China Achieves "Soft Landing" Through Sustained Macro Stabilization

• Pages: 217-219

Page 217

The following article is based on the recent Article IV discussions by the staff of the IMF's Asia and Pacific Department with the People's Republic of China.

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China has achieved rapid economic growth and substantial structural transformation since initiating a comprehensive package of market-oriented reforms in 1978. Real GDP has grown at an average rate of 10 percent annually since 1978, and a dynamic nonstate sector-accounting for about two-thirds of industrial output-has emerged. Most transactions are now at market prices, and the roles of external trade and foreign investment have expanded.

The Chinese economy has, however, experienced recurrent cycles of overheating and pronounced, but short-lived, retrenchment. Economic upswings have been characterized byPage 218 sharp increases in inflation and a deteriorating external position, as domestic demand has tended to increase rapidly. The latest cycle, which began with a drive for faster growth and reform in 1991, resulted in a strong investment-led boom and a rapid acceleration of inflation. By 1996, however, with the help of sustained stabilization measures, the authorities achieved a "soft landing" for the first time in two decades. Annual retail price inflation dropped to 6 percent in 1996 from 22 percent in 1994, while real GDP moderated to a still strong 9.7 percent from 12.6 percent. Favorable macroeconomic conditions have continued into 1997; real GDP grew by 9.4 percent during the first quarter, and retail price inflation decelerated to an annual average of 3 percent.

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Surging Investment Led to Overheating .

The years since the onset of market-oriented reforms divide into four cycles: 1979-81, 1982-86, 1987-90, and 1991 to the present (see chart, page 217). In the current cycle-to an even larger extent than in earlier ones-aggregate demand during the upswing was driven by fixed investment. Accelerating credit growth fueled an investment boom, with fixed investment by state-owned enterprises growing by close to 70 percent during the first quarter of 1993. The strong growth in investment brought the ratio of fixed investment to GDP to 37.5 percent in 1993. Demand pressures emerged, and in early 1993, overall retail price inflation started to accelerate rapidly. By...