Transcript CHINA II - BYU Marriott School

CHINA
The Great Awakening
Historical Background
The People’s Republic of China
developed from:
The Soviet central-planning system…
…with its information, incentive,
and inflexibility problems.
Historical Background
The People’s Republic of
China developed from:
The confusion and
economic disaster
stemming from the
policies of Mao Zedong
China Under Communism: 19491978
The Great Leap Forward, 1958-1960
• Mao’s version of Soviet Style Central
Planning
• Forced industrialization
• A steel mill in every back yard
• Disappearing tools and famine
China Under Communism: 19491978
The Cultural Revolution
• Red Guards and permanent revolution
• Remove all productive people
(“capitalist roaders”) to the countryside
Enter Deng Xiaoping,
(Three Times Altogether)
The Reforms of
Deng Xiaoping
Phase 1: Reform the Countryside, 1974-1978
• Deng restructured incentives, making it
profitable for peasants to produce.
The Reforms of
Deng Xiaoping
Phase 2: Financial and Enterprise Reform
• 1983, SOEs had to meet negotiated output
targets, but could then sell any excess in
markets.
• Managers set wages, made investments,
retained profits.
The Reforms of
Deng Xiaoping
• An “open door policy” announced 1979
– Four “Special Economic Zones” were
created to open regions to foreign
investment and partnerships
• Markets rather than central direction
SEZs located in:
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Guangdong Province
Fujian Province
Hainan Province
Hunchun
Pudong Development Zone (Shanghai)
The Purposes of SEZs
• As a laboratory to provide reform experience for
the inland regions.
• Promote Inflows of foreign investment,
technology, and managerial techniques
Policies in the SEZs
• Domestic decentralization, no planning or
regulation from center
• Tax incentives to foreign investors
The Result: an Example
• Shenzhen, a small border town, changed
into a modern city
• In the early years, the average annual
growth rate was over 80 percent
The Result: an Example
• Per capita GDP was 7 times the nation’s
average
• Foreign investment and exports were the
primary engines of economic growth
Shenzhen: The Early 1970s
Shenzhen: Today
The Reforms of
Deng Xiaoping
Phase 2: Financial and Enterprise Reform
• The economic boom continued, but…
• There was political rebellion (Tiananmen
Square, 1989) and subsequent retrenchment
But Communistic Legacies Remain
• The State-owned enterprises remain a
part of contemporary China, and they
need reforms.
• The Communist Party of China remains
and needs reforms.
• Authoritarian methods and bureaucratic
traditions likewise remain.
Where is China at Today?
• The Asian Crisis after the mid-1990s
slowed the economy down
• But by 2000, 9% annual economic growth
again became the standard.
• In early 2006, first quarter growth was
over 10%.
The Old Guard: Passing from the
Scene?
Jiang Zemin, Deng’s heir to power
The Party Today
Hu Jintao,
Elected General
Secretary of the CPC
and President of the
People’s Republic of
China,
March 15, 2003.
The Current Scene
• The global economy puts tremendous
pressures on China’s political system.
• Change is gradual, since the party wishes
to perpetuate its own power, but change
does go on.
• Reforms are tentative, the party is not
moving quickly toward price liberalization,
currency convertibility, or reduction of
subsidies.
Leadership Since Deng
• It is not probable that the CPC will be a
part of a peaceful evolution all the way to
democratic government.
Political Environment Since Deng
• The process of democratization began at
the same time as the economic reforms,
and modest progress has been made
since.
Political Environment Since Deng
– Purges no longer occur
– The National People’s Congress has
been strengthened
– The legal system has been reformed to
prevent any further cultural revolutions.
– Human rights abuses remain a problem
Authoritarian Controls still needed?
• The Party believes that the process of
economic development requires
authoritarian leadership.
• Dissent must be managed while painful
reforms are administered.
• The SOEs should be privatized or closed.
Many millions will likely be sent into
unemployment.
Chinese SOEs and Industries
• Industrial organization still reflects the
vertical relationships characteristic of
central planning.
• Japanese and Korean development
focused on protection and independent
high-tech development.
• Chinese high-tech industries dominated by
foreign companies.
Chinese SOEs and Industries
• “Timid business culture” (Gilboy) keeps
Chinese firms from developing key technologies
and keeps them dependent on the West.
• SOEs enjoy favored status granting preferential
access to capital, technology, and markets, but
• Reforms have also favored foreign investment.
Foreign firms dominate high-tech production
and industrial exports.
Chinese SOEs and Industries
• Firms focus on developing privileged
relations with Party (CCP) officials, but
avoid horizontal association and
networking.
• Little development of links to research
institutions, financiers, partners, suppliers,
and the right (feed-back customers).
• They also forgo investment in long-term
development and diffusion.
Political Impact on Industry
• The unreformed political system suppresses
independent social organization and horizontal
networking.
• It reinforces vertical relationships.
• Chinese firms carry out R&D projects in relative
isolation. In 2000, firms spent 93% of their $2.7
bil total R&D outlay in-house, with only 2% on
collaborative activities with universities and less
than 1% with other firms.
Political Impact on Industry
• Few Chinese firms develop alliances with
or invest in companies in other provinces.
• Strong local political ties tend to isolate a
region from the rest of the economy, so
Chinese firms are often smaller and
industries fragmented.
The SOEs and Unemployment
• By 1998, nearly 1/3 of the
labor force was
unemployed or
underemployed.
• Millions of SOE
employees were laid off in
the late 1990s.
Economic Reforms
Reforms have also attempted to:
• Allow management greater decisionmaking prerogatives
• Impose greater accountability for the
bottom line on enterprise management
• Promote greater labor discipline on the
shop floor.
Can market and plan be combined?
• Overall economic direction includes
protection of inefficient industries, fixing
the value of the yuan, and statist planning*
at the regional level.
• *Picking industries, subsidizing, and
protecting them has been common. There
has been a tendency to pick identical
industries and generate excess capacity.
Another Chinese advantage:
An Open Economy
• Deng’s early desire to link to the global
economy was much more far-sighted than
the autarky that crippled the Soviets over
their entire existence.
• As early as 1980, China renewed its
membership with the IMF and the World
Bank.
China and the WTO
• After more than a decade attempting to
gain admission to the WTO, China
officially joined on December 11, 2001
• China became the 143rd member.
Chinese Policy Objectives:
Maintaining an Undervalued
Currency and
Purchasing US Bonds
What are China’s trade policy objectives?
• Keep the value of the Yuan low to promote
exports.
• Keep the U.S. export market open.
50 million jobs dedicated to U.S. trade.
Rural Chinese pour into manufacturing
areas seeking work.
How has China kept the Yuan price low?
• Sell Yuan in foreign currency markets.
• Buy dollars.
Dollars become foreign currency
reserves. How can you make money on
reserve holdings?
• Purchase U.S. treasury bonds.
Why do we sell so many bonds?
• To finance the war in Iraq, to fund Katrinarelated projects, to fund medicare
prescription benefits,
• Etc.,
• Etc.,
• Etc.
• Purchasing our bonds, China helps
maintain the U.S. trade-finance system.
We need the foreign funds to sustain our
import deficits.
• Why does China want to sustain our
system by purchasing treasury bonds?
• They have about two hundred billion
dollars invested in it.
• They want to retain our export markets.
• U.S. bond yields, although currently fairly
low, still higher than those of other major
countries.
What happens if China were to sell off
their bond holdings?
The increase in supply would drive the
price down.
S1
S2
$96
$92
So the interest rate
rises from 4% to 8%.
• When China unpegged the Yuan from the
dollar, it was pegged to a market basket of
currencies including the Euro.
• China then purchased Euros to support
their new market-basket pegging.
When China Unpegged the Yuan
• Interest rates rose a little (bond prices fell
a little).
• We panicked. Was China restructuring it’s
reserve portfolio?
A cutback can do the same job as a
selloff in the Treasury bond market!
Cutback
Selloff
Japan has been doing the same
thing, only they’ve got a lot more
bonds!
• Why do they buy bonds?
• When they sell Yen, buy dollars in foreign
exchange markets. . .
Japan has been doing the same
thing, only they’ve got a lot more
bonds!
• They acquire huge dollar reserves.
• Buying U.S. bonds yields 3-4% interest.
That’s better than just sitting on the
dollars.
• They have c. $740 billion in our bonds and
have lost c. $110 billion in value with
decline of the dollar.
Japan’s Interest in the Dollar
• Maintaining the bond market defends the
dollar.
• If bonds sell well, the value of the dollar
will not fall.
• If China stops buying our bonds, Japan's
central bank probably would buy more to
protect its huge export trade with the US.
Is a selloff likely?
• Nobody thinks so at the moment, but
would it take a selloff to drop bond prices
and raise interest rates?
• No, the cutback would do the job fine.
Could we raise the funds by selling
additional bonds to other parties?
• Of course.
• How can we get other investors to buy
more than they currently want?
• Raise the interest earnings (drop the costs
of the bonds).
Could we raise the funds by selling
additional bonds to other parties?
• But if interest rates go up, then what?
• Other interest rates rise as well.
Crowding-out occurs in private sector
investments.
• Interest rates on housing go up, so the
housing boom ends.
What happens if the housing boom
ends and all i rates skyrocket?
Fini
(The End)
“Let China sleep, for when it wakes,
it will shake the world.”
-Napoleon