Market Reform, Political Legitimacy, and State-Owned Enterprise

Galen BeplerMay 13, 2008

Fundamental-Instrumental Discrepancy Great Leap Forward : Material failure Cultural Revolution : Ideological failure

Deng Xiaoping’s “Open Door” Policy 1979 : Equity Joint Venture Law Pareto-Improving Methodology FDI: 1979 to1997, from $1.17 billion to $45.26

billion.

Dual-track reform: state-track AND market-track Between 1978 and 1982, housing construction

due to an increase in worker welfare funds increased more than 300 %. Worker bonuses showed a 14% increase in real wages in urban areas between 1978 and 1980

 Tracks rupture 1985 to 1992 : state-owned enterprises’ ratio of

pre-tax profits to total capital decreased from 23.8 % to 9.7 %.

State-Owned Enterprises (SOE)

1980 to 1996: state-owned enterprises’ ratio of pension expenditure/total wage payment increased from 6.9% to 22.6% despite that the ratio of retired employees/in-post employees was decreasing from 1/13 to 1/6

Soft-budget constraints:

1989 and 1990: while low performing township and village enterprises (TVE) were closed down or taken over, losses among state-owned enterprises increased tremendously though only a handful went bankrupt due to the fact that a “120 billion yuan credit relief operation was initiated in the fourth quarter of 1989 to write-off non-performing enterprise credits, mainly inter-SOE credits”.

Managerial Autonomy

Political Legitimacy: making the difference between managing the means of production and owning the means of production “beyond definitional”

1983 : “Detailed Implementation Act of the Equity Joint Venture Law”

State-track VS. Market-track

1983 to 1994: the employment in the state-track is almost stationary, going from 87.14 million in 1983 to 83.61 million in 1994

VS.

By 1996: of 8.91 million workers stepping down from their state-sector post, 3.57 million find jobs, 2.34 million decide to leave the work force, and 3

million continue looking for new employment

Between 1978 and 1994, employment in the non-state sector increased by 318.8 %, whereas employment in the state sector increased by only 50.5%.

Protecting the Labor Market for SOEs By 1999: 66 % of SOEs and 45 % of non-SOEs

are members of business groups called “Qije Kituan”

“Qije Kituan” similar to the horizontal conglomerations of Japan’s Keiretsu’s or Korea’s Chaebols

1995 : about 80% of SOE managers, especially those of large and medium SOES, are appointed through political and administrative channels

1988: PRC Law on Industrial Enterprises Owned Wholly by the People “Hold the big, release the small”

1988 : Sino-Foreign Cooperative Joint Venture Law joint venture enterprise, limited liability

enterprise, (private company), joint stock liability enterprise, (public company), state-owned enterprise owned by the state but under private management contract

Deng’s maxim’s “Socialism with Chinese characteristics” Entrepreneur’s comment during a Party

symposium in 1988 : “shareholding is not a patent of capitalism”

1994 : CCP promulgates the Company Law of the People’s Republic of China State-Owned Enterprises obliged to remain

under a majority stake of the State

Report of the Working Party on the Accession of China

Chinese representative : “China was furthering its reform of state-owned enterprises and establishing a modern enterprise system”

WTO members: Ask that China clarify its understanding of the “types of activities that would not come within the scope of Article III:8(a) of GATT 1994”

Fair competition and illegal/legal government procurement

Chinese legal capacity Showing strength in new confidence to take

cases to the multilateral sphere, the DSB.

VS.

Increasing level of civil unrest in rural and municipal areas, presence of corruption Some Township and Village Enterprises (TVE),

as subsidiaries of large urban SOEs, practice corruption.

“the Chinese are not communist, but the only political control in the country is exercised by politicians who are all in the communist party, and they both want to and have the power to keep China a single party system for the foreseeable future. Western style democracy may well come to China in your lifetime, but probably not in mine. And China without any effective government would likely be a mess, so maybe that's the best thing after all.”

Where do you see China in the next 25 years ? Chinese Communist Party’s one-power authority Rural/Urban divide WTO cases initiated by China WTO cases initiated towards China

China in the next 50 years ? Etc….

China in the 100 years ? Etc….