Chinese economy term paper

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“From the 1950s through the 1970s, thinking in China was that it was desirable to hold the money supply to one-eighth of the gross value of retail transactions (Yang Peixin 1990). Officials postulated that the money supply would turn over eight times on average, and the money stock would be 12.5 percent of the gross value of retail transactions, but that if it rose to 16.5 percent of this value, there would be a risk of inflation. However, in the midst of the 1980s economic reform, adherence to these standards was abandoned. First, the "monetization of the economy" proceeded along with the development of the commodity economy. Second, the "cash settlement" component of commerce increased markedly along with the development of individual enterprises and township and village enterprises, whereas settlement by bank transfer among state-owned enterprises stagnated. As these financial changes evolved, the previous 12.5 to 16.5 percent parameters were neglected. In the first half of the 1980s, the ratio of money supply to retail transactions was barely kept below 20 percent, and the inflation level reached about 25 percent in the rest of the decade. This adverse trend continued: The ratio had risen to an alarming 39.4 percent by the end of 1992. To analyze why money increased, it is useful first to understand how money supply is calculated Increase in currency in circulation equals (a) fiscal deficit, plus (b) loans to the private sector minus increase in deposits, plus (c) increase in holdings of foreign exchange minus other factors.”
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“Many theories deny the effectiveness of transfer of technology and management techniques, taking into consideration the negative effects caused by the entry of foreign-capital companies into developing countries. They include: double structured economy, interruption of domestic industrial development, unequal income distribution, weakening of national technical development efforts, unbalanced distribution of resources, decline in ntrepreneurship, and political as well as economic subordination. Unfortunately, these problems are very difficult to quantify. Nevertheless, they are approached from five perspectives: supply of labor, fostering of manpower, production management, forward and reverse related effects, and business achievements, that is, the transfer is examined by analyzing overall corporate production activities, working conditions, the effects of these conditions on laborers, corporate business achievements, and the problems that have been encountered. The analysis centers on Shenzhen Special Economic Zone, because the number of corporations in Shenzhen is the highest, and the structure of these corporations is similar to that of corporations in the other zones. My research found no big difference in corporate structures among the five special economic zones.”
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“Associated with this inherent bias in investment demand is the likelihood that investment fund allocation may not be based on the criterion of profitability. This is entirely different from standard practice in western corporate business. The reasons for the socialist departure from such 'orthodoxy' are twofold. First, the pre-eminent role of planners in determining resource allocation tends to override considerations of 'profitability' (as that term would be understood in the west). This highlights the emphasis on physical planning, whereby planners must operate with--at best--rough estimates of relative marginal utility (estimates which are themselves subject to the vagaries of various exogenous variables). A striking example of potential distortions from this source is afforded by the 'Third Front' strategy during the Cultural Revolution, which sought to prioritize the industrial and defense capabilities of China's western frontier. The second aspect of the problem is that 'profitability' (or the rate of return to investment), may in its Chinese usage not be a reliable criterion of investment. For many years prices were centrally determined. The result is that input and output prices were distorted and irrational, in the sense of failing to reflect changes in real costs and demand conditions. As a result, marginal changes in absolute levels of industrial output (whether measured in physical or value terms) themselves became the main investment criterion, to the detriment of allocative efficiency in terms of input-output rationalization in relation to relative resource scarcities.”
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