Chinese Economic Planning and the Role of Subsidies

Usha C. V. Haley, PhD

Hearing on China’s WTO Compliance and Industrial Subsidies

US-China Economic and US-China Economic and Security Review CommissionSecurity Review Commission

April 4, 2006Usha C. V. Haley, Statement

before US-China Economic and Security Review Commission

Figure 1Ratio of Private to Government Consumption

0

1

2

3

4

5

6

7

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Year

China

India

April 4, 2006Usha C. V. Haley, Statement

before US-China Economic and Security Review Commission

Outline

Subsidies: Form and Function of Chinese subsidies

Squinting through the Chinese Fog: the Lack of Transparency

Back to the Future: the PRC’s 11th 5-Year Plan

Who Benefits: Recipients of Subsidies Who Profits: the Financial Performance

of Multinationals in China

April 4, 2006Usha C. V. Haley, Statement

before US-China Economic and Security Review Commission

Form & Function of Subsidies Free to Low-cost Loans Asset Injections No Break-Even Subsidized Purchases Beijing’s International Bargaining Power Labor Controls Tax Breaks & Concessions Energy & Land Subsidies Sectoral Credit Allocations Stock Listings Cheap Technology Control over Distribution Channels Special Market Information Undervalued Currency

April 4, 2006Usha C. V. Haley, Statement

before US-China Economic and Security Review Commission

Lack of Transparency

Reduces ability to gauge true efficiency and productivity of Chinese labor

Reduces the ability of US manufacturers to prove dumping

Magnifies the weaknesses of China’s statistical system

Reduces the credibility of the SOEs’ books

April 4, 2006Usha C. V. Haley, Statement

before US-China Economic and Security Review Commission

Where India Trounces ChinaCapital Goods

0.00%

10.00%

20.00%

1999-2001 2002 2003

China ROE India ROE

China ROI India ROI

Food, Beverage & Tobacco

0.00%10.00%20.00%30.00%

1999-2001 2002 2003

China ROE India ROE

China ROI India ROI

Materials

0.00%10.00%20.00%30.00%

1999-2001 2002 2003

China ROE India ROE

China ROI India ROI

Pharmaceuticals & Biotech

0.00%

20.00%

40.00%

1999-2001 2002 2003

China ROE India ROE

China ROI India ROI

Software & Services

0.00%10.00%20.00%30.00%

1999-2001 2002 2003

China ROE India ROE

China ROI India ROI

April 4, 2006Usha C. V. Haley, Statement

before US-China Economic and Security Review Commission

Lack of Transparency Affects Chinese GDP figures Statistics Generated by the NSB Sensitive Data such as Debt or FDI Statistics on Private and Service

Sectors Some Economic and Industrial

Data Classified as State Secrets Unemployment Statistics Statistics on NPLs

April 4, 2006Usha C. V. Haley, Statement

before US-China Economic and Security Review Commission

11th 5-Year Plan Indicates that Subsidies will flow into Integrated circuits and software New generation networks Advanced computing Biomedicine Civil airplane Satellite applications High-performance and new

materials

April 4, 2006Usha C. V. Haley, Statement

before US-China Economic and Security Review Commission

Subsidies to Chinese Industry in the next 5 years will Include Controversial sectors including

Stem Cells, Gene Therapy and Genetically Modified Crops

Traditional US-dominated industries including Software, Semi-conductors and Space Exploration

Emerging technologies including Renewable Energy Sources – Solar, Hydro and Wind power

April 4, 2006Usha C. V. Haley, Statement

before US-China Economic and Security Review Commission

Policies Underpinning Subsidies Are Political Rather than Economic and

so Promote Exports & Inefficient Domestic Industries

Are Guided by needs to Control SOEs rather than Increase their Profits

Stem from Long and Mid-range Plans as well as Mistakes

Are Generally Very Difficult to Unravel Are Clearest for Global Champions Are Different at Central, State and Local

Levels

April 4, 2006Usha C. V. Haley, Statement

before US-China Economic and Security Review Commission

The Mirage

Only 1/3rd of the Foreign Companies Operating in China have Ever Made a Profit there

US Companies operating in China had lower profit margins than in their other global operations

In 2004, total China earnings for US foreign affiliates including all sources of profits (licensing, royalties) was $8.2b

In 2004, US foreign affiliates earned $7.1b in Australia (19m people), $8.9b in Taiwan & South Korea (70m people) and $14.3b in Mexico (95m people)

5 US companies accounted for 1/3 of equity profits – 3 carmakers (including GM), Yum Brands and McDonalds

Successful companies in our research did not rely on Chinese economic and industrial data

“You manage by objectives, objectives that must be clearly stated – then determine what kinds of tools you can use to determine if you achieved them, but stick with your objectives. However, if it comes to financial figures, it will be challenging. What good will numbers be if the base rates used for comparison of performance are not reliable.”

Elmar Stachels, Bayer, China