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Chapter 4
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Market Building: Tackling Challenges in an All-Round Way



Along with the advance of the reform of the economic system in 2004, the construction of China’s market system has made certain progress, and its foundation role in the allocation of resources has been increasingly enhanced. But it should be noticed that the market order is not as good as desired. Monopoly, unfair competition, improper government interference in the market and other problems are fairly prominent in some places and industries. The phenomena of making and selling counterfeited products, and harming and swindling consumers continue despite repeated prohibition. Problems existing in the labor, capital and other markets occur in no small number. In 2004, China’s market witnessed full acceptance of challenges. Centered on the need for integration with the international market after entry into the World Trade Organization (WTO), different degrees of regulatory reform were carried out in many aspects of the market system in 2004. Great efforts have been made in the reform of the capital market, as evidenced in the document “On Promoting the Reform, Openness and Steady Development of the Capital Market” published by the State Council on January 3, 2004. Governments at all levels have published regulations and documents on regulating the land expropriation system, bringing about remarkable results in improvement of the land market. New flashpoints have also appeared in the construction of a social credit system in dealing specifically with the “credit crisis” of the whole society. An electricity shortage highlights the need for reform of the electric power structure, and hastens the reform of a coal-electricity price linkage mechanism.


The year 2004 was a year in which China’s market fully accepted the test of opening up. The brightest flashpoint in opening up to the outside world was that some Chinese industries planned to be opened to the outside fulfilled their commitments made for accession to the WTO on schedule, and some even ahead of schedule. For instance, at the end of 2003 they gave foreign-funded auto enterprises the right of independent sales; in 2004, they fully liberalized the foreign trade operation power for foreign-funded enterprises. At the same time, market construction is faced with all-round challenges in its comprehensive integration with the world due to its irregularity, so strategic and structural transformation must be carried out. Along with the further increase in China’s dependence on foreign trade, China will soon enter the phase of frequent occurrence of trade friction. In an effort to solve the anti-dumping problem, the Chinese government is doing its utmost to attain “market economy status” and is probing for an anti-dumping mechanism featuring integrated linkage of government, trade associations and enterprises. Furthermore, the structure of China’s foreign economy is also facing a severe challenge: The strategy of opening up to the outside world should effect a change from dependence on external needs to equal importance attached to both external and internal needs; the foreign trade strategy should switch from “stress on exports to the neglect of imports” to equal importance attached to both exports and imports; international reserves should also change from single foreign exchange to equal importance to foreign exchange and strategic materials.


Section 2  Further Opening-Up to the Outside World, and Severe Challenges in Overall Fulfillment of China’s WTO Promises


1. Fulfilling China’s commitments made for the membership of WTO on schedule or even ahead of time, and opening wider to the outside world


The brightest point in China’s opening to the outside world in 2004 was that China had fulfilled its WTO promises of opening some industries on schedule, and some other industries were opened even ahead of time, and so the level of opening to the outside world had been further raised. The opening-up policy has played an active role in the reform of the domestic economic system and economic and social development. Unprecedented progress has also been made in foreign economic and trade activities. (The following materials in this section were chosen mainly from the article titled “The Gains and Losses in the Three Years after WTO Entry: Progresses Are Varied, Different Tracks Are Made by Different Industries” carried by China Economic Information Network on December 7, 2004.) At the same time, Chinese enterprises have withstood the tests of opening to the outside world, and the situation is far better than expected.


(1)                With regard to barter trade, the level of opening to the outside world has further risen, and the degree of the interaction between the Chinese and world economies has been further deepened


First, the average tariff level continues to decline. At present, China’s tariff level has been reduced to 10.2 percent. The tariff quota implementation period for wheat, corn, rice, cotton, wool and other farm products was concluded at the end of 2004, and the rate of tariff reduction for certain farm products is even ahead of the timetable set by the WTO. Second, non-tariff barriers keep decreasing. Currently, products placed under export quota license management have decreased to 52 kinds, and only eight kinds of commodities are under import quota license management. Quota, license and specific bid-invitation management of over 16 duty items have been abolished. Third, foreign trade management power has been fully liberalized. The “Foreign Trade Law,” revised on July 1, 2004, makes clear the liberalization of foreign trade management power for Chinese domestic enterprises. This means that from now on all Chinese enterprises will possess the right to handle the import and export of all their products. It also means that for China, a country in urgent need of perfecting its foreign trade management system and enterprise operation mechanism, these reforms and adjustments have been preliminarily accomplished. Foreign individuals and enterprises enjoy no lower treatment than Chinese enterprises in regard to foreign trade power. In the three months from July 1 to the end of September 2004, the number of foreign trade managers put on file for registration reached 18,582 nationwide, including 17,605 from Chinese-funded enterprises, 197 from enterprises invested in by Hong Kong, Macao and Taiwan businessmen, 573 from foreign-funded enterprises, and 207 from enterprises invested in by individuals. The orderly liberalization of foreign trade management power has made foreign-funded enterprises become the business mainstays of China’s foreign trade, while the foreign trade business in collectively- and privately-run enterprises has also experienced rapid development.


China’s foreign trade scale exceeded US$1 trillion for the first time in 2004, and its foreign trade aggregate has jumped to third place in the world. The utilization of foreign capital has grown year after year, pushing China to the world’s No.1 position in 2004, hitting US$60 billion-worth. Experience has proved that accession to the WTO was a correct choice for China to make in its policy of opening to the outside world and actively participating at a higher level in the process of economic globalization. On the eve of the country’s entry into the WTO, many people asserted that after the accession imports would increase by a big margin, while the growth rate of exports would slow down, and thus quickly lead to a trade deficit and reduction in China’s foreign exchange reserves, and an unfavorable balance of international payments would force the devaluation of the RMB. Judging from the situation over the past three years since China’s entry into the WTO, facts prove otherwise. By December 2004, China’s foreign exchange reserves had increased to US$609.9 billion, making it the country with the second-largest FX reserves, next only to Japan. The surplus in the capital account expanded continuously, and in the utilization of foreign direct investment (FDI) China was the world’s No. 1 for three straight years. The expected immediate trade deficit failed to appear. China’s trade surplus stood at US$30.5 billion in 2002, and at US$25 billion in 2003. In the third year after WTO accession, although the trade surplus decreased somewhat, it stayed at about US$12 billion.


(2)                The reform and opening of service trade-centered industries are being pushed forward in an all-round and steady way


Following its promises made prior to its WTO membership, China has gradually quickened the opening pace of various industries, and the scale of opening has continuously expanded. China has basically fulfilled its promises for WTO accession, and the work of revising and perfecting related legal clauses has been carried out in accordance with the timetable. By the end of 2004, China had promulgated over 40 laws, regulations and rules, which covered the fields of banking, insurance, securities, legal services, retail, communications and transportation, tourism and education, basically forming a legal system conforming to the WTO’s rules in the field of foreign investment services. These laws and regulations expand policy, the scope of businesses and regions for foreign service workers to enter the inland region of China, and lower the threshold for the accession of related industries. Most industries open their business to the outside world in accordance with the timetable. A small number of areas, such as retail and audio-visual products, in particular, took the initiative to open their business ahead of time, and some key industries and key regions have achieved significant progress in opening to the outside.


Agriculture. The farm products China imports are mainly raw materials, such as soybeans. This shows that the mix of China’s farm products is tending to become optimized. Accession to the WTO hasn’t dealt a fatal blow to China’s farm products. On the contrary, acting completely in accordance with its WTO promises, China has gradually mitigated protection of agriculture, correspondingly cancelled relevant taxes on agriculture, intensified support for promoting the export of farm products, improved agricultural productivity and lowered the cost of the circulation of farm products. That’s why it is said that WTO entry, far from being an obstacle to China’s agricultural modernization, actually marked the real beginning of China’s agricultural modernization.


Auto industry. Before the WTO accession, many people were worried about this industry suffering a disastrous blow, but in the past three years China’s auto industry has witnessed a scene of flourishing auto production and sales at home, while motor vehicle import and sales have also been very brisk. On the one hand, we probably underestimated the competitiveness of China’s auto industry before WTO entry; on the other hand, we also underestimated the benefits that might be brought about by the opening of the auto industry. In the period following the start of negotiations for WTO entry, technology introduction and technology innovation by the Chinese auto industry quickened enormously. However, we need to give forward-looking consideration to the auto industry: At present, there is a surplus in the world’s auto production capacity, a great part of which has been shifted to China. By 2010, China will possibly be the world’s second largest auto producer. By then, if China has not formed a favorable selling environment, and if it cannot export motor vehicles at zero taxation, these motor vehicles will have to be sold on the home market. For this reason, local governments need to look squarely at the problem of blind investment in the auto industry.


Telecom industry. China’s telecom industry has opened fairly widely to foreign investment. Foreign investors take part in China’s telecom market mainly in the form of buying the stocks of listed companies. However, China’s telecom industry has also withstood tests. In October 2004, the number of mobile phone users in China approached 320 million, and that of fixed telephone users exceeded 310 million. The income from China’s telecom service continued to grow at a two-digit rate, some five-fold higher than the level of global growth in this field. However, we need to give serious consideration to the telecom industry’s development mode, which at present features low ratios of input, income and profit.


Banking industry. The banking industry was also a major focal point of debate at the time of China’s WTO accession. So far, the proportion of foreign banks handling the business of deposits and loans in RMB is still rather low -- no more than 10 percent. Acting on China’s promise to allow foreign banking institutions to handle RMB business in some big cities and permitting them to enter the Chinese market, the Chinese government and banking regulatory commissions have, over the past three years, been conscientiously carrying out China’s promise to open the banking market. They have lifted restrictions on regions and clients in relation to foreign banks’ handling exchange business, the regions where foreign banks are allowed to handle RMB business have rapidly expanded from only Shanghai and Shenzhen at the time of China’s WTO entry to 13 cities, qualified foreign banks are allowed to provide RMB services to Chinese enterprises in regions that have opened RMB business, and foreign banks in China are provided with scope for fully developing RMB business. By July 15, 2004, the number of foreign banking institutions allowed to handle RMB business in China had reached 100, making up 50 percent of the total of foreign banking business institutions with offices in China. The regions involved include Shanghai, Shenzhen, Tianjin, Dalian, Guangzhou, Zhuhai, Qingdao, Fuzhou and Wuhan. A survey comparing the competitiveness of Chinese and foreign banks shows that among the 34 Chinese and foreign banks already doing business in Beijing, the top 12 are foreign banks.


Insurance industry. Since its WTO accession, China has issued a large number of licenses so as to enlarge the scale of this business. At its 2004 annual meeting, the China Insurance Regulatory Commission disclosed that now a total of 39 foreign insurance companies have opened 70 business institutions in China, and 124 foreign institutions have set up 187 representative offices. As an important component of its opening to the outside world, the Chinese insurance industry has been constantly quickening its pace of opening up.


Retail business. Practice over the past three years since China’s WTO entry proves that, instead of hindering the development of China’s wholesale and retail industries, opening this section has accelerated China’s commercial reform and changes in this sphere. At present, China’s commercial development is in a confident state, and the scale of commodity retail is being steadily expanded. However, it is necessary for China’s retail industry to introduce more marketing ideas.


Intensifying efforts for the protection of intellectual property rights. Beginning in 2004, China designated the April 19-26 period each year as “publicity week for the protection of intellectual property rights,” in the hope of better promoting publicity for and the protection of intellectual property rights. In September, the State Council decided to launch a special campaign for the protection of intellectual property rights nationwide in the following year. Currently, intellectual property-related cases have covered all the areas stipulated in the WTO “Agreement on Trade-Related Intellectual Property Rights.” In dealing with serious cases of infringement on intellectual property rights, the public security and judicial departments have intensified their efforts for the protection of intellectual property rights. In January-June 2004 alone, the country’s public security organizations put over 500 criminal cases of encroaching upon intellectual property rights on file for investigation and prosecution, involving some 300 million yuan. In 2004 alone, Chinese industrial and commercial departments at all levels retrieved an economic loss of well over 900 million yuan for consumers through launching a special campaign against counterfeiting activities. Patent offices nationwide accept and handle more than 1,000 patent dispute cases each year, the overwhelming majority of which are solved satisfactorily. In the first half of 2004, local courts across the country received 5,689 intellectual property-related cases, 25.42 percent up as compared with the previous year.


Opening of the culture industry. China is constantly opening its radio and TV broadcasting sector to the outside world, even though this was not a condition of its WTO entry. On November 17, 2004, the State Administration of Radio, Film and Television and the Ministry of Commerce published the “Interim Provisions on the Management of Sino-Foreign Ventures and Cooperative Enterprises Engaging in the Production and Operation of Radio and TV Programs,” announcing that after November 28, 2004, foreign media companies would be able to buy shares in domestic radio and television program production and operation enterprises, but the amount of shares held by Chinese investors should not be less than 51 percent. The children’s channel of a US television company gained approval from China’s State Administration of Radio, Film and Television and established a joint-venture company with the Shanghai Media Group to produce localized children’s programs. In the “Interim Provisions on Foreign Investment in Cinemas,” effective as of January 1, 2004, it is stipulated that in Sino-foreign co-funded cinemas in the pilot cities of Beijing, Shanghai, Guangzhou, Chengdu, Xi’an, Wuhan and Nanjing, the proportion of foreign investment in the registered capital should not exceed 75 percent. In October 2004, Warner Bros. Pictures was given approval to jointly establish with the China Film Group and Hengdian Group the Warner China Film HG Corporation. This was the first time for China to permit a foreign institution to set foot in China’s film production and distribution business.


2. Dumping and anti-dumping will be a source of foreign trade friction for some time to come

(1)                China is gradually entering a period marked by frequent occurrence of trade friction


China has been the country most subject to anti-dumping investigations in the world for nine consecutive years. From its WTO entry in 2001 to the end of November 2004, foreign countries had launched 137 anti-dumping investigations of some 4,000 kinds of Chinese products, which involved a total of about US$3.5 billion, and six individual cases of which involved more than US$100 million each. Investigation of four cases was launched by the United States, involving US$1.854 billion; investigation of two cases was conducted by the European Union (EU), involving US$446 million each. The total amount of money involved topped US$2.3 billion. Involved were China’s mineral, chemical, electromechanical, light and textile industries, and food and native animal by-products. China’s farm products and textiles have gradually become hot spots of foreign anti-dumping actions against China. In the past three years since China’s WTO entry, the country’s foreign economy and trade sector has faced various challenges posed by international trade rules. These challenges were expected, but in terms of the degree of their complexity, they are unusual. Various signs show that, as Chinese enterprises are exerting themselves to march into overseas markets, China has also entered a period of the frequent occurrence of international economic and trade friction.


(2)                “Four-entity united action.” China has gained initial achievements in its exploration of ways for the establishment of a mechanism to deal with trade friction


To counter foreign anti-dumping investigations, China has initially formed a “four-entity united action” mechanism for coordinated work among the central and local governments, Chinese business institutions stationed abroad, enterprises, and chambers of commerce and trade associations. Practice over the past few years proves that the mechanism has played an important role in heightening the enthusiasm of enterprises to respond to prosecution and in making the results more favorable to the Chinese side. In the “four-entity united action” mechanism, the government should strengthen guidance for enterprises’ response to prosecution, and intensify efforts in its representations and negotiations with foreigners on major issues of principle, with emphasis placed on unfair, unjust and discriminatory policies and acts of investigation conducted by foreign countries against Chinese products. The government should, through a perfect, practical, efficient incentive mechanism conforming to WTO rules, further enhance activeness in response to prosecution. At the same time, Chinese business institutions abroad will closely follow the trend of anti-dumping actions launched by foreign institutions against Chinese products, give full play to the advantage of timely access to information, and accomplish the institutionalization and regularization of representation so as to realize the effective transmission of early-warning information and quick response to prosecutions.


(3)                To solve the anti-dumping problem, it is necessary to strive hard for a “market economy status”


Compared with other commitments, the problem of a “market economy status” is the final threshold set up by the WTO to China’s accession to this organization that lasts the longest time and contains the greatest difficulty. There are still 12 long years to go before reaching this final threshold. However, this final problem containing the greatest difficulty became a key point in the Chinese government’s foreign work in 2004. On April 14, 2004, New Zealand took the lead in recognizing China’s “market economy status,” followed by Malaysia and Singapore. But to win overwhelming victory, we must win support from the United States and the EU. They were China’s first and third largest export markets, respectively, in 2003, as well as the main regions that launched anti-dumping investigations against China.


(4)                China should adjust its attitude to the anti-dumping problem


A “market economy status” is an international anti-dumping term, whereas anti-dumping is an action taken by a country against enterprises of other countries. Although anti-dumping has seriously harmed the interests of Chinese enterprises against which actions have been filed, nevertheless, anti-dumping does not threaten China’s trade mainstream. According to Customs statistics, China’s export volume reached US$438.37 billion in 2003. Of this, the US$2.2 billion involved in cases in which dumping accusations were made accounted for only 0.5 percent. China should adjust its attitude toward solving the problem concerning its market economy status, and it should not upgrade enterprises’ problems to national problems.


3. The foreign economy system is faced with all-round challenges, and strategy and systemic transformation is imperative under the circumstances


(1)                China’s economy is faced with severe tests posed by the “rear transition period” of industrial protection


Beginning in the “rear transition period” of industrial protection on December 11, 2004, the challenges facing the Chinese market show no signs of decreasing.

First, rapid import growth possibly brought about by lowered tariffs and removal of non-tariff barriers, and increased pressure from the imbalance of international payments will have an impact on related domestic industries. Some management measures will be gradually liberalized or abolished, and some sensitive industries will face competition or even adverse impact caused by imported products. Designated operational means will also be abolished. The export quota management measures being applied by China for some superior resource commodities, such as coal, coking coal, rare-earth materials and some nonferrous metals, are subject to continuous queries by Europe, the United States, Japan and other WTO members.


Second, the entry of large batches of transnational corporations has led to a rise in the concentration of industries, so the government will face a heavier task of preventing monopoly and maintaining the order of market competition. The expansion of investment in China and business scope by magnates of foreign banks, insurance companies, commerce, transportation and telecommunications with global competitiveness will bring great pressure on domestic service trades lacking sufficient competitiveness.


Third, within the “rear transition period,” China is still in the applicability period of such discriminatory provisions as “special guarantee clause” and “non-market economy status.” It will, along with the growth of exports, face more restrictive measures in its foreign trade, and economic friction with its main trading partners will be possibly aggravated. Technical and other forms of trade barriers in international trade tend to become increasingly complicated, disputes over intellectual property rights (IPR) have increased rapidly, and foreign business people are concerned about China’s protection of intellectual property rights.


(2)                Excessive dependence on foreign requirements tests the Chinese economy’s ability to cope with risks


China’s strategy of opening to the outside world should effect a change from depending on external needs to giving equal importance to external needs and internal needs. The degree of China’s dependence on foreign countries -- the proportion of total trade volume to GDP (gross domestic product) was 43 percent in 2001, and 69.9 percent in 2004 -- much higher than that of the United States and Japan, and putting China in the ranks of countries highly dependant on external needs.


First, it is impossible for the world’s natural resources to support China’s industrial development in accordance with its present input structure. Calculated in accordance with PPP (purchasing power parity), in 2002, China’s GDP represented 11.9 percent of the world’s total, whereas the output of its steel, coal and cement accounted for 22.8 percent, 31.0 percent and 40.3 percent, respectively, of the world’s total. The per-unit GDP consumption of steel, coal and cement was 1.9-fold, 2.6-fold and 3.4-fold, respectively, of the world’s average level. In light of China’s present economic consumption level, the speed of development of the world’s natural resources cannot meet China’s requirement for quadrupling its GDP once more over the next 20 years.


Second, the markets of the developed countries, with a combined population of 1.2 billion, can in no way accommodate the industrialization demand of China, which has a population of 1.3 billion. Since the launching of the policy of reform and opening up some two decades ago, the rate of China’s industrial development has always been higher than that of its GDP. If the economic structure remains unchanged, even calculated in accordance with the synchronous development of industry and GDP, the output of many China-made industrial products will be quadrupled in the next 20 years. The world’s markets, mainly the markets of the developed countries, can in no way satisfy China’s demand for industrialization.


Third, excessive dependence on external needs has resulted in a transfer of international wealth unfavorable to China. Consecutive years of huge surpluses and high amounts of foreign exchange reserves have rid China of the restriction of foreign exchange deficiency, and have laid a necessary foundation for China’s further development, but at the same time China has paid a price for the transfer of international wealth: Enduring low wages and environmental damage.


Fourth, excessive dependence on external demand contains potential threats to the national economy and political security.

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In China’s economic development, particularly since the launch of the reform and opening-up policies, an outward-looking strategy and export-oriented policy have played an irreplaceable, crucial role. We cannot deny, nor can anyone else deny, that this strategy and policy will exert a tremendous influence in the future. However, excessive pursuit of outward-looking economic growth will hamper the sustained, steady and balanced development of the entire national economy, and thus ultimately deprive China’s foreign economy and trade of the foundation and scope for development.


In fact, an antithesis also exists between internal needs and external needs. First of all, excessive dependence on external demand has restrained the sustainable growth of internal demand. On the one hand, this is because China’s huge potential production capacity itself cannot find enough external demand; on the other hand, it is because excessive dependence on external demand has aggravated the imbalance between China’s consumption and investment. In view of the fact that China possesses one fifth of the world’s population and has an almost unlimited manpower supply, if it relies solely on the foreign market, then the capacity of this market will be far from enough to allow China to bring its own huge potential production capacity into full play.


At the same time, a major defect of the internal demand of the Chinese economy is that consumption is too low, whereas the rates of deposits and investment are too high. According to the International Financial Statistics Annual Report, currently the consumption rate in developed countries is around 78 percent and the average consumption rate in developing countries stands at 74 percent, whereas China’s consumption rate was only 52.8 percent in 2003. Excessively low consumption not only lowers the people’s current living standard, but will also possibly result in relative overproduction and the decline of investment efficiency.


(3) As trade balance becomes the leading factor, the foreign trade strategy should change from “stressing exports to the neglect of imports” to attaching equal importance to exports and imports


In 2004, China’s import and export trade had already entered the stage of a rough balance between imports and exports, and the situation of a huge trade surplus for 10 consecutive years will soon come to an end. The export-oriented strategy is a successful experience gained since the start of the reform and opening-up era. This strategy played a tremendous role in promoting the process of China’s economic growth in the 1990s. But the trade surplus brought about liabilities as well as advantages.


First, the huge trade surplus led to the emergence of a series of trade disputes, and China has become the country receiving the most anti-dumping investigations. Second, the trade surplus was in US dollars, which increased foreign exchange reserves, which, speaking from the angle of resources, might be a kind of waste. Third, the continued high surplus has led to anticipation of an appreciation of the RMB, which, in turn, has led to an increase in the net inflow of capital, and which, in turn, has further brought pressure for a revaluation of the RMB. Fourth, the huge current account surplus will be converted into pressure of a huge amount of money supply, which is an important factor behind the emergence of inflation.


Conversely, the result of a deficit is not all bad. An appropriate amount of deficit is conducive to relieving short-term trade disputes and helpful for the long-term stable growth of trade. A deficit is tantamount to buying productive equipment and equivalent to investment. As long as good investment projects are chosen, the efficiency thus brought about will be higher than that from the money deposited in banks. In this way it is possible to supplement some shortfall in domestic raw and semi-processed materials, quickly enhance production capacity, and increase employment opportunities and the economic aggregate. In addition, a deficit can also reduce anticipations of a revaluation of the RMB, and the net inflow of capital will slow down. In fact, the pressure for the appreciation of the RMB in 2004 was really less than in the latter half of 2003. So a short-term trade deficit is helpful for relieving inflationary pressure in China.


Through a careful analysis of the successful experiences gained in China’s export-oriented economy over the past decade, it is not difficult for us to discover that it was not exports alone, but both exports and imports that jointly promoted China’s economic growth. On the one hand, exports brought about demand; on the other hand, imports boosted technology introduction and enhancement of all-element productivity. Furthermore, under certain circumstances, the role played by imports in promoting the national economy is even greater than that of exports. For instance, imports of oil, iron ore, steel products, electromechanical equipment, etc., as part of initial input, make tremendous contributions to economic growth from the aspect of supply.


Viewing long-term trends, a basic balance of international trade complies with the requirements of China’s economic development. For this reason, the government should further adjust its foreign economic and trade strategy, switch from pursuing a trade surplus to pursuing a trade balance, and adopt a balanced strategy that attaches equal importance to exports and imports. In terms of export scale, China has become the world’s fourth-largest exporter, so there is no need to further expand the scale of exports. Instead, the export policy should shift its emphasis to winning market shares through quality. With regard to products which consume large amounts of resources and energy, China should adjust its industrial policy, lower the position and reduce the proportion of exports of such commodities, or reduce their growth rate to a reasonable level. This will be helpful for lessening the pressure on resources and energy, and ease the scramble for resources with regard to exports and internal demand. In the past, the rapid growth of exports was boosted mainly by relying on labor-intensive industries and products. The substantial increase in foreign exchange reserves was gained mainly by relying on the absolute amount of export products. “China-made products” relied on the input of large amounts of social resources, and the achievement of many No.1 positions in terms of world market share has led to ever-sharper contradictions in the utilization of externally and internally demanded resources. What is more, some regions have exerted excessive efforts to attract foreign capital and earn foreign exchange through exports, by extending “super-national treatment” and providing favorable terms in the aspects of land use and taxation, which has resulted in shortages of resources, including water resources, and aggravated pollution. With regard to the import policy, the emphasis should be shifted from the previous stress on advanced technology and equipment to the attachment of equal importance to the import of foreign resources, and technology and equipment, thereby forming a situation featuring the complementarity of internal demand and external demand.


(4) International reserves should be switched from foreign exchange only to equal importance being given to foreign exchange and strategic materials


From February 2002 to January 2004, the nominal effective exchange rates of the US dollar against other principal currencies fell by about 25 percent. By December 2004, China’s foreign exchange reserves had topped US$609.9 billion.


As a large developing country, China needs considerable foreign exchange reserves to guard against possible financial, debt and social risks. But the figure of US$609.9 billion might be beyond the scope of needed foreign exchange reserves.


In this regard, it is first necessary to change the habit of stressing foreign exchange reserves to the neglect of the reserves of strategic materials, and to take the purchase of overseas energy sources, iron ore, nonferrous metals and other resources as an important measure for the use of foreign exchange. Second, it is necessary to change the habit of attaching importance to government reserves and belittling non-governmental reserves, to appropriately relaxing some exchange-settlement policies. In addition, both enterprises and individuals should be allowed to hold foreign exchange, and, through their investments, to reduce risks to the national reserves. The function of the “foreign exchange pool” of the banks, enterprises and individuals should be enhanced. Of course, the financial system should also provide an effective exchange rate risk-prevention mechanism for private sectors. Third, it is necessary to give more encouragement to the two-way flow of funds, and quicken the pace of opening to the outside world. It is especially necessary to allow capital projects to make investments abroad. Fourth, it is necessary to reconsider whether the US dollar should be and can possibly continue to be the sole foreign currency. Improvement of the RMB exchange rate formation mechanism has become imminent.

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