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Lecture 8

THE CHINESE ECONOMY

Industry: Ownership and Governance

• Ownership change in the first period of transition (1978-1995)• SOEs, down to city level, produced 77% of industrial output

• Collective enterprises: were nominally owned by the workers in the enterprise but were actually controlled by local governments or other state bodies

• Town village enterprises (TVEs)

• Private firms, smaller scale, micro-business

• Foreign-invested enterprises (FIEs)

• Ownership Change from 1996 Through the Present• The adoption of the Company Law in 1994

• Complex forces of restructuring, competition, and privatization thus began to reshape Chinese industry after the mid–1990s

• Small-scale industry (i.e., SMEs) is extremely important

• Decline in state employment and state share

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SOE Profit

monopoly

Lack of competitveness,

Reformed n

restructured

• Under the planned economy, industrial finance was not a pressing issue, as government allocation and subsidy (政府拨款补贴）

• Four state banks: PB, ICBC, BC, ABC

• During reform, policy-makers gradually shifted over to rely on bank loans to finance the industrial sector

• Banks tightened their lending standards and began to behave more like commercial banks (market-based and for profit) after the mid-1990s: bad loans!! Don’t have to pay back!

• State-owned industry’s overall financial position improved

• Substantial reliance on bank credit continues to be an important characteristic of Chinese industrial SOEs

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• Creating Corporate Governance: Transition A• the enterprise remained tied to the government bureaucracy (industry bureaus)

• Reformers experimented with a variety of incentive devices

• Enterprise managers gained authority and autonomy

• Creating Corporation: Transition B• Corporatization

• Corporatization and the Company Law

• Autonomy

• Depoliticization and profit maximization

• Encouraging specialized government oversight

• Typology of Corporate Governance Systems• Market base and control base: Chinese Corporations are control-based

• Managerial Abuse

• Privatization has become significant in China since the end of the 1990s.

• Privatization, especially insider privatization and managerial buyouts (MBOs), became a widespread phenomenon

• (started from management contract, e.g., Haier)

• The high degree of discretionary control rights that managers have achieved, inevitably translates into the privatization process

• The process is extremely dispersed and nontransparent (loss of state asset, corruption as state asset is transferred to private ownership, e.g., princelings, at very lower prices)

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THE CHINESE ECONOMY

Structural Change: Industry, Energy, and Infrastructure

• Industrial growth was rapid throughout the post–1949 period, despite its problems

• After 1978, China diversified into a range of relatively low-technology, labor-intensive consumer goods that had been neglected under the planned economy (services as well)

• Especially in Guangdong for export-oriented operations

• Moreover, several energy-intensive sectors are growing more rapidly than industries overall

• Regional Growth Patterns• Coastal provinces grew much more rapidly than the national average

• Better endowed with skills and infrastructure

• An especially sharp contrast is with the three northeastern provinces (the rust belt with sunset industries based on the Soviet model)

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Energy Production

Oil Exports and Imports

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Physical Infrastructure Investment

• Energy giant, immature giant (rolling black-out to smog)

• Two huge challenges: • First, to integrate China’s rapidly growing demand into the global energy economy;

• Second to mitigate the large environmental costs that China’s inefficient energy industry imposes on China and the world

• Overwhelmingly dependent on coal for primary energy generation

• The three main energy sectors• Coal

• Oil and gas

• Electric power

• Energy Security, Diversification and Imports• Transport system was tied up, distribution problem

• China will continue to follow a multi-stranded approach, diversifying to reduce risk and exploiting as many different opportunities as possible

• Geopolitical risks, dams for hydro power, nuclear power plants

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• China’s telecommunications infrastructure is growing extremely rapidly

• Monopoly status (three to four big players, China Mobile, Unicom, China Telecom, Netcom, and Railway Telecom), compared with 6 operators and 11 brands in Hong Kong, non-portable numbers, high fees and low speed

• Built the telecom infrastructure without foreign financial or operational participation

• Rapidly rising incomes have fueled explosive growth in demand

• First phone is a mobile phone for many

• Need some degree of competition, based on licensing different technologies to different firms

• Large-scale investment in physical infrastructure- An essential government function given monopoly status• Framework planning

• Financing

• Critical for economic development

• The robust level of investment• Electricity

• Telecommunications

• Transportation

• China has opted to maintain state ownership of companies (SOEs) in certain industries as an alternative to creation of a stronger regulatory framework followed by privatization

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THE CHINESE ECONOMY

Technology Policy and the Knowledge-based Economy

• Most of tomorrow's technologies will also come from developed economies (spillovers and copycat)

• Developing countries could concentrate on transfer and adaptation of existing technologies

• R&D GDP ratio: China 1.1% world’s fourth largest R&D effort (but still lower than 3% of developed economies)• Mostly on Military

• Strategy• Do it Yourself

• Bargain for it

• Seed it

• Encourage Spin-offs

• Open-up to foreign direct investment(technology transfer)

• Support domestic entrepreneurship (IT, Taobao, Tencent, Baidu, etc.)

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Gross Expenditures in R&D

R&D Expenditures as share of GDP

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Graduates from Colleges and Technical Schools

• China has an impressive total of technical personnel• Science and engineering majors make up about 45% of graduates, while

economics management, and law account for another 25%

• State-planned development and enrollment: physics, biochemistry, and now financial engineering, etc..

• Most of the study-abroad talents are reluctant to go back

• Brain drain

• Tide is reversing, more are returning, to science parks and incubators (留学生创业园, 中关村）

• Baidu.com, menglu.com

• The China’s effort in human development is large, but it is less effective than in some other countries because of China’s overall lower level of development and inefficiencies in resource allocation (e.g., government jobs vs. entrepreneurship).

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• China is the only developing country in which U.S. overseas affiliates conduct a significant amount of research and development

• China’s R&D effort character• Relatively a strong government sector

• A relatively weak university sector (compared with Silicon Valley)

• A still immature business R&D effort

• Aligning Incentives in Favor of High-Technology Development• Tax Breaks.

• Subsidized Credit.

• Procurement Preference.

• Corporate Governance Provisions.

• Manipulation of Technical Standards.(Internet technologies)

• Systems and environment for innovation and entrepreneurship, VCs, IPR

• During the 1980s and 1990s, China rapidly integrated into global production and try to move up the value chain

• Chinese domestic firms are utilizing international networks in their own ways (such as TCL, Midea, Haier)• Chinese firms seek access to global technology at the cheapest cost (JVs)

• combine it with their own capabilities to serve the Chinese market

• Two large challenges• The first is to strengthen its protection of intellectual property rights

• The second is to develop enough bargaining power on technical standards

• Role of private businesses and entrepreneurs and their relationship with the government: institutions and legitimacy, misaligned environment, unfair competition, government intervention

• Deepening reforms! Intellectual Property Rights (IPR)