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Lecture 4

THE CHINESE ECONOMY

Market Transition: Strategy and Process

• Market transition in China is far from complete• Successfully moved away from the command economy

• In the beginning, reforming without a blueprint

• Lowered barriers and gradually opened up their system, giving individuals and groups the opportunity to act entrepreneurially and meet market demands

• The focus of reforms shifted toward dissolving the compulsory plan and creating uniform rules and tax rates (for profit) for all sectors of the economy.

• The process was achieved with a minimum of economic disruption and relative social stability (vs. big bang or shock therapy)

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• The rural reform• China’s leaders believed that the rural economy needed profound

restructuring and rehabilitation

• Procurement targets were stabilized and slightly reduced for farmers.

• Agricultural production began to surge. Helped along by higher prices and the increased availability of modern inputs such as chemical fertilizer

• Household farming again （包田倒户）, co-ops to replace communes (villages and towns)

• Farmers increased grain output with less days spent in the fields

• The number of workers in township and village enterprises increased rapidly, and output from this (non-agricultural) sector surged as well. Many moved on to non-agricultural jobs (in cities and coastal areas!)

• Rural incomes increased rapidly, and reforms gained the support of the bulk of the rural population.

• Successful rural reform and its further implementation• Rural areas still under-developed, especially in remote areas

• Using contracts to stabilize some crucial pieces of the existing economic system

• Decentralizing, shifting power and resources from the hands of central planners to local actors

• The focus of policy-makers shifted, as it became increasingly necessary to build a firmer institutional basis for the market economy

• Again, injection of the market mechanism

Demand supply relations determines the price of goods (grains, poultry, fruit, and vegetables, etc.)

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• Dual-Track System• The coexistence of a traditional plan and a market channel for the allocation of a

given good.

• Implied a two-tier pricing system for most goods: a single commodity had both a (typically low) state-set planned price and a (typically higher) market price

• Growing Out of the Plan• Implied a gradual process in which the plan would become proportionately less and

less important until the economy grew out of the plan

• The commitment to grow out of the plan crucially altered incentives at the level of the individual enterprise

• The plan became irrelevant gradually

• Particularistic Contracts• Planners signed individual contracts with state-owned enterprise, specified tax

payments and contributions to the material-balance (input-out) plan

• Each contract was drawn up on the basis of the firm’s performance in a previous base year

• Entry• Large numbers of start-up firms, especially rural industries, rushed to take

advantage of large potential profits in the industrial sector

• The entry sharply increased competition and changed overall market conditions in the industrial sector

• This lowering of entry barriers was greatly facilitated in China by the nation’s huge size and diversity

• Prices to balance supply and demand• Flexible prices to balance supply and demand played an important role

• Transactions between the state and non state sectors were permitted, and they developed into a remarkable variety of forms

• Incremental Managerial Reforms instead of Privatization• The combination of increased competition, improved incentives, and more

effective monitoring of performance improved state-enterprise performance

• The Chinese approach worked adequately during the early stages of transition.

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• Disarticulation • “Special economic zones (SEZs)” -export-oriented enclaves were created

• Let the organizational form in the countryside devolve back to household farming

• Initial Macroeconomic Stabilization Achieved Through the Plan• Chinese used the instruments of the planned economy to shift resources toward the

household sector and relieve macroeconomic stresses at the beginning of reform.

• Gradual development of markets for exchange at the local levels.

• Preserve stability and solidify support for the reform orientation.

• Continued High Saving and Investment• Rapid increase in household saving

• Offset the reduction in government saving

• Total national saving remained high, thereby sustaining high levels of investment and growth

• Table 4.1 Styles of Reform: Zhao Ziyang (agriculture) vs. Zhu Rongji (industries)

An Example: Steel making

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+ Marketing development is the reform process of the continuously increasing effect of marketing structure in economic resource allocation.

+ Central planning permeated every aspect of the economy, from the types of products, quantities, channels to pricing.

+ Two periods for the innovation：– In the 1980’s, the domestic adjustment and innovation are

the main concerns; – After the 1990’s, the opening policy drives the innovation

(new ideas and practices to China), the coastal cities exemplifies for the inner ones, the practice causes the innovations of policies and theories, and the economic activities stimulate the social and political changes.

• The cause and the effect• During 1988–1989 one of the severe cycles of macroeconomic

imbalance led to a serious political crisis

• Rising inflation

• Anger at corruption and arbitrary privilege,

• Rising expectations about political and economic change

• Unexpected death of Hu Yaobang

• Conservative leaders ordered the military into the square.

• The course of China’s reform was forever altered.

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• Prerequisites • Market Reunification

• Recentralization

• Macroeconomic Austerity

• Regulatory and Administrative Approach• Fiscal and Tax System

• Banking and Financial System

• Corporate Governance

• Membership in the WTO

• Outcomes • From Inflation to Price Stability

• State Enterprise Restructuring and Downsizing

• Privatization of state-own enterprises

• Allow bankcrupties, unemployment (millions), transfers, and private start-ups

Central government budget?

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What is this? Employment?

+ Economic Reforms since 1979+ Focus on the improvement of corporate governance, the

promotion of the non-state sector and the protection of property rights.

+ Building up further a market oriented behavior by regulation and law.

+ The growth of foreign direct investment, import of equipment, technologies, management know-how, and new business concepts as well as ideas and lifestyles.

+ Private ownership will be or is becoming a fundamental building block of the economy.

+ Now 60%-70% market economy, p.21. – Greater reliance on market factors and consumer trends

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+ The stage of decentralizing authority and reducing profit (1978~1982)“放权让利”阶段（1978～1982年）– Break the big rice bowl,

+ The stage of changing taxation of profits (1983~1986)+ “利改税”阶段（1983～1986年）+ The stage of contract system (1987~1992)+ “承包制”阶段（1987～1992年）+ The stage of operation system transition (1992~1993)“转换经营机制”阶段（1992～1993年）

+ The stage of modern corporation system.+ “现代企业制度”阶段（1993年以后）

+ Ingenuity and energy of people released!+ Rapid economic growth: in output, brands, and

distribution outlets.+ Rise of standards of living and quality of life:

consumption waves and upgrade+ Under-developed legal systems, thus many loop-holes

for the opportunists!+ Policy swings and over-corrections, and constant

adjustment!

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+ Stage one, 1978~1989, typical seller’s market.第一阶段，典型的卖方市场

+ Stage two, 1990~1996, the seller’s market and the buyer’s market coexist.第二阶段，卖方市场与买方市场并存

+ Stage three, 1997~present, gradually becomes the buyer’s market. 第三阶段，1997年至今，整体上进入买方市场阶段

+ The decrease of the concentration (monopoly) levels indicates the fierce market competition and resource waste (duplication), and causes the drop of the profit rate and the deficit of corporations. 产业集中度的下降表明市场竞争越来越激烈，使资源浪费，导致企业利润率下降和许多企业亏损

+ Only until recently, there has been signs of reconsolidation by mergers of firms.

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+ From central planning to market forces (70%)+ From an economy of scarcity to oversupply

(seller’s market to buyer’s market)+ From the dominance by SOEs to the co-existence

of several modes of ownerships with an increasing proportion of private businesses

+ Sector by sector: now bank, insurance, and other financial institutions– Recently, the media, and the military

+ “Deepening Reforms?”

+ The Walder article+ Gradualism: gradual reforms over time across regions and

industries (unlike the shock therapy in Russia) + Dualism: a mix of market forces and government planning

depending on industry (capitalism + socialism), thus mixed forms of enterprises (SOEs, collective, private, stock, FDI), with government playing a major role, but more flexible and decentralized

+ Constant changes in laws and policies due to the gradual reforms, creating instability as well as windows of opportunity and boom-bust cycles caused by the switching between laissez-faire and austerity programs

+ Incomplete or partial reforms: political reforms and legal development still lagging behind, only recently recognized private ownership of assets

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+ The broad geographic areas and potential.+ 大：地域辽阔，+ Dramatic changes of development, policies, and laws.前景巨大变：发展快，变化快，政策多变，法规不健全

+ Chaos market, infringement, and poor reputation.乱：市场秩序混乱，假冒侵权严重，信誉缺乏

+ Short term orientation, and excessive competition.躁：短期导向，多度竞争

+ Variations across regions, systems, industries, marketing levels, and generations differences. 异：区域差异，体制差异，行业差异，营销水平差异，世代差异

• Challenges for the new leadership• Current policies lock in the growth of an increasingly

competitive and open economy.

• The commitments to the WTO, limit China’s ability to protect large sections of the economy from international competition

• Inequality and uncertainty increases the urgency for China to provide effective social policies

• Disparities, fairness, redistribution, stability and Toquevilleabout French revolution

• The next step to a highly functioning market economy

• Role of the state, government, corruption, stronger institutions

• Transparency, freedom and universal values