Economics 162 Fall 2024 The Chinese Economy PDF

Economics 162. Fall 2024 The Chinese Economy Yuanyuan Deng Lecture 10 1 Non state sector 2  What Is in the Non-State Sector? Firms which are not Non-State ▪ Traditional State-Owned Enterprises (SOEs) ▪ Stock companies in whi...

Economics 162. Fall 2024 The Chinese Economy Yuanyuan Deng Lecture 10 1 Non state sector 2  What Is in the Non-State Sector? Firms which are not Non-State ▪ Traditional State-Owned Enterprises (SOEs) ▪ Stock companies in which the state has controlling shares (called state controlled enterprises) Types of ownership forms in the non-state sector ▪ Private ownership firms ▪ Non-private ownership firms (collectives and cooperatives) ▪ Township and Village Enterprises (TVEs) 3  Varieties of Non-State Ownership Forms Private ownership ▪ Individual family business (getihu) (since 1981) ▪ Private companies hiring eight or more than 8 employees ▪ Foreign invested ▪ Share holding companies (private parties have controlling shares) ▪ Listed ▪ Not listed Non-private (but also non-state) ownership ▪ Rural Township-Village Enterprises (TVEs): rural collective firms ▪ Urban collective firms ▪ Joint ventures with TVEs or collectives controlling ▪ Share holding companies (neither the state nor private parties have controlling shares) 4 Two Stages of Non-state sector Development First Stage: from 1978 to mid 1990s ▪ Slow start of private firms ▪ Very rapid growth of collective firms, especially rural TVEs ▪ No privatization of collective firms Second Stage: from mid 1990s onward ▪ Rapid growth of privately owned firms ▪ Fast privatization of collective firms ▪ Fast emergence of share holding ownership forms ▪ Publicly traded stock companies ▪ Closely held stock companies 5  From 1978 to mid 1990s The major growth engine: rural industry ▪ Most new non-state enterprises in other planned economies under socialism were in service sector, not in industry ▪ Most new industrial enterprises in developing countries are not in rural areas Rural enterprises = TVEs + rural private enterprises 6  Share of Industrial Output by Ownership 1978 1993 Changes SOEs 78% 43% -35% Non-State 22% 57% +35% Urban 13% 10% -3% Rural 9% 36% +27% TVEs 9% 27% +18% Private 0% 9% +9% Others 0% 10% +10% 7 8  How the TVEs Changed China? During the first 15 years of reform, TVEs made the most important contribution to economics growth TVEs changed the landscape of China’s industry, as well as its economic institutions The ownership form of TVEs is unique ▪ Neither state-ownership ▪ Nor private ownership ▪ A corporate form between entrepreneurs and community (township or village) government TVEs are uniquely Chinese ▪ Not in other transition and developing economies ▪ Not in other East Asian economies 9  Common Characteristics of TVEs 1. TVEs did not receive bailouts from the government and faced “harder budget constraints”. 2. Officially supported by the government and faced low risk and more secure property rights. 3. TVEs could use limited official channels to access credit. 4. Responded to market signals and were not constrained by the central plan. Labor intensive sectors Market driven and guided by market prices. Link to international market opportunities. Organizational form was more flexible 10  Why TVEs? Why is TVE a puzzle? ▪ We usually think government ownership is bad ▪ Reform is to transform government ownership to private ownership ▪ But TVEs represent a major anomaly: government ownership is the key to TVE success Understanding TVEs ▪ Historical reasons ▪ Political reasons ▪ Economic reasons 11  Prior to 1979 1958: Communes set up small scale industrial enterprises such as steel mills but was short lived 1970s: Re-emergence of “Commune-Brigade Enterprises” (CBEs), the predecessor to TVEs Annual growth rate: 26% between 1970 and 1976 By 1978: 49 billion Yuan output, of which 39 billion Yuan from industry (9% of national total industrial output) Main motivation: agricultural mechanization drive ▪ Typical business: machine repairing, food processing ▪ Limits: only to serve agriculture ▪ Grey areas: subcontracting for SOEs in nearby urban areas (Southern Jiangsu province near Shanghai) 12  The Golden Period: 1979-mid-1990s Government Policies: a gradual process from tolerance to encouragement ▪ Lifted restrictions on lines of business (most industrial lines, not only agricultural supporting industries) ▪ Provided some tax relief (three years tax holidays) ▪ But other support was limited (e.g., limited credit from state banks) The Effects of Agricultural Reform ▪ Township and Village government focused on rural industry after the household responsibility system ▪ The success of agriculture reform supplied labor, capital, and market for rural industry growth 13  The Golden Period: 1979-mid-1990s TVEs at the peak (1992): 52 million employees ▪ Townships ▪ 48,200 townships ▪ On average 8.2 township enterprises in each township ▪ Total of 400,000 township enterprises with 26 million employees ▪ Villages ▪ 806,000 villages ▪ On average 1.4 village enterprises in each village ▪ Total of 1.1 million village enterprises with 26 million employees 14  Industrial Subsectoral Composition of TVEs (1985) Metallurgy 3.4% Forestry 3.0% Electric power 0.4% Food 7.9% Coal 3.8% Textiles 12.5% Petroleum 0.1% Garments 3.7% Chemicals 8.4% Leather 1.6% Machinery 25.5% Paper 2.4% Construction 18.9% Cultural 3.0% materials 15  Ownership form of TVEs Distinct feature of TVE: Alliance of Entrepreneurs and Community (Township or Village) Government What do entrepreneurs contribute? ▪ Ideas ▪ Management skills ▪ Connections (people) ▪ Connections (supplies and marketing) 16  Ownership form of TVEs What does township and village government contribute? ▪ Political protection and government connections ▪ Initial capital investment ▪ Help obtain loans from rural credit cooperatives/banks ▪ Negotiation ▪ Collateral provision ▪ Loan guarantee ▪ Selection and rewarding managers ▪ Profit sharing ▪ Leasing 17  Ownership form of TVEs How does township and village government benefit? ▪ Use of after tax profits ▪ Retained profits earmarked for local public expenditure (40%) ▪ Retained profits for reinvestment (60%) ▪ Private benefits ▪ Cars, banquets, cell phones, offices, hotel rooms, traveling ▪ “corruption” ▪ Promotion ▪ Not clear 18  Economic Conditions for Rural Industry Distortions under central planning created enormous opportunities for rural industry to enter using China’s comparative advantage. ▪ Very cheap labor in rural areas ▪ High prices for industrial goods due to state monopoly ▪ Persistent shortages, especially in consumer goods ▪ Small scale operation advantage: low overhead, flexibility Early entry is very profitable: average rate of profit on capital was 32%, or 40% if tax revenue also included, in 1978 ▪ Even without state subsidies in input prices and capital 19 20  Geographical inequalities TVEs did not grow spectacularly everywhere. Most spectacular development was concentrated in: – Jiangsu province – Zhejiang province (private) – Guangdong province Pearl delta region (Hong Kong connection) 21  Why Privatize TVEs Government ownership has costs ▪ Some TVEs were collectives in name only (in Wenzhou) ▪ But most TVEs were real collectives Changing economic conditions ▪ Markets became more competitive, profit rates declined rapidly ▪ Private firms enter, attracting able entrepreneurs away ▪ When TVEs grew larger, more costly to manage with government involvement Changing political conditions ▪ Private property rights become more secure 22  Patterns of TVE Privatization A local government driven process, no national privatization program ▪ Some started in mid-1990s, some started in late 1990s Various methods of TVE privatization ▪ Sale (at discount) to managers and employees ▪ Sale to outside domestic investors ▪ Sale to foreign investors ▪ Going public (IPO) Various corporate forms after privatization ▪ “stock cooperatives” ▪ Private firms ▪ Joint ventures 23 24 25  Domestic De Novo Private Firms Varieties of private firms: Domestic privatized firms, de novo private firms, and foreign firms From rural to urban areas, from local to national or even international Takeoff of domestic de novo private firms (start from scratch) in urban areas in mid-1990s A class of new rich. Crony capitalism “Chinese style”. 26  Problems of private firms in China Political status Government regulation ▪ Registration difficulties ▪ Business line restrictions Financing ▪ Hard to get bank loans ▪ Hard to go raise funds from the public (even Ant group and Didi). 27