Trade reform, macroeconomic policy and sectoral labour movement in China - Agriculture and Food Security in China - page 274

that peaked in 1993 and continued until 1996. In this period the Chinese
economy grew at ts greatest hstorcal rates. Durng the Asan crss and n
the period thereafter, however, declines in the growth rates of activity in
manufacturng and servces appear to have drven workers back to the rural
sector. In the post crisis period this backflow appears to have continued.
Performance since the Asian crisis
Good weather and mproved farmng ncentves brought a resurgence of the
rural economy n 1995 and the reform of state-owned ndustral enterprses
(SOEs) was accelerated, precipitating substantial lay-offs (Meng 1998). These
changes changed saving incentives, leading to a sudden increase in the
private saving rate (Yang and Tyers 2000, 2001). The contractionary effects
of these internal shocks were worsened by the arrival of the Asian financial
crisis in 1997, which saw the mostly illegal flight of a substantial part of
China's additional private savings, leading to a fall in private investment.
At the same time, the slowdowns and currency depreciations in other Asian
economies made their exports relatively competitive, so that the dollar
value of China's exports grew more slowly than in 1990-96 (Yang 1998).
Our macroeconomc polcy story begns wth the crss and Chna's
reaction to it. The shocks of that period, the rise in the domestic saving
rate, the increased outflow on the capital account, and the adverse change
n the terms of trade deprecated the real exchange rate. Ths effect can
be seen from the following definition of the real bilateral exchange rate,
for regon i wth regon j , as the common currency ratio of the price of
a basket of regon i 's goods and the prce of a correspondng basket of
regon j 's goods:
(1)
where E ij s i 's nomnal exchange rate wth j , measured as foreign currency
units per local unit and the price index used is the GDP price, P Y . 9 The
real exchange rate deprecates when the prce of the basket of home
goods falls relatve to the correspondng basket of foregn goods. The real