a model of china's state capitalism...private enterprise state-owned enterprise current account...

A Model of China’s State Capitalism

By Xi Li (HKUST)Xuewen Liu (HKUST)Yong Wang (HKUST)

Discussant: Jian WangFederal Reserve Bank of Dallas

June 2012

By Xi Li (HKUST), Xuewen Liu (HKUST), Yong Wang (HKUST)A Model of China’s State Capitalism

Growing like China (Song et al. 2011 AER)

I Puzzling facts about Chinese economyI High rate of investment and high return to capital

I High capital return and current account surplus

I An explanation based on financial imperfectionI Two types of firms: entrepreneurs and SOEsI The entrepreneurs are more productive but financially

constrained.I SOEs are less efficient but have better access to credit markets.



I Puzzling facts about Chinese economyI High rate of investment and high return to capitalI High capital return and current account surplus






I An explanation based on financial imperfectionI Two types of firms: entrepreneurs and SOEs

I The entrepreneurs are more productive but financiallyconstrained.

I SOEs are less efficient but have better access to credit markets.





constrained.

I SOEs are less efficient but have better access to credit markets.



I Entrepreneurs finance their investment mostly by internalsavings.

I Capital return is higher for entrepreneurs than for SOEs.

I Sustained return to capital is from reallocation of resourcesfrom SOEs to entrepreneurs.

I Current account surplus is from financial frictionsI Household savings can only be deposited to banks.I Banks make most loans to SOEs.I SOEs shrink → excess domestic savings






I Current account surplus is from financial frictions

I Household savings can only be deposited to banks.I Banks make most loans to SOEs.I SOEs shrink → excess domestic savings






I Current account surplus is from financial frictionsI Household savings can only be deposited to banks.I Banks make most loans to SOEs.

I SOEs shrink → excess domestic savings






I Current account surplus is from financial frictionsI Household savings can only be deposited to banks.I Banks make most loans to SOEs.I SOEs shrink → excess domestic savings



I The model is also consistent with several other features ofChinese economy

I CA surplus increases in the share of entrepreneurs.

I Entrepreneurs specialize in labor intensive products.

I What are missing in Song et al. (2011)I SOEs outperform private companies in China after 2001.I SOEs’ profits comove with China’s export and CA surplus after

2001 while their shares in exports decline significantly.




I CA surplus increases in the share of entrepreneurs.I Entrepreneurs specialize in labor intensive products.







I What are missing in Song et al. (2011)I SOEs outperform private companies in China after 2001.

I SOEs’ profits comove with China’s export and CA surplus after2001 while their shares in exports decline significantly.


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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Profit Margin of Chinese State-owned Enterprises Up Sharply in Last Decade

Private Enterprise State-owned Enterprise Current Account as Share of GDP (Right Axis)

Percent, Profit Margin Percent, Share of GDP


Li, Liu, and Wang (2012)

I Vertical structure in Chinese economy (after 2001)I SOEs have low productivity but monopolize upstream

industries.

I Private free competition exists in downstream industries.

I Trade liberalization (Accession to the WTO)→ rapidexpansion of downstream firms

I Profits of upstream SOEs increase, as a result.


Li, Liu, and Wang (2012)

I Vertical structure in Chinese economy (after 2001)I SOEs have low productivity but monopolize upstream

industries.I Private free competition exists in downstream industries.

I Trade liberalization (Accession to the WTO)→ rapidexpansion of downstream firms

I Profits of upstream SOEs increase, as a result.


Why is it an important issue?

I Complement Song et al. (2011) in understanding China’seconomic growth

I Different prescription for China’s long-run economic growthI Eliminating financial frictions in Song et al. (2011)

I Not enough in Li et al. (2012)I Remove entry barriers in upstream industries to sustain

long-run economic growth.


Why is it an important issue?

I Complement Song et al. (2011) in understanding China’seconomic growth

I Different prescription for China’s long-run economic growthI Eliminating financial frictions in Song et al. (2011)I Not enough in Li et al. (2012)

I Remove entry barriers in upstream industries to sustainlong-run economic growth.


Some assumptions need to be verified more carefully

I Upstream vs downstream industriesI Clarify upstream and downstream industries: input-output

table?

I Coincide with other classifications such as capital intensive vs.labor intensive?

I Are profits of upstream/downstream industries in othercountries high/low?

I Other reasons for rising profits in upstream industries, such asthe run-up of energy prices?




table?I Coincide with other classifications such as capital intensive vs.

labor intensive?

I Are profits of upstream/downstream industries in othercountries high/low?






labor intensive?I Are profits of upstream/downstream industries in other

countries high/low?






labor intensive?I Are profits of upstream/downstream industries in other

countries high/low?I Other reasons for rising profits in upstream industries, such as

the run-up of energy prices?



I Reasons for the monopoly status of SOEsI Entry barriers by assumption

I A result of financial frictions in Song et al. (2011)?I Financial frictions → SOEs specialize in capital intensive

industriesI Capital intensive industries coincide with upstream/high-profit

industries

I In either case, financial market liberalization is good forChina’s long-run economic growth

I Banking is one of the upstream industries that are dominatedby SOEs.

I Dallas Fed President Richard Fisher’s RMB speech



I Reasons for the monopoly status of SOEsI Entry barriers by assumptionI A result of financial frictions in Song et al. (2011)?

I Financial frictions → SOEs specialize in capital intensiveindustries

I Capital intensive industries coincide with upstream/high-profitindustries

I In either case, financial market liberalization is good forChina’s long-run economic growth

I Banking is one of the upstream industries that are dominatedby SOEs.

I Dallas Fed President Richard Fisher’s RMB speech


Disconnections among data, model, and arguments

I Data: profit margin of SOEs increased

I Model: total profit of SOEs increased (profit margin isconstant)

I Data and argument: the increase in profit margin is from thecomposition effect

I Not in the modelI Argument and model: China’s economic growth after 2001 is

mainly driven by trade liberalizationI Data: Reallocation of resources may continue after 2001

(Figure 4)I How much trade liberalization contribute to China’s economic

growth?






I Not in the model

I Argument and model: China’s economic growth after 2001 ismainly driven by trade liberalization

I Data: Reallocation of resources may continue after 2001(Figure 4)

I How much trade liberalization contribute to China’s economicgrowth?








(Figure 4)

I How much trade liberalization contribute to China’s economicgrowth?








(Figure 4)I How much trade liberalization contribute to China’s economic

growth?


Conclusion

I This paper proposes a different story to explain Chineseeconomy after 2001

I SOEs outperformed private companiesI SOEs’ profitability comoved with trade though their shares in

trade declined.

I Vertical structure between SOEs and private firmsI SOEs monopolize upstream industries.

I Private competitive markets exist for downstream industries.

I A sensible story on a very important issue

I More cross-checks of this story with the data are desirable.


Conclusion

I This paper proposes a different story to explain Chineseeconomy after 2001

I SOEs outperformed private companiesI SOEs’ profitability comoved with trade though their shares in

trade declined.

I Vertical structure between SOEs and private firmsI SOEs monopolize upstream industries.I Private competitive markets exist for downstream industries.

I A sensible story on a very important issue

I More cross-checks of this story with the data are desirable.


a model of china's state capitalism...private enterprise state-owned enterprise current account...

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