13.2 12.3 6.8 7.7 5.3 1.1 -9 scientific and technical services Administrative and 20.9 11.5 9.4 9.4 13.5 2.8 -15.9 voluntary service Tourism, conference 14.1 18.9 10.1 12.6 12.8 1.7 -5.5 and exhibition services Computer and 9.8 6.8 5.3 16.2 2.4 -12.2 -27.5 information technology services Source: Hong Kong SAR Government Financial Analysis and Business Facilitation and Analysis Division, "Half-yearly Economic Report 2009", 2009.8.

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2. The Impact of Financial Crisis on Major Industries of Macao For Macao, the impact of the financial crisis on the industries of Macao is mainly embodied in the gaming industry and tourism. The financial crisis had its earliest and most severe impact on the booming gaming industry, which not only directly affected the Macao SAR Government's main revenue sources – gaming tax revenue, but also caused concerns in betting industry about the employment situation. From Table 12-5 we can see that due to the impact of the financial tsunami, Macao‘s gross gaming revenues in the third and fourth quarter of 2008 continued to fall, by 26.2 billion patacas and 24.3 billion patacas respectively. However, because in the first three quarters of 2008, gross gaming revenue had already reached 85.468 billion patacas, even more than 2007 annual total of 83.8 billion patacas, this shows that if it did not reflect the impact of the financial tsunami, Macau gaming gross income in 2008 would have had a greater increase. In addition, in the first and second quarter of 2009, the gross gaming revenue fell by 12.7% and 12.2% respectively compared with the same period of previous year. The continued decline of gross gaming revenues of Macao‘s gaming industry in the first two quarters of 2009 has shown that the sector still continues to slow down with the impact of the financial tsunami. Table 12.5. Macao’s gross gaming revenue for the period of 2006-2009 Year 2006 2007 2008 2008

2009

Quarter

1 2 3 4 1 2

Gaming gross income (millions Macao Pataca) 57 521.3 83 846.8 109 826.3 30 084.9 29 179.2 26 204.3 24 357.7 26 252.2 25 618.8

Source: Macao Statistics and Census Service.

After Macao's gaming industry encountered its first winter since liberalization, the overall employment situation of Macao has also deteriorated immediately. A number of gaming companies have announced plans to suspend or slow down investment expansions. Cutting costs and reducing manpower is the most common practice for corporations to respond to the financial crisis, and thus triggering a series of layoffs and payment cuts. In the first quarter of 2009, gross fixed capital formation experienced a sharp decline of 32.1%, largely due to the suspension of international investments following decline in external demand. For example, the U.S. corporation Sands, was once very famous in Macau gaming industry. Due to the problem of indebtedness and plummeted stock prices caused by the impact of the financial crisis, in November 2008, the corporation put on an emergency stop on the fifth and sixth large-scale projects of Macao Bright Avenue. The number of construction workers who were immediately affected reached 10,000, among whom about 2,000 local workers in Macao were deployed one by one to other jobs, and the remaining


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more than 9,000 employees from outside were laid off, in addition to internal suggestions to cut payments for employees or ask them to go on leaves without payment. Due to the impact from the parent company Sands, operation and investment plans of a subsidiary of the Venetian Macao gaming were also thrown into a halt. The financial crisis is sweeping the globe, and the tourism as a pillar of Macau‘s service industries is inevitably affected to a greater extent. The number of Macao's visitor arrivals and Macau's gaming revenue are in a high positive correlation, with the correlation coefficient as 4 high as 0.809. This shows that changes in the number of visitors and consumer preferences will have a direct impact on Macao's gaming revenue. As Table 12-6 shows, in 2008, the total number of Macao's visitor arrivals was 12.07 million, down by 55.30% compared with the same period in 2007. Among the main sources of tourists, mainland tourist visits to Macao fell by 38.89%. Hong Kong and Taiwan have fallen even more than half, reaching 77.50% and 60.77% respectively. Up until 2009, when the world is facing the financial turmoil and the new flu outbreak is also spreading rapidly around the world, in Macao, during the first 6 months of 2009, the total number of visitors compared with last year's first 6 months has reduced by 11.39%, down to 10.37 million. Based on travelers‘ original residence, visitors from mainland China reached 5.13 million (accounting for 49.45% of the total number of visitors), declined by 17.31% compared with the same period of last year; among these, mainland tourists on personal tours to Macao significantly reduced by 51% from 0.47 million of last June to a current 0.23 million. In addition, in June 2009, the number of group visitors to Macao has also further reduced to 0.18 million , which, compared with the same month last 5 year, fell significantly by 46%. In the meantime, in June 2009, the number of Macao residents traveling abroad in groups compared with the same month in 2008 fell significantly by 40%. In the first half of 2009, the total number of group travelers of Macao residents 6 traveling outside was 90,000, decreased by 14.0% compared with the same period in 2008. It is noteworthy that in addition to the sudden drop of the number of visitors to Macao, the consumption by visitors also decreased. In 2008, the total spending by tourists fell by a big margin of 16.7%. In the first quarter of 2009, the average per capita spending of visitors was 1,638 Macao patacas with a reduction of 5% over the same quarter of 2008. The per capita consumption by visitors that stay overnight and visitors that do not decreased 1% and 7 15% respectively, compared with the same quarter of 2008. The decrease in visitors and tourist consumers to Macao greatly affected the overall economic development of Macao, which is one of the main reasons of significant drop of GDP in the first quarter. In addition, the industry chain as extension of gaming tourism industry, such as hotel and catering services, wholesale, retail and exhibition industry, also suffered in different degrees because of turmoil in the gaming industry.

4 Zeng Zhonglu, Dong-Mei Zhang. Macau visitors: Analysis and Forecast [M]. Macao Polytechnic Institute publication. June 2007, P5-6. 5 Source: Macau Statistics and Census Service: the number of visitors from entry. 6 Source: Macau Statistics and Census Service: the tour and hotel occupancy rates. 7 Source: Macau Statistics and Census Service: Passenger consumption surveys.

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Zheng Yanting, Zhao Zheng, Wu Wenshi, et al. Table 12-6. Total number of inward tourists to Macao based on original place of residence, 2007-June 2009

Origin

2007

2008

Rate of change (%)

January to June, 2008

Total (Person 27 003 370 12 069 291 -55.30 11 704 139 time) The Republic 225 417 28 079 -87.54 158 500 of Korea Eas China 14 873 490 9 089 578 -38.89 6 201 538 Mainland ter Hong n 8 176 964 1 839 848 -77.50 3 337 162 Asi Kong a China 1 444 342 566 618 -60.77 672 075 Taiwan Japan 299 406 38 965 -86.99 166 779 Others 4 803 2 494 -48.07 2 671 Source: Macau Statistics and Census Bureau, the number of visitors by entry.

January to June, 2009

Rate of change (%)

10 370 979

-11.39

95 217

-39.93

5 127 933

-17.31

3 326 335

-0.32

617 545

-8.11

169 127 2 370

1.41 -11.27

SECTION 2: THE MAJOR MEASURES OF HONG KONG AND MACAO IN DEALING WITH THE FINANCIAL CRISIS Since the outbreak of the financial crisis, Hong Kong and Macao governments have introduced a number of policies and measures, including supporting the banks, improving people's livelihood as well as focusing on solving the employment problems to deal with the impact of financial crisis on the local economy.

I. The Main Measures of Hong Kong Government in Dealing with the Financial Crisis Facing the tremendous impact of the global financial crisis, in early 2009, Hong Kong Government's overall strategic plan was changed from "Market Leads, Government Facilitates" in 2008 to "stick to 'stabilizing financial system, supporting businesses and preserving employment.'" Hong Kong Government took a number of measures to maintain financial system‘s stability, ease employment pressure and promote economic development, which shows the SAR government's determination to combat the financial crisis.

1. To Support Banks and to Ensure Financial Stability The financial sector is one of major pillars of Hong Kong. As a world-renowned international financial center, Hong Kong's financial industry was seriously affected by the


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rapid spread of financial crisis. In the period from September to October in 2008, Hong Kong interbank interest rates were soaring, which was somewhat eased only after the authorities‘ provision of liquidity to the banking sector. Subsequently, Hong Kong SAR Government has strengthened the prudential supervision of the financial industry. The HKMA has introduced measures to reduce banks‘ liquidity pressures, stabilize banks‘ customer deposit base and enhance confidence in the banking system. These measures made Hong Kong's financial system relatively stable, which reduced the negative impact of the financial crisis. In the first half of 2009, Hong Kong financial industry‘s order is gradually restored and the rebound in the stock market is more significantly evident. Hong Kong Monetary Authority took som measures including: foreign exchange operations within the Convertibility Zone and a total of 24.8 billion injections of funds to the banking system; announcing the launch of five temporary measures and providing liquidity support according to demands of licensed banks in Hong Kong; providing term financial support to banks through the discount window or outside the discount window in the case that the licensed banks provide a wide range of collateral with credit quality approved by the board; announcing an adjustment to the Base Rate formula, valid for 2008.10.9-2009.3.31; the Financial Secretary announcing the availability of two preventive measures to strengthen confidence in the banking system of Hong Kong. These two measures are: to provide a temporary full deposit protection, and to establish a contingent bank capital facility. Two measures will remain in force until the end of 2010; implement expansion of the Exchange Fund Bills and Notes Program; publish the measures of providing term loans to licensed banks in the case of individual licensed banks providing credit quality of collaterals which are acceptable to the HKMA, and introduce optimization of the arrangements. Bank of China and the HKMA signed the 200 billion Yuan (227 billion Hong Kong dollars) currency swap agreement, which supports short-term liquidity for the two branches of banks located in one 8 and another when necessary to ensure Hong Kong financial stability.

2. Multiple Simultaneous Measures to Protect the People's Livelihood Employment is the core of people's livelihood. Since the financial crisis, Hong Kong's overall employment situation has been deteriorating and the unemployment rate broke sustained lowest point in the past decade. To this end, the SAR Government set increasing employment as its main task, and has taken many positive measures to promote employment and protect the people's livelihood. (A) Financial Support Directly Eases the Predicament Hong Kong SAR government has increased direct financial support, and announced a number of fiscal measures to ease the predicament in February 2008, July 2008, and May 26, 2009 respectively, , with a total aggregate of approximately 87.6 billion Yuan to allocate 9 resources, which is equivalent to 5.2% of Hong Kong‘s GDP. At the same time, in Hong Kong Special Administrative Region Government's budget, the section about "short-term 8 Source: Hong Kong SAR Government Financial Analysis and Business Facilitation and Analysis Division, "Halfyearly Economic Report 2009", 2009.8. 9 2009-2010 Annual Budget - Budget Speech http://www.budget.gov.hk/2009/chi/speech.html

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strategy - jobs security‖ was increased, including setting aside 400 million Yuan of nonrecurrent funding to strengthen the Labor Department's implemented employment programs; an additional 13 million Yuan to help the Labor Department to actively assist the corporate layoffs and closure-affected employees due to the financial crisis.

(B) Projects Create Employment Opportunities Hong Kong SAR Government made efforts to promote the construction of infrastructure projects to accelerate and promote 10 major infrastructure construction projects, such as the Hong Kong-Zhuhai-Macao Bridge, Guangzhou-Shenzhen-Hong Kong Express Rail Link, and the MTR South Island Line. These projects involve funding of 250 billion Hong Kong dollars, which can create 250,000jobs, accounting for 7% of total employment. At the same time, Hong Kong SAR Government has actively carried out the constructions of commercial buildings, residential buildings and hotels and building renovation, maintenance and other minor areas of residential construction projects. In the 2009 legislative year, 100 projects have been funded by the Legislative Council with the total cost of 70 billion Hong Kong dollars, which is expected to create 40,000 jobs. (C) To Make Efforts to Solve Graduates Employment Problems In February 2009, Hong Kong Special Administrative Region Government announced the first trainee program for university students. The funds of 140 million Yuan for the Training Scheme are mainly provided by the SAR government. The Plan provides for this year's graduating university students in Hong Kong with preferential policies. If a student graduates from college and stays to work in Hong Kong, HKSAR Government will give 2,000 Yuan subsidy per person per month; if the graduate works in the mainland, HKSAR Government will provide 3,000 Yuan subsidy per person per month. After the implementation of the scheme, employers pay a monthly salary to the graduates, including government subsidy and the amount of subsidy paid by businesses, and then the corporations submit rosters to the government to obtain the appropriate funding. It is estimated that the money could be allocated to more than 4,000 students. 3. Vigorously Support the Development of SMEs SMEs account for 98% of the total number of enterprises in Hong Kong and absorb more than half of the local working population. Under the influence of the financial crisis, banks tightened credit for the sake of self-protection, which leads to many SMEs facing the difficulties of survival. To alleviate the plight of small and medium enterprises, Hong Kong Special Administrative Region Government has taken two major steps to ease the credit problems faced by small and medium enterprises with an aim to strengthen support for SMEs. The first is "Special Finance Scheme for SMEs". Until July 2009, the total loans granted by the plan were about 36.5 billion, benefiting 11,000 companies and more than 290,000 employees. The second is that Hong Kong ECIC deals with export credit insurance applications by SMEs with flexibility, and increases the sum insured; improving six emerging markets‘ underwriting limits and reducing the premium; shortening the application procedures for small credit limit to 4 days; the ECIC undertakes the supreme law of responsibility from the present 15 billion Yuan to 30 billion Yuan.


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4. Structural Change, Cultivate New Industries Through the promotion of industrial restructuring, Hong Kong SAR Government also found a new economic growth point and developed new industries to deal with financial crises. On the basis of supporting the traditional industries, Hong Kong Special Administrative Region Government makes efforts to cultivate six new competitive industries, including testing and certification, medical services, technology innovation, culture and creative industries, environmental protection industries and educational services. To take cultural and creative industries for example, there are 32,000 institutions engaging in creative industries, including film, television, design, architecture, urban planning, comics, animation, digital entertainment and many other areas. The annual output value is 60 billion Hong Kong dollars, which accounts for about 4% of the Gross Domestic Product. Creative industries have shown unlimited business opportunities and good prospects for development. In this case, Hong Kong Special Administrative Region Government based on the reality and made the creative industry as an important starting point to achieve industrial restructuring and address the financial crisis. In order to establish a creative capital of the Asia-Pacific region , the government set up a "Creative Hong Kong" office to help Hong Kong‘s creative industries to develop the mainland and international markets, and to display the achievements in order to promote the development of creative industries in Hong Kong. It provides a new impetus for Hong Kong‘s response to the financial crisis and attempts to seek for continued prosperity and stability in the region.

II. Macao Government‟s Main Measures in Responding to the Financial Crisis Macao SAR Government actively takes effective measures to combat the financial crisis. The specific points are as follows:

1. To Expand Public Investment and Introduce a Number of Policies on People's Livelihood and Welfare In response to the financial crisis, Macao SAR Government has introduced a series of economic measures and policies on people‘s livelihood, including a modest increase in public investment. In April 2009, SAR Government started to increase input in public construction projects. The "public investment program" soared from 376 million in the first 5 months to 648 million in June of the same year with 154.7 percent surge. In addition, in order to ease the impact of the financial crisis on the real estate market, the SAT government made an introduction of incentives to support the home ownerships in a timely manner. First-time home buyers who purchase housing units with value less than 3 million patacas will receive four per cent interest subsidies, so that Macao's real estate market has not been plunged into recession because of financial crisis. In the aspect of people's livelihood and welfare policy, it will continue to reduce 25% of the occupational tax of the overall employed population; to continue to waive all sales taxes, hawker license fees, market stall rentals, life and non-life insurance stamp duty, bank charges and stamp duty, etc; The SAR government will continue to provide 150 Yuan electricity subsidies for residential units per month per unit; starting from 2009/2010 school year, SAR government has launched a new book allowance system to pay 1,500 Macau patacas allowance per school year to all students of Macau identity. Among

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a number of policies on people's livelihood and welfare, the more remarkable is that the Macao SAR Government has introduced cash-sharing and voucher scheme. In 2008, the Macao SAR Government disbursed 6,000 patacas and 3,600 Macau dollars in cash grants to permanent and non- permanent local residents respectively, as well as health care vouchers of 500 patacas per person. Although due to the impact from external economic environment, external demand reduction is the main reason of GDP decline in first quarter of 2009, there is actually an increase in domestic demand in Macao. For example, private consumption 10 expenditure raised by 3.4%, reflecting that the released cash-sharing plan and a number of welfare policies have had a positive effect.

2. To Actively Create Employment Opportunities and Protect Local Employment In order to create more employment opportunities, SAR Government announced the launch of 77 small and medium sized projects to drive 5,500 construction workers jobs. And in 2008, there were 7,000 public housing units that government has been completed or building under construction, which will bring life to employment for construction workers in the near future. In addition, in order to ease the employment pressure, Macao government reduced the number of outside employees to protect the employment of local workers.

Source: Labor Affairs Bureau of Macao. Figure 12-1. 2008-2009Q2 number of Macao enterprises / entities and foreign employees on a quarterly basis.

As shown in Figure 12-1, in the fourth quarter of 2008, total number of employees from the outside was 92,000, with a decrease of 11.62% compared with 104,000 people in the previous quarter. Although from 2008 to the first and second quarters of 2009, the number of Macao's business / entities are constantly increasing, and in the second quarter of 2009, the enterprise / entity number rose to 6,804, the number of outside employees declined further to 10 Source: Macau Statistics and Census Service: Gross Domestic Product


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84,000 during the same period, mainly because a substantial part of outside employees have been laid off in the financial crisis or have not renewed the contracts after they expired.

3. Strongly Support the Non-Gaming SMEs to Overcome Difficulties SMEs in Macao have been occupying a pivotal position, but in previous years due to the rapid development of Macao's gaming economy, SMEs are faced with the severe challenges of restructuring and operating difficulties. Coupled with the financial crisis, the situation of SMEs worsened. In this situation, Macao SAR Government emphasized the support for SMEs through difficult times and assisting their restructurings to explore overseas markets. The governmental policies of 2009 announced that SAR Government will allocate 1.5 billion patacas budget to the commercial and industrial development fund to assist small and medium enterprises‘ development; SAR government will also deliver government proposals to the Legislative Council with an aim to increase the limit for governmental guaranteed loans for small and medium enterprises from banking institutions, from 300 million patacas rise to 3.5 11 billion patacas. The "14th Macao International Trade and Investment Fair (MIF)" which will be held in October 2009 encourages the participation of Macao SMEs to open up more business opportunities. The government will launch a special enterprise exhibitors‘ concession for SMEs in Macao, in which each 9 square meters booth costs only 3,600 patacas, which received exhibitors‘ warm response.

III. The Central Government‟s Support Measures for Hong Kong and Macao Hong Kong and Macau were influenced by the serious impact of current financial crisis and the slowdown of global economy. As China's two Special Administrative Regions, the central government attaches great importance to Hong Kong and Macao economic stability and supports Hong Kong and Macao Special Administrative Region Governments to face the challenges of the global financial crisis.

1. Measures to Support Hong Kong As a strong backing for Hong Kong, the central government attaches great importance to Hong Kong's economic stability and provides Hong Kong SAR full support to properly deal with the challenges of the global financial crisis. The central government has launched financial cooperation, economic cooperation, infrastructure and many other effective measures to promote the comprehensive development of Mainland-Hong Kong economic cooperation and exchanges. In conjunction with Hong Kong, the central government deals with the financial crisis and revitalizes the economy.

11Source: The People's Republic of China Macao Special Administrative Region Government address in 2009 fiscal year.

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(A) To Expand RMB Business and Consolidate the Role of Hong Kong as an International Financial Center In the financial aspect, allowing qualified corporations to conduct RMB business in Hong Kong and make trade payments in RMB will strengthen Hong Kong's status as an international financial center. In the current financial crisis, RMB is gradually growing into a strong currency and demonstrating an international potential. It is foreseeable that, RMB will gradually be internationalized, but at the same time, historical experience shows that any currency changing from a closure currency to a freely convertible currency needs a transition process over time. Hong Kong's prominent position and important commercial value in international economic development mainly result from its proximity to Mainland China which is home to a large population and rich resources. The basic driving forces for Hong Kong‘s economic development are its roles as a bridge to help China communicate with the world economy and as an intermediary between Chinese and foreign countries. As an intermediary link, Hong Kong has the opportunity to become the center of outside RMB clearing and circulation business. Thus, RMB business in Hong Kong has become the key foreign investment‘s expectation for its functionality as a financial center. During the financial crisis, allowing qualified corporations to conduct RMB business in Hong Kong will undoubtedly inject new vitality to financial development of Hong Kong trade payments. By May 2009, there were 41 banks offering RMB business in Hong Kong. Hong Kong‘s total RMB deposits were up to 53.449 billion; Hong Kong banks have transferred a cumulative total of 29.996 billion Yuan to the mainland; the total amount of aggregate liquidation of mainland cards used in Hong Kong was equivalent to 92.85 billion Yuan; the total amount of aggregate liquidation of Hong Kong's RMB cards used in the mainland was equivalent to 5.344 billion Yuan. Five mainland financial institutions including State Development Bank have issued RMB bonds for 7 times in Hong Kong, and the total value amounts to 22 billion Yuan. Hong Kong and Mainland‘s cross-boundary trade settlements are going forward, which will play a huge role in the consolidation of Hong Kong‘s status as an international financial center. (B) The Building of the Hong Kong-Zhuhai-Macao Bridge Enhances the Space Value of Hong Kong In the aspect of infrastructure, Hong Kong-Zhuhai-Macao Bridge under construction is the biggest highlight. The construction period of Hong Kong-Zhuhai-Macau Bridge project is six years, and the estimated total investment is more than 70 billion Yuan, among which the co-constructed main project has been invested with about 38 billion Yuan. Mainland (including the financial support from the central government), Hong Kong and Macau invested a combined total amount of 15.73 billion Yuan. Hong Kong-Zhuhai-Macao Bridge upon completion is a great bridge connecting Hong Kong, Zhuhai and Macao. The design driving speed is of 100 km per hour and the driving duration from Hong Kong to Zhuhai will be reduced from more than three hours to half an hour. Hong Kong-Zhuhai-Macao Bridge upon completion will not only expand space for Hong Kong's further development, but also improve Hong Kong‘s own transportation situation, connecting social, cultural and commercial activities with more efficient and convenient transportation system. More importantly, it can strengthen the rail and road transportation links between Hong Kong and neighboring Shenzhen in the Pearl River Delta and enhance the integration between Hong


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Kong and surrounding areas to consolidate Hong Kong's position as a international city, thus comprehensively enhancing Hong Kong's space value.

(C) To Promote Service Industry Liberalization and Highlight the Features of Hong Kong‟s Industries China‘s central government continued to promote the openness of services in the mainland to Hong Kong in making economic cooperation between the mainland and Hong Kong closer. According to CEPA Supplement 6, from October 1 of 2009, based on the mainland‘s commitment stated in the original CEPA and its supplementary agreement on promising liberalization in service trade to Hong Kong, China‘s central government will further relax market entry criteria in rail transportation, research and development and other fields. The implementation of CEPA further escalated the industrial integration between Hong Kong and the Pearl River Delta region. The main feature is to accelerate the services integration with each other. The entry of Hong Kong‘s manufacturing service enterprises provides Pearl River Delta‘s manufacturing industry with an international service system, which accelerated the upgrade of Pearl River Delta region‘s manufacturing structure and the extension of the service industry chain. Meanwhile, as Pearl River Delta's manufacturing industry aggregates, the demands for financial services, scientific and technological research and development, design management, storage and transportation, logistics and distribution, accounting, legal and other production-related services are increased. The production-related services in Hong Kong will also play an increasingly important leading role, which provides more options to further promote the leader and influential role for Hong Kong‘s service industries and help consolidate Hong Kong's leadership in finance, trade, logistics and professional services. (D) Expansion of the "Free Travel" Propelled Hong Kong's Tourism Development The growth of Mainland residents‘ "free travel" visits to Hong Kong has provided a strong support for tourism development in Hong Kong. Central Government states that residents of Shenzhen whose official residence in identification book is not Guangdong can apply for the Scheme of Individual Visit to Hong Kong in Shenzhen. Shenzhen residents, whose official residence in identification book is Shenzhen and meet certain criteria, can apply for one-year multiple-entry tourist visa. At the same time, the Central Government decides to increase the number of cities in the Mainland with Individual Visit Scheme. At present, the number of cities whose residents can enjoy "free travel‖ to Hong Kong and Macao has reached 49; the total number of people has increased to about 250 million to 300 million. The largest-ever "free travel‖ expansion has brought over one hundred million mainland new tourists resources for Hong Kong. 2. Measures to Support Macao Policy measures that the Central Government used to support Macau are divided into six specific areas, mainly including: 1. promote and strengthen financial cooperation between mainland and Macao (i.e. expand pilots that offer RMB business in Macao); 2. Speed up construction of related infrastructure projects in Macao; 3. Promote and deepen economic cooperation between Guangdong and Macao; 4. Help ease the operational difficulties of Macao-owned small and medium enterprises; 5. Further expand the opening up of service

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industries to Macau; 6. Make every effort to ensure food supply security for Macao. In the six major policy measures, the focuses of social concern have been encouraging Macao‘s participation in the development and construction of Heng Qin Island, the Hong KongZhuhai-Macao Bridge, and deepening economic cooperation between Macao and Guangdong. First of all, the development of Heng Qin promotes moderate economic diversification. In June 2009, the State Council passed "HENG QIN overall development plan" in principle, and proposed to attach great importance to Macao's industry docking, including the focus on the development of tourism and leisure industry which docks and sometimes dislocate with the Macau gaming industry. The plan also includes emphasis on the development of the modern service industry to match with tourism services; supporting the relocation of the University of Macau in Heng Qin; emphasis on the development of science, research and development industry adapting to the plan; exploring new cooperation mechanisms for technology innovation within Macao-Zhu Hai based on the platform of Heng Qin. At the same time, the central government has also agreed on the relocation of University of Macau to Heng Qin on the request of Macau SAR Government. Heng Qin Island, which covers an area of 1.09 square kilometers, will be leased to the Macao SAR Government as a new campus of Macau University in the way of leasing. NPC Standing Committee made a breakthrough in the management of authorization. The project becomes the first landmark 13 project for Heng Qin development. The important strategic value of Heng Qin development lies in its ability to cover up the shortage of Macao's land resources and address the issue of the overly-single industrial structure, and provide new opportunities to promote the diversity and sustainable development of Macao's economy. With Heng Qin, Macao can overcome the limitation of regional space and integrate into the greater region, so that the whole industry chain can be extended. The hotels, wholesale and retail industries as well as the new convention and exhibition industry associated with the gaming industry are the main direction to Macao's economic diversification in recent years. Based on the existing industrial resources, to extend or expand the industrial chain is the root of resolving the problem of Macao's economic diversity. Second, Hong Kong-Zhuhai-Macao Bridge project will effectively strengthen the tripartite inter-regional cooperation. The initiation of Hong Kong-Zhuhai-Macao Bridge marked a new orientation for Pearl River Delta regional cooperation, from Macau-Zhuhai or Hong Kong-Macao cooperation in the past to the entire Pearl River Delta regional cooperation, which really links the three together for better development. Take tourism for example, after the opening of Hong Kong-Zhuhai-Macao Bridge, tourist industry of the three places gradually shifted from the local diversified development of tourist products to diversified development of regional cooperative tourist products. As for Macao, it can take its comparative advantage and focus on gaming and entertainment, history and culture, special exhibition and feature cuisines to expand the advantages of related projects. Macao's tourism positioning will not be limited to the land of 28 square kilometers, but as part of the overall regional tourism. Guangdong, Hong Kong and Macao will develop middle- and long-term 12

12

.Local events recalled in 2008, the Macao Radio and Television Co., Ltd. http://www.tdm.com.mo/c_news/news.php?p=recalling2008 13. Regional cooperation group of Macau Development Strategy Research Center, Heng Qin development and new opportunities for Macau - "HENG QIN overall development plan,", P.2-9．


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target markets for inbound tourism in the future. Visitors will not be limited to multi-day visit to Hong Kong and Macao; their itinerary can include Hong Kong and Guangdong Province. The completion of Hong Kong-Zhuhai-Macao Bridge is bound to further promote 14 the overall economic activity in regional tourism development.

Column 12-1. Hong Kong-Zhuhai-Macao Bridge The construction concept of Hong Kong-Zhuhai-Macao Bridge was originally proposed in 1983. The Hong Kong-Zhuhai-Macao Bridge in planning is a large bridge connecting Hong Kong, Zhuhai and Macao in the form of highway bridges. The starting point is Hong Kong‘s Dayu hill. Passing Tai O, across the Pearl River estuary, and divided into Y-shaped, one end of the bridge connects Zhuhai, and the other connects Macau. The bridge is designed to be about 29 km throughout with the standard of six-lane expressway and the vehicle speed of 100 km per hour. Upon completion, it will closely follow Lake Pontchartrain Bridge and Ningbo Hangzhou Bay Bridge, and become the world's third longest bridge. Hong Kong-Zhuhai-Macao Bridge is estimated to cost 2 billion U.S. dollars, among which ports and connection cables are invested by the governments of Guangdong, Hong Kong and Macao with a total investment of about 35 billion Yuan; the total investment of the main bridge is 37.6 billion Yuan, among which the Central Government and Guangdong, Hong Kong and Macao government jointly invested 15.73 billion Yuan, and bank loans consist of approximately 22.0 billion Yuan. The start of Hong Kong-Zhuhai-Macao Bridge construction is set on December 20, 2009.

Third, the interactive collaboration between Guangdong and Macao is the basic approach to maintain sustainable economic development of Macao. First, Guangdong-Macao cooperation ensures the basic livelihood of the residents of Macao. For example, the "Water Transfer from the Western Region to the Eastern Region" project in 2006, to a certain extent, improved the water supply situation in two places during the salt tide. In addition, Macao government and southern electricity companies are scheduled for electricity purchase project in 2015. By then Macau can purchase 10% power from Guangdong Province. Furthermore, Guangdong and Macao‘s trade and economic cooperation is mainly embodied in the "9+2" cooperation and Zhuhai-Macao cooperation. The proposal of "9+2" concept can provide better protection to the sustainable development of the Pearl River Delta in Guangdong Province and a lot of space for Macao's economic restructuring and development diversification. Macao Government positions Macau as a service center in the western region of the Pearl River Delta and develops Macau into an attractive gaming center in the world and a platform for regional business service cooperation. Because of this, it is necessary for Macao to take full advantage of the opportunities of the Pan-Pearl River Delta economic integration to expand its space. Especially under the influence of the financial tsunami, it 14 Tang Jizong, the discipline of the fourth meeting of Macao and Zhuhai Development Forum, Macau Research No. 50, P.185-186.

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should leverage its advantage as free port and actively play the role of a platform for foreign countries such as the European Union or Portuguese-speaking areas to improve its overall competitiveness and industrial diversification. On the basis of mutual benefit, Macao will expand the scale of its economy and ensure genuine sustainable development. To sum up, Heng Qin development, Hong Kong-Zhuhai-Macao Bridge project, and Guangdong-Macao cooperation are all proposals on regional cooperation. The ultimate goal of regional economic cooperation is to build economic growth based on a number of economic development points, and explore new growth opportunities in a timely manner, so that the region's economic development can be continued and diversified. As for Macao, actively seeking and participating in regional cooperation is not just in response to the financial crisis. The consideration of how to make the appropriate extension of the gaming tourism industry chain through regional cooperation, and the realization of industry diversification are both the inevitable choices for Macao's sustained economic development.

CONCLUSION The global financial crisis brought Hong Kong's economy a huge trauma. The overall economy, employment, import and export are all facing the impact. As an open economic system, Hong Kong is highly integrated with the world economy. Therefore, the future performance of Hong Kong's economy is greatly influenced by external environment. However, from the above analysis we can see that under effective financial supervision, Hong Kong is in a more stable financial order. With the resumption of economic growth in the mainland as well as slightly stabilized external environment, Hong Kong‘s economy has improved in the second quarter of 2009. In the future, Hong Kong's economic recovery has not been solid yet, the adverse effects of global financial crisis on Hong Kong has not weakened, the situation of sharp decline in external demand continues, and the production and management of a number of industries and enterprise are still relatively difficult. However, as the government has introduced measures for financial markets stabilization, enterprise support, job creation, in addition to the further growth of the mainland economy, the impact of the measures that the central government has introduced to support Hong Kong's economic development is gradually showing up. We have reasons to believe that in the current financial crisis, Hong Kong's long-term economic prospects remain optimistic. Macao's economy has also been tremendously influenced by the global financial crisis. As we mentioned earlier, from the fourth quarter in 2008 to the first two quarters in 2009, a number of Macao‘s major economic indicators continued to drift downwards, including GDP, gross fixed capital formation, exports of goods and gaming gross income, etc., which reflects that Macao‘s economy has not yet come out of the haze of the financial tsunami. As a highly externally-oriented micro-economic system, in addition to the impact of the reduction of external demand on Macao's economic slowdown, other factors include Macao's own structural problems, the continued spread of H1N1 influenza and the tightening central policy for Macao's "free travel" (the abolition of simultaneous access to the Mainland visitors with Hong Kong visas to visit Macau without another sign), and so on. The opening-up of Macao's gaming industry has brought rapid economic growth and many challenges, such as pressure from excessive visitors and infrastructure bottlenecks. The impact of financial crisis on


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Macao's economy further demonstrates the high risk of depending on a single industry. Therefore, the financial crisis provided a opportunity for Macao's heating economy to take a breath and adjust the industrial structure, improve infrastructure and actively leverage the surrounding resources and markets to make up for its own shortage. In the long run, this is undoubtedly an opportunity to expand markets and achieve moderate diversification. In general, Macao should make development strategies for relevant industries based on its specific situation, and strive to minimize the negative impact of the current financial crisis. We believe that Macao has the ability and confidence to achieve this. Translator: Shi Jing (SUFE) English Version Editors: Lv Mei (SUFE), He Yiming (Harvard)

REFERENCES Since CEPA has been signed for six years, the average annual growth of the total import and export in Hong Kong and mainland is 18.4%. http://finance.sina.com.cn/roll/20090625/02086395193.shtml Hong Kong SAR Government Census and Statistics Department - Hong Kong Statistics http://sc.info.gov.hk/gb/www.censtatd.gov.hk/home/index_tc.jsp China Financial Planning net - " financial business income of Hong Kong's banking plummeted nearly 30% in the crisis " http://www.51cfp.net/CFP/skill/200812/32729.html Tencent Finance - "the crisis affect Hong Kong's financial industry, business incomes significantly shrunk in size in the first quarter " http://finance.qq.com/a/20090612/017536.htm China Travel Monthly net - Hong Kong tourism review in 2008 and outlook in 2009 http://www.hkcts.com/yuekan/200904/ywsx1.htm China News net - ―cross-border logistics industry has been severe influenced by the financial crisis with outage of 4000 trucks‖ http://www.chinanews.com.cn/ga/fzsj/news/2009/0323/1613608.shtml Market research report net - "Hong Kong real estate was hit by financial crisis,"http://www.164.com.cn/industrynews/200811/xianggangfangdichan301315.htm 2009-2010 Annual Budget - Budget Speech http://www.budget.gov.hk/2009/chi/speech.html People's net – ―Central Government introduced 14-point package to support Hong Kong‖ http://politics.people.com.cn/GB/1026/8550889.html Pan-PRD co-operation Information net – ―the central government and Hong Kong join hands to take positive measures to cope with the global financial crisis‖ http://www.pprd.org.cn/zhuanti/twelve/dkjrwj/200906/t20090630_61676.htm He Zhong, Xie Ya-xuan, Zhao Wen-li, 2008. Overseas macroeconomic Comments - the Central Government put forward 14-point package in seven aspects to support Hong Kong to cope with the financial crisis [R] China Merchants Securities (HK) Macro report,12:5-6

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Baidu Wikipedia – ―Hong Kong-Zhuhai-Macao Bridge‖ http://baike.baidu.com/view/157066.htm China net – ―Tung Chee-hwa: Pan-PRD regional cooperation is conducive to play our strengths‖ http://www.china.com.cn/chinese/2004/Jun/576363.htm Hong Kong International Investment Promotion Council's official website - "the central government added 1.6 billion to help small and medium enterprises crack financing difficulties‖ http://www.hkiipa.com/shownews.asp?id=246 The People's Republic of China National Development and Reform Commission's official website - "CEPA Supplementary Agreement 6 was signed in Hong Kong and 9 measures are on a pilot in Guangdong " http://www.sdpc.gov.cn/dffgwdt/t20090512_278135.htm Interactive Wikipedia - "CEPA” http://www.hudong.com/wiki/CEPA Joint Morning paper – ―signing CEPA Supplement 6, the mainland of China opens up services trade and financial and securities industry to Hong Kong‖ http://www.zaobao.com/special/china/hk/pages2/hk090510.shtml Xinhua net – ―motherland backing is as strong as a mountain- the documentary of Central Government supporting prosperity development of Hong Kong's economy‖ http://news.xinhuanet.com/gangao/2009-06/30/content_11627944_3.htm Li Xiaoxi, in April 2009. International Symposium on Macao's return for a decade: My understanding of moderate diversified development of Macau's economy [R]. Beijing Normal University, Institute of Economic and Resources Management. Wu Wenshi, January 2009. Macao Study Series: The study of the scale and development speed of Macau gaming industry and tourism [R]. Beijing Normal University, Institute of Economic and Resources Management. Economic News, July 31, 2009. SMEs participate in exhibitions [N]. Macao Daily News, A10 economic． Ryu Ji-Yi. The Problems and Solutions of Human Resources of Macao Special Administrative Region in financial tsunami [R]. Macau Research No. 51, P.102-107． Tang Jizong, the minutes of the fourth meeting of Macau and Zhuhai Development Forum [R]. Macau Research No. 50, P.185-186． Guo Yongzhong. The challenges and opportunities faced by the third term Chief Executive [R]. Macau Research No. 50, P.155-156. Liang Angel. Local events Recalled in 2008 [Z]. Macau, Radio and Television Limited. http://www.tdm.com.mo/c_news/news.php?p=recalling2008 Zeng Zhong-Lu, Zhang Dong-Mei, 2007. Macau visitors: Analysis and Forecast [M]. Macao Polytechnic Institute Publishing. Regional cooperation group of Macau Development Strategy Research Center, Heng Qin development and new opportunities for Macau - "HENG QIN overall development plan", P.2-9. Macau Research Editorial Board. ―Macau and Zhuhai Cooperation and Development under ‗One Country Two Systems‘‖ Round Table Minutes [R]. Macau Research No. 51, P.155162．


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ZHANG Yang& KWAN Fung．MACAO‘S ECONOMY IN THE FINANCIAL CRISIS[J] ，EAI Background Brief No.456, P.1-18.




HOW HONG KONG AND MACAO TACKLE THE 2008 GLOBAL FINANCIAL CRISIS Sun Yong* The Chapter 12 of the book describes the impact on the economy of Hong Kong and Macao by the 2008 global financial crisis, and how the Hong Kong and Macao local governments deal with the global financial crisis. Finally, the policies issued by the Chinese central government to support the economy of Hong Kong and Macao are presented. There are three parts in this chapter: the first part describes how the 2008 global financial crisis had effect on the economy of Hong Kong and Macao. When describing the impact, the authors made the analysis from two aspects: one is the whole economy of Hong Kong and Macao; another is the main industries in Hong Kong and Macao. The second part introduced the detailed measures adopted by Hong Kong and Macao local governments to deal with the 2008 global financial crisis, including supporting the banking industry, reducing the unemployment rate, increasing the public finance, and improving the welfare of the residents. The third part is the measures adopted by the Chinese central government to support Hong Kong and Macao, including strengthening the status of Hong Kong as an international finance center by increasing RMB business, building a bridge across the sea to connect Hong Kong, Zhuhai and Macao, and accumulating the development of tourism in Hong Kong and Macao by permitting more tourists from mainland China to travel freely in Hong Kong and Macao. In general, there are three outstanding features in this chapter: First, the authors use detailed data, tables and figures to describe the significant impact on Hong Kong and Macao‘s economy brought by the global financial crisis. By using those detailed data, tables and figures, the authors present a picture of Hong Kong and Macao‘s economy. Based on the detailed data, tables and figures, we find that not only the whole economy of Hong Kong and Macao, but also the major industries in Hong Kong and Macao decline significantly. For example, the table 12-4 in this chapter reflects the percentage change of revenue in the service industry in Hong Kong. From the table, we can easily note * Sun Yong, PhD, Old Dominion University, USA，Associate Professor of Finance, Research Institute of Economics and Management, Southwestern University of Finance and Economics, China.

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that almost all industries decline significantly since the fourth quarter of 2008, especially the finance industry, declined by about 60 percent. These data strongly explain that the negative impact of the global financial crisis on the economy of Hong Kong and Macao. As an international financial center, Hong Kong‘s finance industry received the largest loss. Another example is the table 12-6. The table presents the change of the number of tourists in Macao. According to the data of the table, the number of tourists visiting Macao declined significantly since 2008. Based on a lot of data, tables and figures, the authors strongly support the conclusion of this chapter, that is, as the open economy of Hong Kong and Macao, almost all indexes the economy declined significantly, not only including the whole economy of Hong Kong and Macao, but also including the main industries. The global financial crisis has a huge negative effect on the economy of Hong Kong and Macao. Thus, for both Hong Kong and Macao local government and the Chinese central government, it is necessary to apply powerful measures to deal with the negative impact brought by the global financial crisis. Second, in this chapter, the authors introduce the new deals adopted by the Hong Kong and Macao local governments and the Chinese central government step by step. It provides a very clear clue for the authors to understand the reasons behind those new deals. It helps the readers to better understand it is very necessary for the governments to take very quick and powerful actions to deal with the negative effect of the global financial crisis. At the beginning of this chapter, the authors made analyses of the negative impact brought by the global financial crisis. In this aspect, the authors focus on not only the whole economy of Hong Kong and Macao, but also the representative industries, such as the banking industry. When describing the economy of Hong Kong and Macao, the authors cited a lot of data, tables, and figures, just like a picture showing us how the global financial crisis has effect on the economy of Hong Kong and Macao. Next, the authors respectively introduce the measures adopted by the Hong Kong and Macao local governments for dealing with the global financial crisis. Due to the different economic structure between Hong Kong and Macao, the measures used by the Hong Kong and Macao local governments are also different. As an international finance center, Hong Kong government focuses more on the stability of financial markets, the protection of residents‘ benefits, the development of small and medium-sized enterprises (SMEs); while the Macao government focuses more on expanding the public finance, improve the welfare of residents, and the development of non-gaming SMEs. Although the measures adopted by Hong Kong and Macao local governments are different, both the Hong Kong government and Macao government focus on the protection of residents‘ benefits and the development of SMEs. The last part of this chapter mentioned the policies issued by the Chinese central government, including expanding business involving RMB to strengthen the status of Hong Kong as the international finance center, developing the tourism of Hong Kong by permitting more people from mainland China to travel in Hong Kong freely, constructing the Hong Kong-ZhuHai-Macao bridge, and developing Heng Qin Island. In particular, the Chinese central government emphasizes the cooperation between Hong Kong and Macao and Pearl River Delta (PRD) region. Furthermore, the Chinese central government develops the transportation to reduce the distance between Hong Kong Macao and mainland China to become the basis of further link and cooperation in economy between Hong Kong Macao and mainland China. The structure of this chapter is as follows: at the beginning of this chapter the authors introduce how the global financial crisis affects the economy of Hong Kong and Macao. Next, the powerful measures adopted by the Hong Kong

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and Macao governments are presented. Finally, the policies issued by the Chinese central government to support the economy of Hong Kong and Macao are introduced. The step by step structure of this chapter like this makes readers better understand and accept the reasons behind the policies issued by the Hong Kong and Macao local governments and Chinese central government. Third, through this chapter the authors focus on the major clue, that is, the policies issued by both the Hong Kong and Macao local government and the Chinese central government, which is the most important part among the measures to deal with the global financial crisis. One of the most significant features of this chapter is that all topics are related to the measures and policies issued by the government. This is because the government is the most important entity when dealing with the global financial crisis. Not just because the government has the most resources and is more powerful than other entities like firms and individuals, but also because the government usually thinks about the problem from the standpoint of the whole society., not from the standpoint of any firm or individual. Therefore, following the policies and measures adopted by the government is equal to following the most significant part among all measures dealing with the global financial crisis. This chapter first describes the impact on the economy of Hong Kong and Macao brought by the global financial crisis. Based on the description of the impact, the authors introduce all kinds of specific measures and policies issued by the Hong Kong and Macao local governments and the Chinese central government. From some specific industries to the whole economy, from the Hong Kong and Macao local governments to the Chinese central government, the authors deliberate the efforts made by the Hong Kong and Macao local governments and the Chinese central government to deal with the global financial crisis. When presenting the specific policies and measures adopted by the Hong Kong and Macao local governments to the Chinese central government, the authors describe the difference in the measures and policies issued by the Hong Kong and Macao local governments to the Chinese central government, and also show us the common points in those measures and policies. For example, as the international finance center, Hong Kong‘s local government focus more on the stability of the finance industry, the protection of residents‘ benefits, and the development of SMEs; while the Macao local government focuses more on expanding the public finance, the improvement of the welfare of residents, and the development of non-gaming SMEs. Although the measures adopted by Hong Kong and Macao local governments are different, both the Hong Kong government and Macao government focus on the protection of residents‘ benefits and the development of SMEs. The last part of this chapter mentioned the policies issued by the Chinese central government, including expanding business involving RMB to strengthen the status of Hong Kong as the international finance center, developing the tourism of Hong Kong by permitting more people from mainland China to travel in Hong Kong freely, constructing the Hong Kong-ZhuHai-Macao bridge, and developing Heng Qin Island. In particular, the Chinese central government emphasizes the cooperation between Hong Kong and Macao and Pearl River Delta. Furthermore, the Chinese central government develops the transportation to reduce the distance between Hong Kong Macao and mainland China to become the basis of further cooperation in economy between Hong Kong Macao and mainland China. The Chinese central government focuses more on the whole economy of China, including mainland China, Hong Kong and Macao. The policies issued by the Chinese central government focus more on the further cooperation between mainland China and Hong Kong and Macao, which helps Hong Kong and Macao to deal with the negative impact

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brought by the global financial crisis. At the same time, the opening economy of Hong Kong and Macao helps the development of mainland China. Hence, in this chapter the authors focus on the main clue, that is, the measures and policies issued by the Hong Kong and Macao local governments and the Chinese central government. In this way, the readers can feel the significant and key role played by the government in dealing with the global financial crisis. Although the features of this chapter are outstanding, we also find this chapter ignored something important. This chapter focuses only on the measures and policies issued by the Hong Kong and Macao local governments and the Chinese central government, however, it ignored any measures adopted by other entities, such as banks, firms, or even individuals. From the viewpoint of microeconomics, banks, firms, and individuals also adopt some measures to deal with the global financial crisis in order to protect their own benefits. For example, the banking industry may strengthen the risk management to reduce the possible loan losses. Individuals may save more money to deal with possible risks in the future. In essential, all the measures and policies issued by the Hong Kong and Macao local governments and the Chinese central government will benefit the banks, the firms, and individuals finally. The way includes improving the liquidity of the banking industry, promoting individuals‘ consumption, and finally developing the economy. Furthermore, the effect of the measures and policies issued by the Hong Kong and Macao local governments and the Chinese central government also depends on the benefits of banks, firms, and individuals. The most important thing is the expectation and confidence of banks, firms, consumers about the future of the economy. Only after consumers are more optimistic and would like to buy more products or services, the market can recover and the economy can go upward. As a free and open economy, Hong Kong and Macao are inevitably affected by the 2008 global financial crisis stemming from the US sub-prime mortgage meltdown, resulting in moderation in exports and hence dragging the overall economic performance. In the long run, to combat possible financial crisis in the future, the government, the industries or firms, and even individuals need to make further efforts. In particular, the government is the most important institute in tackling the global financial crisis. First, Hong Kong and Macao local governments need to maintain a healthy and stable financial system, help design better systems in risk management, and improve the ability to defend any possible global financial crisis in the future. The economy of Hong Kong and Macao is very free and open, which means the government seldom intervenes the market. Nevertheless, economies need to take extraordinary measures at exceptional times like this and the Government should be prepared to intervene in a timely and decisive manner. To support small and medium-sized enterprises (SMEs), the credit crunch has caused great difficulties among SMEs. In early November 2008, enhancement measures to SME Loan Guarantee Scheme and SME Export Marketing Fund were implemented; A time-limited $100 billion Special Loan Guarantee Scheme (SpGS) was launched on December 15, 2008 to provide up to 70% guarantee to participating lending institutions granting loans to Hong Kong companies; Under the SpGS, the maximum amount of loan that each enterprise may obtain is $6 million, within which $3 million can be used as a revolving credit line such as commercial overdraft and letter of credit. All companies except listed companies may apply. To continue public spending and stimulate domestic demand, despite the expected economic downturn, the Hong Kong and Macao Government do not cut public expenditure, especially its commitments in healthcare, social welfare, education and improving the environment. To

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boost employment, 60,000 jobs would be created in 2009 through infrastructure projects, advanced recruitment of civil servants, creation of temporary positions and expediting minor works in the 18 districts. Since Hong Kong and Macao are very open to the world, the economy of Hong Kong and Macao is also easily affected by any possible financial crisis from other countries or areas. Thus, a healthy and reasonable regulatory framework set by the government is the most important basis of defending any possible global financial crisis in the future. Second, a strong backing from the Chinese central government is very necessary for Hong Kong and Macao to combat the global financial crisis. In fact, the Chinese central government has been always the strongest backup for Hong Kong and Macao. The Chinese central government issues a series of policies to support the economy of Hong Kong and Macao. For example, On December 20, 2008, the Chinese Central Government announced a 14-point package to bolster Hong Kong‘s economy. The package is made in the interest of Hong Kong and is also an advancement of the development of the nation as whole. Key measures include: (1) Strengthen cooperation between the Mainland China and Hong Kong in financial services sector. (2) Allow qualified enterprises to settle their trade obligation in Hong Kong in RMB, making the city one of the pilot areas for transforming RMB into an international currency. (3) Allow currency swap arrangements between the People‘s Bank of China and the HKMA, a measure that will enable each side to help stabilize the other‘s currency if necessary. (4) Encourage Mainland enterprises to use Hong Kong as a platform to develop international businesses. (5) Support the listing of Mainland firms in Hong Kong. (6) To expedite infrastructure projects related to Hong Kong, such as the Guangzhou-ShenzhenHong Kong Express Rail Link, the Hong Kong-Zhuhai-Macao Bridge and the rail link between airports in Hong Kong and Shenzhen. Third, as ignored by the chapter 12, further cooperation among banks, corporations, and even individuals between mainland China and Hong Kong Macao are also very important. There are several favorable policies issued by the Chinese central government to enhance economic cooperation between Hong Kong Macao and the Pearl River Delta and even the whole mainland China. For example, to alleviate difficulties faced by Hong Kong SMEs on the Mainland, the Chinese Central Government will further adjust the tax rebate rates for exports, improve the labor system to reduce burden on enterprises, facilitate the development of domestic market for processing trade enterprises and develop a guarantee mechanism for SME financing. Other policies include expanding the Individual Visit Scheme, further the opening up of the Mainland services sector to Hong Kong service providers through CEPA, and enhancing economic co-operation between Hong Kong and the Pearl River Delta. In fact, more and more companies from Hong Kong and Macao invest in mainland China, and people in mainland China know Hong Kong and Macao better since 1997. The closer link and tighter cooperation in all kinds of aspects between Hong Kong Macao and mainland China help Hong Kong and Macao to tackle the global financial crisis and promote the development of Hong Kong and Macao. A very good example is that during the 1997-98 Asian financial crisis, the China‘s central government issued a policy to permit individuals from mainland China to visit Hong Kong and Macao freely. The policy brought Hong Kong and Macao a lot of money and helped Hong Kong and Macao recover from the 1997-98 Asian financial crisis rapidly, comparing with other countries or areas suffering by the 1997-98 Asian financial crisis, such as South Korea, Thailand, and Indonesia.

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Finally, Hong Kong is known for its resilient, hardworking spirit and will endeavor to turn crisis into opportunity by vigorously pursuing economic development in areas such as financial services, cross-boundary integration, infrastructure projects, creative industries and scientific research. As long as Hong Kong and Macao continue to uphold the principle of ―Big Market, Small Government‖ in promoting economic development, with sound fundamentals, a strong regulatory framework, a robust Exchange Fund, a production base and market on the Mainland and a strong backing from the Central Government, Hong Kong and Macao‘s economy is well equipped to withstand the downturn. In a word, the chapter 12 of this book provides us with a picture of describing how the Hong Kong and Macao local governments and China‘s central government tackle the 2008 global financial crisis.

REFERENCES ―Asia's Las Vegas, Macau, Fights The Economic Crisis‖, The Independent, January 2009 ―HK Stock Market Capitalization Halved in 2008‖, Xinhua net, 2009-03-03 Hong Kong Census & Statistics Department Hong Kong‘s Economy in the Financial Crisis by Zhang Yang and Sarah Y. Tong, April 2009, East Asian Institute Background Brief No. 448 ―How Hong Kong Tackles Financial Crisis‖, Global Financial Crisis IPA December 2008 Macao‘s Economy in the Financial Crisis by Zhang Yang and Kwan Fung, June 2009, East Asian Institute Background Brief No. 456 ―Macau economy: Unemployment creeps up‖, THE ECONOMIST INTELLIGENCE UNIT, April 2009 Macao Special Administrative Region Economic Services Statistics and Census Service (DSEC), Macao SAR Government



POSTSCRIPT It has taken three months to finish this book. From the beginning of July to early October, I was just like leading a troop fighting in the battlefield to the extent that I almost lost my breath. I can still remember that we put together the preliminary outline of this report on July 9th. Then on July 12th, a meeting was held among people in charge of sub-projects to amend the outline. Another meeting was held among leaders responsible for each chapter on the 22nd of the same month, to pin down the division of work and requirements on writing style. On August 28th, having finished the first draft of all chapters, all members on this project got together to discuss about it. Based on the proposed changes, all groups finalized their first draft by September 9th, which were handed over to the scholars of Southwestern University of Finance and Economics to be commented. Then the comments and the revised draft of each chapter were handed in on September 22nd for a general review. During the National Day holidays, I finished the General Remarks of this report, along with the final reviewed draft of the third volume of The Handbook of Natural Resources and Energy Economics. I went over the draft for a last time with Editor Qiu Yuefang from Encyclopedia of China Publishing House on October 12th, and supplemented it with the preface and the postscript. As I submit this copy, I would like to first extend my thanks to New York based Nova Science Publishers, Inc. in the U.S. and Encyclopedia of China Publishing House in China. They signed the publishing contracts with us on July 6th and 8th respectively, with favorable conditions, and agreed on delivery of the Chinese and the English drafts to the publishing houses in October and November respectively. That started the engine for us to begin this project. In particular, I am deeply indebted to Frank Columbus, Chief Editor of Nova Science Publishiers, Inc. and Guo Yinxing, Director of the Academic Works Department of Encyclopedia of China Publishing House. They have given us their utmost support and trust by allowing us to determine and amend the outline, as well as to specify the content all by ourselves. We owe them our success if this report is recognized by the society. I also wish to sincerely thank the leaders of both Beijing Normal University and Southwestern University of Finance and Economics, for they have extended great to us on researches and writings of this project, and provided us enough funds to carrying this work out smoothly. Professor Shi Peijun and Professor Bian Huimin, both vice presidents, were delegated by the management of the two universities to supervise this project, thereby promoting coordination and speeding it up. Here I would also like to express my thanks and congratulations to all experts, teachers and students on this project. Thank you for your efforts and cooperation in good faith to

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Li Xiaoxi

ensure that the Chinese and English drafts were finished in high quality. Scholars in charge of each chapter are all very serious about the work. They tried to, introduce the current situation of China‘s economic development comprehensively and profoundly in the context of the financial crisis, marking the highlights of China‘s economic development, analyzing the most recent and influential economic incidents and cases, pointing out the policy orientation and trend of development, and using tables, figures and columns to make the articles easier to understand. I really appreciate the hard work and dedicated teamwork by each and every scholar, and would like to congratulate you all for climbing up the ladder of academic research. Here I would like to make a special introduction of Professor Hu Biliang, who has just completed his joint research project at Harvard University. His performance at organizing this project really impresses me. He is quick thinking, passionate, diligent and extremely efficient. He has painstakingly and efficiently advised on the title, the outline, the writing style, and the revision on the comments. Revised drafts from him at Harvard University were often received at midnight in U.S. time. To make a joke of his name, ―the moon from ancient times hangs over Beijing, while one light is sure to be on at Harvard.‖ (In Chinese, the family name ―Hu‖ can be divided into two parts, ―gu‖ and ―yue‖, which means ―ancient‖ and ―moon‖, while the first name ―Bi liang‖ can be interpreted as ―sure to be‖ ―turned on.‖) Coordinated by Dean Gan Li and Dean Liu Fangjian, and organized by Dr. Fan Gangzhi, a group of overseas educated scholars at Southwestern University of Finance and Economics took an active role in the commentary work of this report. They associated the current situation at home with that abroad to make comments from an international perspective. Their work was finished in a timely and efficient way. Furthermore, I would especially like to express my thanks to Dr. Liu Yuanli from Harvard School of Public Health, and Mr. Huang Jiefu who is the vice president of the Chicago Climate Exchange, and Professor Mou Pu from the School of Life Sciences, Beijing Normal University. They have accorded great importance to this joint program and written some fantastic critical comments on parts of this report, which significantly added to the academic value of our book. There are too many people to be appreciated and praised, and I will list some of them: Editor Qiu Yuefang, who is extremely responsible; Madam Nadya Gotsiridze and Stephanie Gonzalez from Nova Science Publishiers, Inc. who are highly efficient with their jobs; the teachers and students from the Translation Center of Southwestern University of Finance and Economics who are engaged in the Chinese-English translation, including Jiang Jiahui, Lv Mei, Xiao Rong et al.; Associate Professor Zeng Xuewen, who has been working so hard in organizing and coordinating this project; Mr. Wang Jianing, Chief Editor of the magazine Reform, who put forward some valuable amendment suggestions; Dr. Zhao Shaoqin, who gave us inspiring suggestions on the improvement of the outline; Dr. Wang Nuo, who put together the invitation for comments on behalf of me; Dr. Zheng Yanting, Dr. Ren Ran and other teachers and students, who translated the paper on Emerging Market Economies with great efficiency; Liu Tao, Tan Song, Wang Xuelei and Zhang Kun, who provided important and timely material for this report; Song Tao and Zhang Ai, who assisted in translating NOVA‘s publishing contract with us and Nova Science manuscript Form and Style Guideline; Jia Limin, Wang Ying, Yan Ling et al., who worked toward allocation of the project fund and reimbursement. I would also like to attribute special credit to my assistants Lin Yongsheng and Liu Yimeng, who worked as liaison for the project. Lin Yongsheng is in charge of communication between all authors and commentators, and worked with a great sense of responsibility and

Postscript

367

high efficiency. Liu Yimeng is in charge of communication with the Nova Publishers, including filing applications, translating the contract, submitting our manuscript, etc. with care and patience. Both of them also assisted me with the completion of another article about Emerging market: its orientation, new developments, and new investment at the request of Nova Publishers, which is the prior cooperative work with Nova before this report. I would particularly express my sincere gratitude to a group of doctoral and master students from Harvard University and MIT include Chang Zheng, Chen Jinzhu, Chen Mo, Ding Mengjie, Du Wenxin, He Yiming, Hou Yue, Jin Tao, Jin Xiaoshi, Li Zhan, Liu Xuzhi, Xu Lilei, Xu Ye, Zhang Jingyi who helped us finalizing the English version of this book within very limited time in November. They contributed tremendously to the improvements of the quality of the translation of the Chinese version into this English version of the book. So many people and things have impressed me that it is hard to list them all here, so let me conclude in anticipation of our future cooperation with success. Li Xiaoxi December 9th, 2009 Translator: Zhang Li (SUFE) English Version Editors: Xiao Rong (SUFE), Chen Jinzhu (Harvard)

INDEX

A agricultural insurance, 12, 36, 72, 99, 103, 104 alternative energy, 7, 176, 199, 217 An Affordable Economy, 244 automobile going to the countryside, 55

B barefoot doctors, 271 basic health insurance for urban employees, 283 basic health insurance system, 271, 273, 276, 283, 292 basic health services, 272, 292, 294 Beijing Consensus, 1 benevolent governance project, 347 bio-energy, 175, 186, 193, 199 bottlenecks, 175, 239, 261, 383

C carbon dioxide, 17, 181, 212, 213, 214, 217, 224, 225, 228, 233, 234, 246, 262 CCX, 216, 241, 242 CDM, 8, 214, 215, 216, 219, 220, 221, 222, 223, 224, 225, 227, 228, 231, 232, 236, 239, 240, 241 CEPA, 313, 359, 379, 384, 385, 391 CER, 216, 220, 228, 231, 241 chain-industries, 147 Changsha, Zhuzhou and Xiangtan city cluster, 302, 303

Chinese pattern, 4 circular economy, 247, 251, 252, 255, 326 Clean Development Mechanism, 8, 212, 214, 215, 216, 231 Clean Energy, 6, 7, 19, 225 clean production, 244, 252, 261 Climate Action and Renewable Energy Package, 177 climate change, 6, 8, 17, 176, 177, 194, 211, 212, 213, 214, 220, 223, 225, 226, 228, 232, 233, 234, 239, 242, 253, 254 climate-smart world, 6 COD, 213, 218, 220, 231, 249 completion area, 148 comprehensive pilot reform areas, 18 comprehensive stimulus, 166 comprehensive supporting reform, 301, 302, 303, 310, 327, 329, 330, 332 Comprehensive Supporting Reform Pilot Zones, 327, 328 convention, 199, 212, 341, 346, 381 Credit Policy, 66, 256 CSRPZs for Balanced Urban and Rural

D Development, 302 CSRPZs for Building a Resource-efficient and Environment-friendly Society, 302 deposit reserve ratio, 21 development model, 1, 2, 4, 7, 17, 18, 20, 212, 244

370

Index

Direct Agricultural Subsidy, 63 diversification, 176, 380, 382, 383 domestic demand, 11, 26, 28, 29, 30, 34, 35, 43, 44, 49, 53, 55, 60, 62, 69, 72, 77, 79, 80, 82, 88, 104, 113, 117, 119, 127, 130, 132, 133, 145, 155, 157, 164, 165, 166, 196, 209, 247, 350, 376, 390

Fixed Assets Investment, 340 fossil energy, 17, 175, 203, 212, 261 Free Travel, 380

G

gaming industry, 359, 370, 371, 373, 380, 383, 385 gaming revenues, 366, 370 E geographic disadvantages, 335 ecological industrial parks, 252 global financial crisis, 22, 24, 51, 53, 145, 164, economic stimulus plan, 3, 6, 18, 21, 22, 26, 29, 165, 192, 196, 197, 232, 244, 335, 359, 360, 30, 38, 41, 42, 43, 44, 45, 46, 75, 164, 245, 247, 367, 373, 378, 383, 384, 387, 388, 389, 390, 401 391, 392 economic structural adjustment, 30, 43 government employees insurance, 271 emission reduction, 8, 27, 32, 38, 39, 75, 123, Green Car, 144 177, 211, 212, 213, 214, 215, 216, 217, 219, Green City, 259 220, 222, 223, 224, 225, 228, 229, 231, 232, Green Companies, 264 233, 236, 239, 240, 241, 245, 253, 254, 256 green ecology, 12, 14 employment, 5, 7, 17, 22, 23, 24, 25, 28, 36, 37, green economy, 6, 8, 10, 13, 15, 16, 17, 19, 243, 43, 45, 49, 50, 51, 52, 53, 76, 77, 114, 115, 126, 244, 245, 247, 254, 255, 256, 257, 258, 261, 130, 147, 176, 207, 245, 280, 313, 315, 350, 262, 264, 265, 266, 267, 268 360, 366, 367, 370, 371, 373, 374, 376, 383, green industry, 8, 11, 17, 353 387, 391, 392 green insurance, 255, 257, 266 energy-saving, 5, 7, 8, 27, 38, 42, 124, 176, 178, Green New Deal, vi, 1, 4, 5, 6, 7, 13, 14, 16, 17, 212, 213, 219, 228, 233, 247, 248, 249, 250, 18, 19, 243, 244, 245, 261 255, 258, 259, 325, 342 Green Recovery, 243 energy-saving and emission-reduction, 247, green revolution, 17 248, 325, 342 green securities, 255, 257 Engel Coefficient, 58 Green Tax, 258 environment-friendly, 11, 18, 175, 245, 254, greenhouse gas, 17, 175, 176, 177, 196, 205, 256, 257, 258, 303, 322 206, 211, 212, 216, 220, 225, 233, 236, 239, essential medicine system, 290, 291, 292 253 ethnic commodity production, 349 guaranteed housing construction, 38 ethnic regions, 15, 335, 336, 337, 338, 339, 340, H 341, 342, 343, 344, 345, 346, 347, 348, 349, 350, 351, 352, 353, 355, 357 Harmonious Society, 100 Every Village Connection Project, 340 health insurance system, 271, 273, 274, 283 expand rural demand, 69, 71, 73 Heng Qin development, 381, 382, 385 export-oriented economy, 147 Heng Qin Island, 380, 388, 389

F Failed Estate Auction, iii Finance Company, 97 financial derivatives, 3, 145, 170, 171, 305 fiscal subsidy, 15, 64, 156, 344

Hong Kong Monetary Authority, 373 Hong Kong-Zhuhai-Macao Bridge, iii, 374, 379, 380, 381, 382, 384, 391 household electric appliances going to the countryside, 55, 64, 70, 71 household solar power, 178

Index Huinong Card, 90 hydropower, 62, 176, 181, 188, 189, 190, 193, 200, 217, 222, 223

I Implementation Effects, 130 income distribution, 28, 45, 46, 77, 317 industrial policy, 123, 126, 127, 142, 143 Industry Supports Agriculture, 60 inflation, 21, 44, 50, 51, 76, 147, 160, 162, 165, 166, 178 informal financial institutions, 87 infrastructure, 5, 11, 12, 14, 26, 29, 30, 31, 38, 39, 41, 43, 45, 46, 52, 53, 62, 72, 75, 80, 90, 108, 109, 125, 128, 144, 147, 155, 156, 157, 176, 204, 205, 206, 207, 208, 213, 215, 246, 252, 268, 278, 307, 313, 320, 325, 326, 337, 340, 342, 344, 347, 351, 352, 353, 356, 357, 374, 378, 379, 380, 383, 391, 392 infrastructure construction, 11, 38, 39, 41, 45, 62, 75, 80, 128, 156, 157, 213, 313, 326, 340, 374 interest rate, 21, 31, 32, 42, 98, 104, 105, 110, 143, 153, 154, 155, 169, 170, 171, 173, 245, 350, 373 International Financial Crisis, i, iii, vi, i, 21, 22, 47, 114, 145, 341 IPCC, 212, 236

K Kyoto Protocol, 8, 212, 214, 215, 223, 231, 235, 268

L Land King, iii Land Reserving, 156 Lessons of Industrial Policy, vi, 141 livelihood projects, 11, 38, 39, 46, 147, 157 local government bonds, 30, 31, 42, 51 Logistics Construction, 64 Loose Monetary Policy, 32, 76 low carbon economy, 240, 241, 247, 253, 254, 266 low-carbon economy, 7, 177, 196, 211, 212, 233, 245

371

M Macao International Trade and Investment Fair, 377 macro policies, 55, 75, 77 macroeconomic control, 158, 160 markup of pharmaceuticals, 292 medicine markup, 290 Medium and Long-term Planning of Renewable Energy Development, 192, 193, 194 methane, 62, 70, 71, 75, 193, 194, 200, 201, 204, 206, 207, 240, 241, 242 micro-credit, 90, 95, 98

N national essential drug system, 282 National Real Estate Prosperity Index, 151 New Countryside Construction, 55, 59, 75, 76, 89, 91, 95, 98, 100 new eco-city of Tianjin, 259 new energy, 6, 7, 8, 11, 116, 124, 139, 144, 175, 176, 177, 178, 179, 181, 187, 189, 192, 193, 194, 195, 196, 197, 198, 199, 202, 203, 204, 205, 206, 207, 208, 209, 219, 220, 225, 245, 248, 261, 262, 401 New Rural Cooperative Medical Scheme, 272 new rural reconstruction, 10 newly-constructed house, 147 nuclear, 7, 36, 176, 178, 181, 187, 188, 192, 194, 195, 196, 197, 225, 233, 254

P partially concerned risk, 166 Pearl River Delta, 302, 310, 330, 363, 368, 379, 381, 382, 388, 389, 391 people-orientation, 16 people-oriented, 18, 254, 273 pilot, 18, 26, 34, 36, 90, 95, 96, 99, 100, 102, 105, 123, 194, 214, 218, 226, 231, 241, 248, 252, 253, 254, 257, 273, 279, 282, 283, 284, 286, 290, 292, 298, 301, 302, 303, 305, 306, 307, 308, 309, 311, 317, 318, 321, 324, 325, 329, 330, 331, 343, 347, 380, 385, 391 Plastic (Bags) Limit Order, iii policy bank, 88 policy-oriented houses, 166

372

Index

pollutant, 211, 213, 214, 216, 218, 220, 228, 231, 232, 236, 239, 246, 248, 251, 257, 267, 268, 310 pollutants, 216, 236, 248 Poverty Reduction, 339 power delegation and profit concession, 272 private capital, 51, 96, 97, 103, 105, 205, 291, 350, 354 PSBC, 95, 96, 106 public health service system, 271 public health system, 273, 299 public hospitals, 66, 272, 273, 276, 278, 279, 280, 282, 290, 291, 292, 293, 298

rural resident, 36, 37, 44, 58, 59, 60, 63, 65, 66, 69, 70, 72, 75, 76, 79, 80, 81, 164, 272, 276, 286, 288, 339, 340

S

sale these medicines at the same prices, 290 Scientific Outlook on Development, 194, 244 self-help, 95, 335 self-innovation, 30, 32, 36, 38, 41 self-reliance, 343, 346 Shanghai Inter Bank Offered Rate (SHIBOR), 305 Shanghai Pudong New Area, 301, 303, 304, 327, 328 Q Shanghai Stock Exchange, 76, 305 QDII, 305 small and medium enterprises, 375, 377, 380, 384 R SO2, 8, 214, 231, 249 Social Security, 36 Real Estate Tycoon, iii socialist market economy, 4 recycling economy, 123, 309, 342 solar energy, 175, 177, 178, 179, 181, 183, 184, reform and opening up, 1, 18, 28, 29, 80, 127, 193, 194, 195, 197, 204, 206, 209, 220, 247, 301, 302, 303, 310, 327, 329, 346, 348 254, 261, 263 regional autonomy of ethnic minorities, 343 Special Economic Zones, 301, 329 regional cooperation, 381, 382, 384 structural adjustment and industrial upgrading, Regional Reinvigorating Plan, 77 renewable energy, 5, 7, 175, 176, 177, 178, 179, 248 sub-crime crisis, 145 183, 187, 192, 193, 196, 199, 202, 216, 219, System of Green Economy Policy, 255 225, 233, 241, 245, 253 returning husbandry to grassland, 338 returning land for farming to forestry, 338 RFCU, 98, 105 RMB Business, 378 RRCs, 92, 93, 94 rural area, 7, 9, 12, 26, 27, 30, 36, 37, 38, 39, 46, 55, 57, 58, 60, 61, 62, 63, 65, 66, 69, 70, 73, 78, 79, 81, 82, 86, 87, 88, 90, 91, 93, 95, 97, 98, 101, 102, 103, 104, 105, 107, 108, 109, 125, 131, 138, 165, 190, 193, 241, 242, 272, 273, 278, 279, 280, 283, 293, 307, 314, 315, 316, 317, 318, 319, 320, 321, 330, 332, 340 rural cooperative medical system, 271, 272 Rural Economy, 55, 56, 78, 106, 358 rural finance, 12, 85, 87, 88, 89, 90, 92, 93, 96, 97, 101, 105, 107, 108, 401 rural households, 58, 59, 70, 86, 90, 242

T Ten Major Industries Stimulus Plan, vi, 113, 129, 139 the development of the western region, 336 Tianjin Binhai New Area, 302, 303, 308, 327, 328 Tianjin Climate Exchange, 216, 218, 224, 225, 227, 228, 235 Tibet-Xinjiang Project, 340 township health centers, 277, 279, 287, 289, 290, 293 trading volume, 25, 145, 146, 153, 154, 160 Traditional energy, 175 transaction prices, 145 two basics, 337 two exemptions and one allowance, 338

Index

W

U unbalanced development, 331, 335 Unity of Nature and Men, 244 Urban and Rural Health Aids, 283 urban and rural overall plan, 10 urban community health centers, 277, 280 Urban Resident, 58, 272, 277, 283

V

373

well-off life, 335 west-east electricity transmission, 340 west-east natural gas transmission, 340 Wholesale Price Index of Agricultural Products, 87 wind energy, 175, 177, 179, 181, 183, 192, 193, 194, 195, 204, 206, 262 work to the people’s heart, 347 Wuhan City Circle, 18, 322, 323, 324

Village Bank, iii, 96, 97 village clinics, 278, 279, 280 village health stations, 290, 292, 293 vitalizing border areas and enriching the people’ zero-discharge, 252 s life, 343, 347

Z

China's New Deal: Economic Development Under International Financial Crisis

Economic and Financial Decisions under Risk

Economic and Financial Decisions under Risk

Economic and financial decisions under risk

Commodities, Governance and Economic Development Under Globalization

New law and economic development

Financial Reform and Economic Development in China

The Asian financial crisis

The Asian financial crisis

What Global Economic Crisis?

A Commonwealth of Hope: The New Deal Response to Crisis

Economic Crisis and Crime

Financial Liberalization and the Economic Crisis in Asia

Daedalus (Fall 2010): On the Financial Crisis & Economic Policy

Asian Financial Crisis, Volume 1: Financial, Structural, and International Dimensions (International Finance Review)

Financial Crisis in Eastern Europe

Europe and the Financial Crisis

Development Under Stress

Minsky, Crisis and Development

The Financial Crisis Inquiry Report

The International Financial Crisis: Have the Rules of Finance Changed?

Seeking Growth under Financial Volatility

External Debt: Brazil and the International Financial Crisis

The Financial Crisis Inquiry Report

Reflections on World Economic Crisis

The International Urban Crisis

Determinants of Financial Development

IMF Essays from a Time of Crisis: The International Financial System, Stabilization, and Development

IMF Essays from a Time of Crisis: The International Financial System, Stabilization, and Development

Determinants of Financial Development

Economic and Financial Analysis of Hydropower Projects (Hydropower development)

China's New Deal: Economic Development Under International Financial Crisis

Economic and Financial Decisions under Risk

Economic and Financial Decisions under Risk

Economic and financial decisions under risk

Commodities, Governance and Economic Development Under Globalization

New law and economic development

Financial Reform and Economic Development in China

The Asian financial crisis

The Asian financial crisis

What Global Economic Crisis?

A Commonwealth of Hope: The New Deal Response to Crisis

Economic Crisis and Crime

Financial Liberalization and the Economic Crisis in Asia

Daedalus (Fall 2010): On the Financial Crisis & Economic Policy

Asian Financial Crisis, Volume 1: Financial, Structural, and International Dimensions (International Finance Review)

Financial Crisis in Eastern Europe

Europe and the Financial Crisis

Development Under Stress

Minsky, Crisis and Development

The Financial Crisis Inquiry Report

The International Financial Crisis: Have the Rules of Finance Changed?

Seeking Growth under Financial Volatility

External Debt: Brazil and the International Financial Crisis

The Financial Crisis Inquiry Report

Reflections on World Economic Crisis

The International Urban Crisis

Determinants of Financial Development

IMF Essays from a Time of Crisis: The International Financial System, Stabilization, and Development

IMF Essays from a Time of Crisis: The International Financial System, Stabilization, and Development

Determinants of Financial Development

Economic and Financial Analysis of Hydropower Projects (Hydropower development)

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