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tighter economic management through central planning and administrative measures or expansion of the scope for market-responsive allocation of resources. There is likewise considerable debate over government proposals to hold annual Gross Domestic Product (GDP) growth to five to six percent per year over the coming decade, substantially less than the nine percent average annual growth experienced in the previous ten years.

The structure of public finances in China precludes the effective use of fiscal policies to achieve macroeconomic objectives. The key weakness is the small share of tax revenue accruing to the central government (about 19 percent) and an awkward revenue-sharing system which compels central authorities to negotiate the size of Beijing's share with provincial governments. The economic slowdown of 1989 and 1990 has had a severe impact on public revenues and expenditures, resulting in a budget deficit for 1989 which was 40 percent higher than the previous year and 2.4 percent of Gross National Product (GNP) (IMF methodology). The 1990 deficit is expected to grow even further. The budget deficit was funded primarily by domestic borrowing, including the forced sales of domestic treasury bonds. Foreign borrowing for budgetary purposes fell 20 percent below the projected amount for 1989. Financial subsidies for state-run enterprises and consumers were responsible for one-third of the expenditures in the central government budget. Provincial and municipal budgets also contain a large proportion of subsidies. The government has included deficit reduction and improvement of fiscal relations in plans to restructure the economy; however no specific steps have been announced.

Economic authorities have relied heavily on monetary policy both to brake overheated growth and, in early 1990, to begin a cautious reflation. The principal tools have been administrative control over credit issuance and adjustments of interest rates to encourage on savings and loans. This has been supplemented by tighter control over investment approvals and foreign borrowing. Since capital is mobilized and allocated on the basis of planned targets rather than the highest rate of return, the banking system has a limited role in financial intermediation. Steps have been taken in 1990 to expand the scope for securities markets mainly for government bonds. Discussion of a broader role for stock markets in mobilizing capital is also continuing although the government has been reluctant to proceed quickly in this area. Responding to strict controls on bank credit, industrial production, dampened consumer demand and a sharp (35 percent) increase in personal savings, money supply grew only 17.6 percent in 1989, compared to about 20 percent the year before. Cash in circulation was reduced even more sharply. This led to a liquidity gridlock in the system and snowballing enterprise debts which required significant increases in new credit during the last quarter of 1989 and early 1990. Modest relaxation of controls on credit and investment spending have started to stimulate industrial production in some sectors, but the continuing sluggish trend in retail sales in mid-1990 reflects the difficulties in reviving depressed demand.

2.

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Exchange Rate Policies

China administers a managed, floating official exchange rate. This rate is nominally linked to a trade-weighted basket of currencies, but is in fact effectively pegged to the U.S. dollar. Most of China's trade transactions are denominated in U.S. dollars. China issues Foreign Exchange Certificates (FEC); this is a hard currency-backed scrip for domestic payments by foreigners. The Chinese currency, the renminbi (RMB), is not freely convertible.

In November 1990, the renminbi was devalued 9.57 percent, from 4.71 to 5.2 RMB to 1 U.S. dollar. A devaluation in December 1989 had reduced the value of the renminbi against the dollar 21.2 percent. The renminbi is still widely regarded as overvalued.

Black market rates run about 5.8 RMB

to $1.00 in the capital. The rates at Foreign Exchange Adjustment Centers (commonly called "swap markets") have also remained stable at about 5.8 RMB to $1.00 for the past year. Swap markets were established in late 1986 to permit the trading of enterprise foreign exchange or foreign exchange retention quotas. Swap market rates are determined daily through negotiation between buyers and sellers, although trading methods differ from center to center. The apparent appreciation in the value of the RMB over 1988's black market rate is due to a declining demand for foreign exchange in general and, as domestic money supply growth shrank, a concurrent increase in demand for RMB.

3. Structural Policies

China's socialist system has accommodated a number of market-oriented reforms which have enhanced economic development and overall growth. At the same time, this hybrid system has resulted in accumulating inefficiencies and contradictions at the micro level which have forced the government to intervene frequently with erratic stop-go policies. China is now in the "stop" phase and employing the instruments of a planned economy controls over specific investments and prices, targetted credit, administrative allocation of raw materials, etc. to modulate destabilizing trends. Where fault-lines appear in the system, such as when the desire to use price incentives to increase agricultural production conflicts with protecting food costs for urban consumers, the government has constructed elaborate subsidy safety nets at great financial cost. Resolution of this and other contradictions in the system requires comprehensive economic restructuring, not short-term fixes. The government has accepted this in principle, but has not yet developed a strategy for concrete action.

China's policy of "opening to the outside" has led to a dramatic growth in foreign trade and investment over the past decade. The value of foreign trade now constitutes over a quarter of GNP. Since stabilization policies were adopted in late 1988, the government has successfully turned a trade deficit into a large surplus. This has been achieved through restrictions on foreign imports and a recession-induced drop in demand. Exports, however, have risen significantly, particularly to the U.S. market. The current account showed a deficit of $4.3 billion in 1989; a $5.2 billion surplus is

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expected in 1990. U.S. exports to China in 1990 showed significant decline over 1989, while Chinese exports to the United States are projected to grow about 33 percent.

China expanded the use of administrative controls in the foreign trade sector during 1989 and 1990, both to exclude the importation of products it deems competitive with domestically produced goods or incompatible with development priorities and to prevent the exportation of materials in short supply within China.

Foreign investment is welcome in areas approved under the industrial policy and development plan. The government has allowed certain areas along the coast to offer preferential terms to foreign investors to increase the financial attractiveness of locating in China. Nevertheless, the myriad difficulties of doing business in the developing world apply to an even greater degree in China's plan/market economy. Investment from other Asian areas, such as Hong Kong and Taiwan, has grown more quickly than from Western sources, especially following political turmoil in 1989. In general, the difficulties experienced by all enterprises during the stabilization period have been shared by foreign investors. However, the government has attempted to accomodate to a certain extent the needs of firms concentrating on exports.

4. Debt Management Policies

The International Monetary Fund, the World Bank, and the commercial banking community regard China's current debt burden as well within acceptable limits. At the end of 1989 China's total outstanding debt was officially reported at $41.3 billion. Of this total, an estimated 10.3 percent is in short-term loans, the rest is in long and medium-term loans. Outstanding debt at yearend 1989 was equivalent to 12 percent of 1989 GNP or 79 percent of merchandise exports. The debt service ratio was estimated at under 10 percent of export earnings.

Since June 1989, multilateral development banks limited new lending to China namely to loans that served basic human needs projects. Most new long-term commercial lending remains on hold. China cites this reduction in capital inflows as well as its debt repayment obligations as the rationale for the need to accumulate larger foreign exchange reserves. By tight administrative control over imports and by boosting exports, both through direct export subsidies and through preferential access to credit and raw materials, China had amassed foreign exchange reserves of $23.6 billion by June 30, 1990. Reserves are expected to continue to increase further during the remainder of the year.

Debt management responsibilty is shared by several central government agencies, including the State Planning Commission, the People's Bank of China, the Ministry of Finance, and the Ministry of Foreign Economic Relations and Trade. Annual quotas for foreign borrowing are allocated to localities and enterprises through the central planning process. The State Administration for Exchange Control (SAEC), a unit of the People's Bank, is responsible for enforcing quota restrictions, approving any out-of-plan

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borrowing, and ensuring that borrowers are capable of repaying their loans. Since mid-1987, all foreign loans nationwide (including those of Sino-foreign joint ventures) must be registered with the SAEC.

5. Significant Barriers to U.S. Exports

China's annual import plan plays a key role in

determining the composition of China's imports. This plan is designed to ensure the inflow of materials and technology needed for the country's development. An annual determination is made for each class of raw material, foodstuff or manufactured product of what the domestic demands for that product will be the following year. If domestic production can meet that demand, imports are banned or strictly limited. If domestic production cannot meet anticipated demand, the shortfall is designated as the import quota for the following year. The current slowdown in China's economy has resulted in decreased domestic consumption. This has in turn shrunk the gap between domestic production capacity and anticipated demand. As a result, China has clamped down on imports to prevent factories from losing orders. A substantial rise in China's imports may have to await the reappearance of supply bottlenecks in the domestic Chinese economy.

China uses a wide variety of overlapping import restrictions to achieve the objectives set forth in the import plan. These devices include tariffs, an import regulatory tax, import licensing, embargoes, import substitution regulations and foreign exchange restrictions.

China's import licensing system covers about half of China's imports. Currently, 53 broad categories of products require import licenses, covering a wide range of consumer goods, raw materials and production equipment. Even after a license has been issued by a local trade bureau, it can be rescinded if the central government decides that the transaction is not consistent with current trade policy.

Obtaining permission for an import often requires approval from several layers of bureaucracy, and in many cases, a certificate of approval from the ministry that oversees the manufacture of such products in China. Approval is often withheld if the ministry believes that an acceptable domestically-made substitute is available. Although regulations state that the import substitutes must be "comparable" in quality and price to the imports, no implementing procedures to ensure that this standard is maintained have been published for domestic products.

China uses embargoes to restrict certain consumer goods imports. China has also banned imports of production lines for televisions, tape recorders, washing machines and air-conditioners. Approximately 80 types of consumer goods, raw materials and production equipment are now embargoed. Because U.S. consumer goods exports to China are relatively small, U.S. trade has not been greatly affected.

U.S. firms frequently cite China's foreign exchange controls as the most significant non-tariff barrier to trade and investment. Because many of the regulations surrounding

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foreign exchange are unavailable to foreign business persons, U.S. companies are often uncertain if foreign exchange is available to pay for contracted products and services. China's requirement that joint ventures balance their foreign exchange requirements is particularly onerous.

China's standards and testing requirements hold imports to a higher quality standard than applies to domestic products. Import certification can be a time consuming process. It appears designed to exclude products that economic planners believe are unnecessary for China's development.

Services Barriers: Chinese restrictions on certain foreign firm service activities (including insurance, construction, banking, accounting, and legal services) prevent U.S. firms from participating fully in China's service sector. U.S. and other foreign banks, for example, are not allowed to engage in local currency business in China, while the New York Branch of the Bank of China has conducted all forms of branch banking activities since 1980. U.S. insurance firms are not allowed to participate in the direct insurance market in China. U.S. lawyers and accountants must limit their activities mainly to servicing foreign firms that do business in China. Foreign law firms cannot be registered as official representative offices, nor can accountants be registered as CPA's. U.S. ocean carriers' representative offices in China are prohibited from performing many functions basic to their cargo, issuing bills of lading, and setting rates

despite inclusion of such provisions the time the 1988 U.S.-China Maritime Agreement was signed.

Investment Barriers: Under Chinese regulations, export-oriented and advanced technology manufacturing investments are given special incentives. Beijing has expressed interest in foreign direct investment (FDI) to develop basic infrastructure (energy production, communications, transportation, etc.). Chinese laws permit equity participation in investment projects from a minimum of 25 percent up to complete foreign ownership. Government approval is required for all foreign investment in China.

Chinese regulations and policies place strong pressure on most foreign investors to export. Encouraging localization is another central goal of Chinese investment policies. Chinese rules do not set a fixed limit on the percentage of foreign personnel in a given enterprise's staff, although in practice foreign personnel normally constitute only a very small portion of staff. Chinese law prohibits forced disinvestment, except under extraordinary circumstances. The law permits repatriation of profits.

Many joint ventures are highly dependent on China's state-owned sector for downstream services. Some investors have been permitted to set up their own marketing and service organizations, but many have no choice but to rely on People's Republic of China (PRC) channels for support. China does not provide national treatment to foreign investors. In some key areas, such as input costs, foreign investors are often treated less favorably than Chinese firms. Foreign investors may not own land in China. Chinese authorites are, however, approving long-term land use deals for investors, some lasting up to 70 years.