Transformation of Chinese Economy

Junhui Qian2015 October

Outline• Investment and Productivity• Labor and Human Capital• Ownership and Governance

Data Issue• Problems of Chinese data• Transition to a new data-collection system in 1998 • Vulnerability to official manipulation

• It is an impossible task to fake so much data with some consistency for the National Bureau of Statistics, which hires an army of accountants and statisticians. • Some data, real GDP growth in particular, may be “smoothed” using

GDP deflator. But a simultaneous examination of a multitude of time series would reveal more information on the economy. • There are also 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

1970-1973. • 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

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 20120

500

1000

1500

2000

2500

Net FDI into China (USD 100mil)

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

• Data: CGSS 2005, 5778 observations, publicly available. • Results from the multiple linear regression:

, , ***

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.