China: The Awakening China: The Awakening GiantGiant

Eric HageEric Hage

““Enter the Dragon”- March 10, Enter the Dragon”- March 10, 20012001

• Somewhat recent dramatic increase Somewhat recent dramatic increase in Chinese economyin Chinese economy

• However, China is still poorHowever, China is still poor• Upon accession of WTO, China will rid Upon accession of WTO, China will rid

tariff and non tariff barriers and open tariff and non tariff barriers and open certain sectors of the economycertain sectors of the economy

• China wants to separate business China wants to separate business from governmentfrom government

What is the Chinese What is the Chinese government trying to do?...government trying to do?...

• Privatize socialist housingPrivatize socialist housing

• Develop a tax system Develop a tax system

• Crack down on local-government Crack down on local-government corruptioncorruption

• Provide pensions for the elderlyProvide pensions for the elderly

• Put together social welfare initiativesPut together social welfare initiatives

Predictions about ChinaPredictions about China

• Economy will grow at 9% during 2006-2015Economy will grow at 9% during 2006-2015• By 2020, economy will grow to 10 trillion in 2000 By 2020, economy will grow to 10 trillion in 2000

dollars dollars • Membership to the WTO depends on foreign Membership to the WTO depends on foreign

direct investment (FDI)direct investment (FDI)• China’s export industries make up the bulk of its China’s export industries make up the bulk of its

FDIFDI• Cheap labor and educated graduates create Cheap labor and educated graduates create

export machineexport machine• China contains advantage cheap labor-intensive China contains advantage cheap labor-intensive

areas such as toys, textiles and shoesareas such as toys, textiles and shoes

Continued…Continued…

• Multinationals are a dominant force in Multinationals are a dominant force in unprotected sectors of the mainland unprotected sectors of the mainland economyeconomy

• Foreign involvement likely to double with Foreign involvement likely to double with WTO membershipWTO membership

• Information technology is helping China Information technology is helping China integrateintegrate

• Financial integration is also improvingFinancial integration is also improving• Chinese government is planning to Chinese government is planning to

develop equity marketsdevelop equity markets

What does China need to do?...What does China need to do?...

• To continue to separate business from To continue to separate business from governmentgovernment

• Develop capital markets Develop capital markets • China is a continental economy driven by China is a continental economy driven by

domestic demanddomestic demand• Shutting China out would be detrimental Shutting China out would be detrimental

to American intereststo American interests• Chinese reforms could create new wealthChinese reforms could create new wealth

““China’s Economy: Celebration China’s Economy: Celebration and Concern”- Nov 10, 2001and Concern”- Nov 10, 2001

• Chinese GDP estimates are inflatedChinese GDP estimates are inflated• WTO membership will not fix GDP inflation WTO membership will not fix GDP inflation

issueissue• China is not truly a “safe haven” for foreign China is not truly a “safe haven” for foreign

investmentinvestment• Domestic demand contributes 90% to Domestic demand contributes 90% to

domestic growthdomestic growth• China’s economy is continental, not an export China’s economy is continental, not an export

driven onedriven one• Urban consumers worried about investmentsUrban consumers worried about investments• Freer farm trade in China will hurt farmersFreer farm trade in China will hurt farmers

In long run, potentials benefits In long run, potentials benefits of WTO membership are of WTO membership are

clear…clear…• It will force state-owned enterprises to It will force state-owned enterprises to

become more efficientbecome more efficient• Encourage efforts to reform China’s Encourage efforts to reform China’s

banking systembanking system• Put private enterprise on a more equal Put private enterprise on a more equal

footing with the state sectorfooting with the state sector• Call these changes a painful adjustmentCall these changes a painful adjustment• 7% growth in economy is not enough to 7% growth in economy is not enough to

make up for the increase in unemploymentmake up for the increase in unemployment• Process of reform should be slowProcess of reform should be slow

““Can India Overtake China?”Can India Overtake China?”August 2003August 2003

• Foreign Direct Investment (FDI)- fuels export led Foreign Direct Investment (FDI)- fuels export led manufacturing industrymanufacturing industry

• Investor confidence level in India is not as high as Investor confidence level in India is not as high as ChinaChina

• China’s diaspora vs. India’s diasporaChina’s diaspora vs. India’s diaspora

• Forbes 200- “best small companies-” India ranked Forbes 200- “best small companies-” India ranked considerably higher than Chinaconsiderably higher than China

• India has a stronger infrastructure to support private India has a stronger infrastructure to support private enterprise, more efficient and transparent capital enterprise, more efficient and transparent capital markets than China and a better legal systemmarkets than China and a better legal system

• India relies more on organic growthIndia relies more on organic growth

The Stifling StateThe Stifling State

• China still struggles with free market China still struggles with free market reforms due to old communist waysreforms due to old communist ways

• India- Fabian socialism- intended to mitigate India- Fabian socialism- intended to mitigate social ills of capitalism, not destroy itsocial ills of capitalism, not destroy it

• India’s system did not prevent India’s system did not prevent entrepreneurship from flourishing; China’s entrepreneurship from flourishing; China’s diddid

• China imposed legal and regulatory China imposed legal and regulatory constraints on indigenous private firmsconstraints on indigenous private firms

Continued…Continued…

• China’s state owned enterprises China’s state owned enterprises protected by governmentprotected by government

• Failure of Chinese entrepreneurs in Failure of Chinese entrepreneurs in 1990’s1990’s

• Foreign investors are benefited by Foreign investors are benefited by systemsystem

• India calls system of advantaged India calls system of advantaged foreign investors infeasibleforeign investors infeasible

India is flourishingIndia is flourishing

• Government stopped monopoly over Government stopped monopoly over long-distance phone calls,; some long-distance phone calls,; some tarrifs have been cut; bureaucracy tarrifs have been cut; bureaucracy has been trimmed; & a # of has been trimmed; & a # of industries open to private investmentindustries open to private investment

• Indian Firms- wholly private Indian Firms- wholly private initiatives versus Chinese Firms- initiatives versus Chinese Firms- significant state involvementsignificant state involvement

Why isn’t India’s superiority Why isn’t India’s superiority reflected in the numbers?reflected in the numbers?

• Late startLate start• Small national savings rate and less FDI Small national savings rate and less FDI

than China than China • India’s ethnic and religious tensionsIndia’s ethnic and religious tensions• India’s dispute with Pakistan over KashmirIndia’s dispute with Pakistan over Kashmir• Meanwhile, China has been able to Meanwhile, China has been able to

concentrate more on economic concentrate more on economic developmentdevelopment

• India’s growth rate 20% less than China’s- India’s growth rate 20% less than China’s- remarkableremarkable

Who is better off: China or Who is better off: China or India?India?

Depends on…Depends on…

• How well both countries utilize their How well both countries utilize their resourcesresources

• Answer unknown for many yearsAnswer unknown for many years

• Appears that India will surpass China…Appears that India will surpass China…

- ground up approach- ground up approach

- Indian diaspora- Indian diaspora

- potentially increasing FDI- potentially increasing FDI

- homegrown entrepreneurship- homegrown entrepreneurship

““The Business of Governing The Business of Governing Business in China”- January Business in China”- January

20052005- How will China govern its markets?How will China govern its markets?

- What form will the new regulatory What form will the new regulatory state take?state take?

- Author presents two models: Author presents two models:

- Independent Regulator- Independent Regulator

- Developmental State- Developmental State

The Independent Regulator The Independent Regulator ModelModel

• known as the benchmark of institutional known as the benchmark of institutional modelsmodels

• originated in the United Statesoriginated in the United States

• emphasis on administrative restructuring emphasis on administrative restructuring of state institutionsof state institutions

• the regulator is independent from businessthe regulator is independent from business

• the regulator must be separate from and the regulator must be separate from and impartial toward the firms it regulatesimpartial toward the firms it regulates

Continued…Continued…

• the regulator should have political the regulator should have political independence (high degrees of transparency)independence (high degrees of transparency)

• the regulator must maintain substantial the regulator must maintain substantial autonomy from political organs such as the autonomy from political organs such as the executive or the legislativeexecutive or the legislative

• primary job: to create a level playing field for primary job: to create a level playing field for market actors and to apply rules evenly market actors and to apply rules evenly without regard to who these particular actors without regard to who these particular actors are, thereby fostering competition and are, thereby fostering competition and eliminating market failureeliminating market failure

The Developmental ModelThe Developmental Model

• opposite from independent regulator modelopposite from independent regulator model

• based on Japan’s postwar regulatory systembased on Japan’s postwar regulatory system

• the developmental state model tolerates the developmental state model tolerates substantial governmental interventionsubstantial governmental intervention

• the model favors particular firms whose the model favors particular firms whose failure would impose unacceptable social failure would impose unacceptable social costscosts

• government is concerned with who the government is concerned with who the specific market actors arespecific market actors are

Continued…Continued…

• Idea is to create “national champions”Idea is to create “national champions”• The model discourages “excess competition” The model discourages “excess competition”

that might reduce profits of favored firms that might reduce profits of favored firms and encourages market stabilityand encourages market stability

• Regulators in this model are highly Regulators in this model are highly centralizedcentralized

• The regulatory bureaucracy is relatively free The regulatory bureaucracy is relatively free from political oversightfrom political oversight

• Regulatory authority held in powerful Regulatory authority held in powerful comprehensive ministriescomprehensive ministries

There exist four institutional There exist four institutional factors that constrain these factors that constrain these

new regulatory bodies’ new regulatory bodies’ independence…independence…

1. State Ownership1. State Ownership

– State ownership of key strategic assetsState ownership of key strategic assets– Use regulatory reform to enhance the Use regulatory reform to enhance the

value of the statevalue of the state

2. State and Party 2. State and Party Comprehensive OrganizationsComprehensive Organizations

• Maintain authority over strategic Maintain authority over strategic assetsassets

• Oversight of government Oversight of government commissions for planning and state commissions for planning and state asset supervision as well as several asset supervision as well as several parties is actually increasingparties is actually increasing

• These organizations hold most of the These organizations hold most of the powerpower

Examples of these Examples of these organizationsorganizations

- National Development and Reform National Development and Reform Commission (NDRC)Commission (NDRC)

- State Asset Supervision State Asset Supervision Administration Commission (SASAC)Administration Commission (SASAC)

- Chinese Communist Party (CCP)Chinese Communist Party (CCP)

3. Bureaucratic origins of 3. Bureaucratic origins of regulatory institutions and regulatory institutions and

personnelpersonnel• The backgrounds and accompanying The backgrounds and accompanying

biases of the leadership and staff of new biases of the leadership and staff of new regulatory agencies is problematicregulatory agencies is problematic

• Ministries were formed based on mergers Ministries were formed based on mergers of older ministries thus still keeping the of older ministries thus still keeping the same peoplesame people

• Beneficial because old members bring Beneficial because old members bring expertiseexpertise

• Still, however, a relationship between the Still, however, a relationship between the incumbent firm, the regulator, and the incumbent firm, the regulator, and the policymakerpolicymaker

4. Fragmented, ambiguous 4. Fragmented, ambiguous authority of the regulatorauthority of the regulator

• Level of authority are rather undefined, creating Level of authority are rather undefined, creating confusion on who has the actual powerconfusion on who has the actual power

• Divisions of labor are generally not defines statutorilyDivisions of labor are generally not defines statutorily• easier to grant regulatory authority rather than revoke iteasier to grant regulatory authority rather than revoke it• Problem of fragmentation is severe in the Problem of fragmentation is severe in the

telecommunications sectortelecommunications sector• Telecommunications sector deals with national and Telecommunications sector deals with national and

domestic securitydomestic security• Numerous actors have vested interests for this particular Numerous actors have vested interests for this particular

sector, and as a result, it is hard to distinguish which sector, and as a result, it is hard to distinguish which body has authority over these mattersbody has authority over these matters

• Other sectors: electric power sector, financial services Other sectors: electric power sector, financial services sector (not as fragmented) sector (not as fragmented)

Metavision gives a reason for Metavision gives a reason for controlled competition among controlled competition among

a limited number of firmsa limited number of firms• Need to control and maintain Need to control and maintain

revenue from major state assetsrevenue from major state assets

• The creation of national championsThe creation of national champions

• The achievement of employment, The achievement of employment, universal services, and social universal services, and social security goalssecurity goals

2 norms that are central to 2 norms that are central to China’s regulatory system…China’s regulatory system…

1. Preference for orderly competition1. Preference for orderly competition– competition in strategic, state-owned competition in strategic, state-owned

industries should be “orderly”industries should be “orderly”– since too much competition creates since too much competition creates

cutthroat pricing, and ultimately lower cutthroat pricing, and ultimately lower state revenues, price floors were state revenues, price floors were implemented- minimum set pricesimplemented- minimum set prices

ConclusionConclusion

• Currently between the independent Currently between the independent regulator model and the regulator model and the developmental modeldevelopmental model

• Current regulatory system still needs Current regulatory system still needs improvementimprovement

• Overall, China prefers orderly Overall, China prefers orderly competition and limiting number of competition and limiting number of firmsfirms

• MetavisionMetavision

Discussion QuestionsDiscussion Questions

• From the given information about From the given information about China’s regulatory system, do you truly China’s regulatory system, do you truly believe that China is in the middle of the believe that China is in the middle of the independent and developmental models independent and developmental models or does it lean to a particular side?or does it lean to a particular side?

• Do you think the author’s assessment of Do you think the author’s assessment of India overtaking China eventually is India overtaking China eventually is premature?premature?