China: The Awakening Giant

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China The Awakening Giant

• Eric Hage

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Enter the Dragon- March 10, 2001

• Somewhat recent dramatic increase in Chinese
  economy
• However, China is still poor
• Upon accession of WTO, China will rid tariff and
  non tariff barriers and open certain sectors of
  the economy
• China wants to separate business from government

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

• Privatize socialist housing
• Develop a tax system
• Crack down on local-government corruption
• Provide pensions for the elderly
• Put together social welfare initiatives

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Predictions about China

• Economy will grow at 9 during 2006-2015
• By 2020, economy will grow to 10 trillion in 2000
  dollars
• Membership to the WTO depends on foreign direct
  investment (FDI)
• Chinas export industries make up the bulk of its
  FDI
• Cheap labor and educated graduates create export
  machine
• China contains advantage cheap labor-intensive
  areas such as toys, textiles and shoes

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Continued

• Multinationals are a dominant force in
  unprotected sectors of the mainland economy
• Foreign involvement likely to double with WTO
  membership
• Information technology is helping China integrate
• Financial integration is also improving
• Chinese government is planning to develop equity
  markets

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What does China need to do?...

• To continue to separate business from government
• Develop capital markets
• China is a continental economy driven by domestic
  demand
• Shutting China out would be detrimental to
  American interests
• Chinese reforms could create new wealth

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Chinas Economy Celebration and Concern- Nov
10, 2001

• Chinese GDP estimates are inflated
• WTO membership will not fix GDP inflation issue
• China is not truly a safe haven for foreign
  investment
• Domestic demand contributes 90 to domestic
  growth
• Chinas economy is continental, not an export
  driven one
• Urban consumers worried about investments
• Freer farm trade in China will hurt farmers

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In long run, potentials benefits of WTO
membership are clear

• It will force state-owned enterprises to become
  more efficient
• Encourage efforts to reform Chinas banking
  system
• Put private enterprise on a more equal footing
  with the state sector
• Call these changes a painful adjustment
• 7 growth in economy is not enough to make up for
  the increase in unemployment
• Process of reform should be slow

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Can India Overtake China?August 2003

• Foreign Direct Investment (FDI)- fuels export led
  manufacturing industry
• Investor confidence level in India is not as high
  as China
• Chinas diaspora vs. Indias diaspora
• Forbes 200- best small companies- India ranked
  considerably higher than China
• India has a stronger infrastructure to support
  private enterprise, more efficient and
  transparent capital markets than China and a
  better legal system
• India relies more on organic growth

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The Stifling State

• China still struggles with free market reforms
  due to old communist ways
• India- Fabian socialism- intended to mitigate
  social ills of capitalism, not destroy it
• Indias system did not prevent entrepreneurship
  from flourishing Chinas did
• China imposed legal and regulatory constraints on
  indigenous private firms

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Continued

• Chinas state owned enterprises protected by
  government
• Failure of Chinese entrepreneurs in 1990s
• Foreign investors are benefited by system
• India calls system of advantaged foreign
  investors infeasible

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India is flourishing

• Government stopped monopoly over long-distance
  phone calls, some tarrifs have been cut
  bureaucracy has been trimmed a of industries
  open to private investment
• Indian Firms- wholly private initiatives versus
  Chinese Firms- significant state involvement

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Why isnt Indias superiority reflected in the
numbers?

• Late start
• Small national savings rate and less FDI than
  China
• Indias ethnic and religious tensions
• Indias dispute with Pakistan over Kashmir
• Meanwhile, China has been able to concentrate
  more on economic development
• Indias growth rate 20 less than Chinas-
  remarkable

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Who is better off China or India?Depends on

• How well both countries utilize their resources
• Answer unknown for many years
• Appears that India will surpass China
• - ground up approach
• - Indian diaspora
• - potentially increasing FDI
• - homegrown entrepreneurship

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The Business of Governing Business in China-
January 2005

• How will China govern its markets?
• What form will the new regulatory state take?
• Author presents two models
• - Independent Regulator
• - Developmental State

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The Independent Regulator Model

• known as the benchmark of institutional models
• originated in the United States
• emphasis on administrative restructuring of state
  institutions
• the regulator is independent from business
• the regulator must be separate from and impartial
  toward the firms it regulates

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Continued

• the regulator should have political independence
  (high degrees of transparency)
• the regulator must maintain substantial autonomy
  from political organs such as the executive or
  the legislative
• primary job to create a level playing field for
  market actors and to apply rules evenly without
  regard to who these particular actors are,
  thereby fostering competition and eliminating
  market failure

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The Developmental Model

• opposite from independent regulator model
• based on Japans postwar regulatory system
• the developmental state model tolerates
  substantial governmental intervention
• the model favors particular firms whose failure
  would impose unacceptable social costs
• government is concerned with who the specific
  market actors are

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Continued

• Idea is to create national champions
• The model discourages excess competition that
  might reduce profits of favored firms and
  encourages market stability
• Regulators in this model are highly centralized
• The regulatory bureaucracy is relatively free
  from political oversight
• Regulatory authority held in powerful
  comprehensive ministries

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There exist four institutional factors that
constrain these new regulatory bodies
independence

• 1. State Ownership
• State ownership of key strategic assets
• Use regulatory reform to enhance the value of the
  state

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2. State and Party Comprehensive Organizations

• Maintain authority over strategic assets
• Oversight of government commissions for planning
  and state asset supervision as well as several
  parties is actually increasing
• These organizations hold most of the power

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Examples of these organizations

• National Development and Reform Commission (NDRC)
• State Asset Supervision Administration Commission
  (SASAC)
• Chinese Communist Party (CCP)

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3. Bureaucratic origins of regulatory
institutions and personnel

• The backgrounds and accompanying biases of the
  leadership and staff of new regulatory agencies
  is problematic
• Ministries were formed based on mergers of older
  ministries thus still keeping the same people
• Beneficial because old members bring expertise
• Still, however, a relationship between the
  incumbent firm, the regulator, and the policymaker

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4. Fragmented, ambiguous authority of the
regulator

• Level of authority are rather undefined, creating
  confusion on who has the actual power
• Divisions of labor are generally not defines
  statutorily
• easier to grant regulatory authority rather than
  revoke it
• Problem of fragmentation is severe in the
  telecommunications sector
• Telecommunications sector deals with national and
  domestic security
• Numerous actors have vested interests for this
  particular sector, and as a result, it is hard to
  distinguish which body has authority over these
  matters
• Other sectors electric power sector, financial
  services sector (not as fragmented)

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Metavision gives a reason for controlled
competition among a limited number of firms

• Need to control and maintain revenue from major
  state assets
• The creation of national champions
• The achievement of employment, universal
  services, and social security goals

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2 norms that are central to Chinas regulatory
system

• 1. Preference for orderly competition
• competition in strategic, state-owned industries
  should be orderly
• since too much competition creates cutthroat
  pricing, and ultimately lower state revenues,
  price floors were implemented- minimum set prices

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Conclusion

• Currently between the independent regulator model
  and the developmental model
• Current regulatory system still needs improvement
• Overall, China prefers orderly competition and
  limiting number of firms
• Metavision

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Discussion Questions

• From the given information about Chinas
  regulatory system, do you truly believe that
  China is in the middle of the independent and
  developmental models or does it lean to a
  particular side?
• Do you think the authors assessment of India
  overtaking China eventually is premature?