Transcript Transition to Market Economy (Part II)

Transformation of Chinese
Economy
Junhui Qian
2014 October
Outline
• Investment and Productivity
• Labor and Human Capital
• Ownership and Governance
Data Issue
• Problems of Chinese data
•
•
•
•
Inadequate correction for inflation
Inadequate accounting for the expanding scope of the economy
Vulnerability to official manipulation
Transition to a new data-collection system in 1998
• But, there are no better alternatives to the official data.
Investment
Comparisons
• US invested an average of 18.5% of GDP during 1970-2010.
• Japan invested 35-37% of GDP in gross fixed capital formation during 19701973.
• Korea sustained a very high fixed investment rate from 1990–1997, peaking
at 39% in 1991.
• For brief periods in the mid-1990s, Thailand and Malaysia invested over
40% of their GDPs in fixed capital (1993–1996 and 1995, respectively).
• Unlike Thailand and Malaysia, China was not dependent on foreign
investment, but mainly on domestic saving.
• Investment ratio has been higher than in Big-Push era.
Is it true that the reason why
China grew so fast is simply
“Because it invested so much”?
The Productivity Story
• A consistently high investment rate that appears to be sustained by a
gradual increase in productivity.
• The persistent FDI into China is one evidence supporting the above story.
• The declining share of inventory investment offers another.
• The experience in the socialist era offers a counter example against
the Harrod-Domar model, which implies that investment is the sole
engine for growth.
• Explaining the China growth is challenging. No single factor can
explain the phenomenal growth.
• Explaining the China growth is also valuable for other less developed
countries.
FDI into China
Net FDI into China (USD 100mil)
2500
2000
1500
1000
500
0
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Outline
• Investment and Productivity
• Labor and Human Capital
• Ownership and Governance
Structural Change in Employment
Employment by Ownership
Urban Employment
Unemployment During the Second-Phase
Transition
Education
Return to Education
Source: Zhang et al. (2005)
Results from Regression Study
• log 𝑦 = 𝛽0 + 𝛽1 𝑒𝑑𝑢 + 𝛽2 𝑒𝑥𝑝𝑟 + 𝛽3 𝑟𝑢𝑟𝑎𝑙 + ⋯ + 𝑢
• Data: CGSS 2005, 5778 observations, publicly available.
• Results from the multiple linear regression:
𝛽1 = 9.9% ∗∗∗, 𝛽2 = 0.08%, 𝛽3 = −10.9%***
Outline
• Investment and Productivity
• Labor and Human Capital
• Ownership and Governance
SOE Reform: Ownership and Governance
• Discussion: Why is ownership important?
• The Company Law of 1994 paved way for the diversification of
ownership of the SOE’s, including privatization.
Grasping the Large and Letting the Small Go
• The 15th Communist Party Congress (Sep 1997): Grasping the large
and letting the small go.
• The “large” were often controlled by the central government, while
the “small” were often in control of local governments.
• The “large” were (and are) often protected by entry barriers (real or
regulatory), while the “small” were often subject to market
competition.
State Industrial Enterprise Profit
Governance Reform
• Objectives:
1. (Incentive) Turn the SOE’s from socialist work units into profit maximizing
companies.
2. (Constraint) Make the management responsible for the solvency risk.
The Soft-Budget Constraint Problem
• A soft budget constraint is said to exist whenever a loss-making
company continues to receive financing.
• To give more discipline to enterprise managers, grants gave way to
bank loans (拨改贷). However, due to the soft-budget constraint
problem, bank loans soared.
Debt-Equity Ratio
Hardening the Soft-Budget Constraints
• “Zombie” enterprises were shut down.
• Banking reform turned state banks into commercial banks.
• Tax reform weakened the link between SOE’s and their bureaucratic
superiors.
• Social security reform and housing reform helped reduce the
bargaining power of SOE’s.
Public listing of SOE’s
• Almost all national champions (telecoms, transport, energy and finance)
have been listed in stock exchanges in Shanghai, Shenzhen, Hong Kong, and
New York.
• The typical practice is: (i) form a limited corporation for asset injection and
eventual listing; (ii) invite “strategic investment” in the corporation from
big-name western investors such as Goldman Sachs, Warren Buffet, and
the likes; (iii) and IPO simultaneously or sequentially at various stock
exchanges.
• Many smaller SOE’s controlled by local governments have also been listed
in Shanghai, Shenzhen, and Hong Kong.
• A listed company not only obtains an additional source of financing, but
also introduces external monitoring of the management.
Case Study: The Reform of Sinopec (I)
• About Sinopec:
• Sinopec Group is one of the big two oil companies in China
and is the world's fifth biggest company by revenue. Its
business include oil and gas exploration, refining, and
marketing; production and sales of petrochemicals,
chemical fibers, chemical fertilizers, and other chemical
products; storage and pipeline transportation of crude oil
and natural gas; import, export and import/export agency
business of crude oil, natural gas, refined oil products,
petrochemicals, and other chemicals.
• In 2009, it was ranked 9th by Fortune Global 500, becoming
the first Chinese corporation to make the top ten and in
2010 it was ranked 7th.
Case Study: The Reform of Sinopec (II)
• China Petrochemical Corporation (Sinopec Group), the parent of the listed
Sinopec Corp., is established in July 1998 on the basis of the former China
Petrochemical Corporation.
• Strategic investors of Sinopec include BP, Exxon Mobile, etc.
• The Sinopec Corp. issued H-shares and A-shares at overseas and home
respectively in October 2000 and August 2001, respectively, and was listed
on stock markets in Hong Kong, New York, London, and Shanghai. The total
number of shares of Sinopec Corp. was 86.7 billion, in which Sinopec Group
owns 75.84%, international investors own 19.35%, and domestic investors
own 4.81%.
• In 2014, Sinopec initiated the so-called mixed-ownership reform. It plans to
sell more shares to strategic investors in the private sector.
Reading Assignments:
• *Chapter 6, 8, 13.
• Chapter 9 of Demystifying the Chinese Economy, Justin Yifu Lin,
Cambridge University Press 2011.