China Today
xxxiaoyin
China_Lecture2_Economy.pptxThe Third Revolution: Xi Jinping and the New Chinese State HOW CHINA GREW
Chs. 4 & 5
Chapter 4: The Not-So-New Normal Chapter 5: Innovation Nation
Primary Arguments in these chapters:
While the 2013 Third Plenum of the 18th Partry Congress endorsed a bigger role for the private market and a move toward state capitalism, the reality is this did not happen.
Instead, the state-owned enterprises (SOE’s) are still heavily influenced, if not controlled, by the state
II. The development goals for China to 2030 are to be world leaders in artificial intelligence
Xi Jinping will not risk a reduction in the role of the Communist Party and the state in the state-owned sector or its role in influencing investment decisions within the state-owned enterprises (SOE’s)
Made in China 2025 initiative is state-driven with intention to place China at the global forefront in:
aerospace & Aviation 2. robotics 3. new energy vehicles
advanced information technology 5. high tech medical devices
Overall strategy to capture global market share in technology sectors and to replace US/European firms with Chinese-owned tech companies
Raise domestic content of products from 40% made in China (2020) to 70% made in China by 2025. HOW?
Reduce Dependency on Imports or Foreign Direct Investment (Crowd out US/Euro firms)
Maintain nationalization of vital industries
Take advantage of low cost of domestic labor
Subsidize the costs in the favored industries (soften budget constraints)
Pour billions of RMB into favored sectors
Maintain protective barriers to trade
China is developing expertise in scientific innovation – breakthrough scientific discovery – but implementation of the technology is slowed down because of property rights issues (incentives) and state’s insistence on “picking entrepreneurs.”
Rule of 72: If you divide 72 by the expected growth rate, expressed as a percentage, the answer is approximately the number of years to double the original quantity.
CHINA: 72/6.5 = 11 years to double current GDP
USA: 72/2 = 36 years to double current GDP
What explains the transformation of the Chinese economy?
Go slowly and don’t be afraid to experiment
Deng Xiaoping: mozhe shitou guohe – “Crossing the river by feeling the stones”
Stage I: The first stage, in the late 1970s and early 1980s, involved the decollectivization of agriculture, the opening up of the country to foreign investment, and permission for entrepreneurs to start businesses.
However, most industry remained state-owned.
Stage 2: Late 1980s and 1990s, involved the privatization and contracting out of much state-owned industry and the lifting of price controls, protectionist policies, and regulations.
Maintain state monopolies in sectors such as banking and energy (coal, oil, gas)
Encourage private sector growth
Don’t be afraid to re-centralize when bottlenecks, economic disequilibrium, or other political problems present themselves. (The conservative Hu-Wen Administration more heavily regulated and controlled the economy after 2005, reversing some reforms
Stage 3: Implement reforms on trial basis
in test areas
SEZ (special economic zones) - localities
in which foreign & domestic trade and
investment are conducted WITHOUT
authorization of Chinese central govt.
in Beijing
Intended to function as zones of rapid economic growth by using tax and business incentives to attract foreign investment and technology
1980: Four designated regions where local governments were allowed to offer tax incentives to foreign investors and to develop their own infrastructure. Local companies were given freedom to make their own investment, production and marketing decisions
1984: Encouraged by the zones’ success, the Chinese government opened 14 larger and older cities along the coast to foreign trade and investment. These “open” cities offered foreign investors much the same incentives as in the special economic zones, but their corporate income taxes were higher.
1988 Hainan Island (South Sea) was made a separate province and a special economic zone
1990 the Pudong area within the Shanghai municipality became a special economic zone with policies even more flexible than those already in force in the original four SEZs.
1992 the Chinese government decided to adopt some of the same policies in 24 major cities in inland China, including many provincial capitals, as a means of encouraging foreign investment in them.
https://www.youtube.com/watch?v=paxRy2msloY
https://www.youtube.com/watch?v=cLvnMjAW2n8
Cyriac Roeding – Internet Entrepreneurism in China
Pick among the policies recommended by the IMF and World Bank
Agree to
Macroeconomic stabilization
Control the growth of the money supply
Control price increases
Control exchange rate changes
Implement responsible fiscal policies – don’t overspend and run government deficits
Liberalize trade (open yourself to foreign trade gradually)
Attract FDI (foreign direct investment)
Privatize SOE’s when it makes sense to do so
Reject:
Laissez-faire/neoliberal arguments regarding role of the state in the economy
Maintain firm government control in guiding economic development
Be activist in industrial policies
Adopt an export-led growth strategy
Start with labor-intensive exports: textiles, toys, footwear (1980 – 98) with goal of capturing significant share of world trade
Move toward more capital-intensive exports, using the technology that foreign corporations bring into China (1998 – 2010)
This shifts production to more sophisticated industries
Takes advantage of specialization
Intensifies technological change
Supports domestic research & development
Invite in foreign firms. Control their access. Pick their brains
Foreign invested enterprises account for over half of China's exports and imports;
--they provide for 30% of Chinese industrial output
--they generate 22% of industrial profits while employing only 10% of labor – because of their high productivity.
Evidence on technology spillovers is more limited, but industries with higher FDI seem to have higher productivity increases than other industries, suggesting a positive effect.
Importantly, foreign investment has catalyzed China’s economic reform. Together, these contributions have supported China in maintaining a record-high 10 percent growth rate during most of the 1980-2010 period. .
Foreign investors report a range of challenges related to China’s current investment climate, including:
broad use of industrial policies to protect and promote state-owned and other domestic firms through employing subsidies
preferential financing, and selective enforcement of laws and regulations
restrictions on controlling ownership of foreign entities through equity caps, limited voting rights, limits to foreign participation on companies’ board of directors, etc.
discriminatory and non-transparent anti-monopoly enforcement
excessive national or cyber security requirements
and an unreliable legal system lacking transparency and rule of law.
US and International Corporations Producing in China
http:// www.jiesworld.com / international_corporations_in_china.htm
In 2010, China announced plans that require Western companies doing business in China to turn over sensitive technologies and patents to Chinese competitors in exchange for access to the country's markets.
Japanese companies are put under more scrutiny than Chinese companies or companies from other countries. If something goes wrong with a Japanese product, particularly a car, the problems get a lot of attention. Advertisement by Japanese companies are also scrutinized carefully for anything that might be perceived as anti-Chinese.
American companies doing business in China have to assure Washington that their dealings will not compromise American national security in any way.In 2006, the Chinese government placed limits on real estate investment and tightened controls on mergers involving foreign firms. The Carlyle Group bid for 85 percent of Xugong, China's biggest maker of construction equipment, was abandoned.
Most goods that U.S. companies manufacture in China are sold in China not exported to the United States.
Save a lot and maintain macroeconomic stability
Corporate Saving:
Weak corporate governance structures, with many enterprises being (formerly) state-owned enterprises, and underdeveloped financial markets are often cited as reasons why in China few dividends get distributed
Another reason for high corporate savings may lie in the capital controls that are still in place, because of which foreign money has to be held at the People’s Bank of China. The capital controls result in forced savings.
Personal Saving.
Health insurance is limited in what it covers and far from universal, so getting sick can be a costly proposition.
Only a fraction of the workforce receives unemployment benefits, while pensions are underfunded and haphazardly administered.
A scarcity of student loans and subsidies for higher education, meanwhile, means that paying for college requires hefty savings.
The inadequacy of the social safety net forces the Chinese to engage in “precautionary savings,” buffering themselves against disaster.
Exchange Rate Policies
Chinese officials see the exchange rate—and prices and market mechanisms in general—as tools in a broader development strategy.
Chinese leaders observe that all countries that have raised themselves from poverty to wealth in the industrial era, without exception, have done so through export-led growth. Thus, they manage the exchange rate to broadly favor exports, just as they manage other markets and prices in the domestic economy in order to meet development objectives such as the creation of basic industries and infrastructure.
Since they perceive that an export-led strategy is the only proven route to rich-country status, they view with profound suspicion arguments that rapid currency appreciation and markedly slower export growth are “in China’s interest.” And because China is an independent geopolitical power, it is fully able to resist international pressure to change its exchange rate policy.
Support export-led policies with outward foreign direct investment
$7 billion in 2001 to $116 billion in 2014 to $183 billion in 2016
China’s 16,000 multinational enterprises (MNEs) had established some 22,000 foreign affiliates in 179 countries and territories by end-2012
China’s outward FDI framework encourages the type of outward FDI that contributes directly to China’s development, especially by obtaining natural resources, promoting exports or strengthening the country’s technological base.
The government has put in place an institutional structure and various instruments (‘home country measures’) for this purpose
China is now second only to the US in outward foreign direct investment
FDI outflows from China increased 44 percent year on year to 183 billion U.S. dollars 2016, driven by a surge in cross-border mergers and acquisitions by Chinese firms
Chinese MNCs –outgoing FDI (foreign direct investment)
