Pub. Pol 751 -001 The Chinese Economy and Economic Policy Lecture 3 Dr Liu Yunhua The famous billboard of Deng Xiaoping’s image in Zhenzhen
Lecture 3 Reforms in Economic Institutions and Performances 3. 1 Reform in Agricultural Sector and Performance 3. 2 Reforms in Enterprise Ownership 3. 3 Development of the Private Firms 3. 4 Growing Entrepreneurs and Billionaires
3. 1 Reform in Agricultural Sector and Performance Reform in agricultural sector: 1982 -1986, collective farming communes were abandoned, the Household Responsibility System (HRS) was set up. (HRS) The HRS is a mechanism which rents the land to farm households with a fixed rent, farmers are allowed to keep the residuals. It turned out that the rural reform was a big success. Grain production increased substantially in the coming few years.
What is the reason for the success of household responsibility system? Review of the compensation theory: fixed wage, piece rate, share cropping, residual claim, efficiency wage, principal agent problem. The feature of collective farming: high monitoring cost. The Household Responsibility System uses residual claim mechanism, reduces the monitoring cost substantially and is the best choice for policy.
Reform in Agricultural Sector and Performance What is the disadvantage of HRS? – Small scale for farming. – Short term lease problem. How did the Chinese farmers overcome the problem of small scale in land areas? – Plant the same crop together, and share the harvest. – Small sized farming equipment.
The crop field in Inner Mongolia.
Small sized agricultural machines are produced on large scale and used very well in China.
The agricultural machines in actual use in my hometown. A combined harvesting machine.
Road construction in rural China now is a big strategy for rural development.
Figure 3. 1 Rural motive power
Performance of China’s agricultural sector after reform A few important questions about China’s agriculture economy Can China feed their population? How much is the surplus labor? What is the real living condition in rural China?
Reform in Agricultural Sector and Performance Can China feed their population? China has 7% of world arable land, while its population is 20% of the world total. 2014, the output of grain of China was 607 million tons, per capita grain was 443 kg. Food security in China is at the top priority of the national security consideration.
China’s grain production since 1991, 100 million tons 1991 435. 29 2003 430. 69 1992 442. 66 2004 469. 64 1993 456. 49 2005 484. 02 1994 455. 10 2006 498. 04 1995 466. 62 2007 501. 60 1996 505. 45 2008 528. 70 1997 494. 17 2009 530. 82 1998 512. 30 2010 546. 48 1999 508. 39 2011 571. 21 2000 462. 17 2012 589. 58 2001 452. 63 2013 601. 94 2002 457. 05 2014 607. 10
World grain production projected to set new record in 2008/09 at about 2200 million tons. China’s 528 million tons accounts for 24% of the world total. Source: Aug. 12 WASDE by USDA
Reform in Agricultural Sector and Performance Food security strategy of China The main food security strategy is to protect the arable land. The other measures include Improving agricultural technology. Subsidizing fertilizer. Infrastructure construction by government: road and irritation system.
Figure 3. 2 Irrigation Area and Fertilizer Use
A World. Known Name: Yuan Longping, The Father of Hybrid Rice His invention on the new rice seeds can increase 2004, Yuan Longping, was the rice awarded the World Food Prize output by 20%.
Provice Mu/per person Heilongjiang 8. 44 Anhui 1. 51 Inner Mongolia 7. 16 Hubei 1. 49 Jilin 4. 96 Shandong 1. 45 Xinjiang 4. 28 Jiangxi 1. 33 Ningxia 3. 82 Guangxi 1. 29 Shanxi 2. 95 Jiangsu 1. 27 Liaoning 2. 85 Hainan 1. 20 Qinghai 2. 81 Hunan 1. 14 Gansu 2. 78 Guizhou 1. 08 Shaanxi 2. 25 Shanghai 1. 07 Average 2. 07 Sichuan 1. 05 Hebei 2. 03 Beijing 0. 97 Tianjin 1. 61 Zhejiang 0. 92 Henan 1. 54 Guangdong 0. 89 Yunnan 1. 54 Fujian 0. 84
Reform in Agricultural Sector and Performance How much is the surplus labor? The survey data for 1200 households: Household Land: 1. 63 acre (10 mu). Labor input/year: 157 days. National average per capita arable land in 1999 is 2. 07 mu. In 2014, the migrant workers away from home province in China were 168. 21 million.
Village farmers stay idle on a mid afternoon, 2008
Work at construction site is the most common jobs of migrant labors from rural area.
Home return of migrant workers during spring festival time is a tough task – daily mobility of more than 100 million people.
What is the real living condition in rural China? One household farm production in Inner Mongolia: Land: 20 mu (3. 2 acre) (1 mu = 0. 16 acre= 4047 square meters) Labor: two persons Crop: Corn Harvest: 1000 kg/mu Net earning per mu: 500 yuan Household net income: 10000 yuan
The home of farmers in Inner Mongolia.
3. 2 Reforms in Enterprise Ownership Change in ownership system of enterprises is the key for a market reform. Started from middle of 1980 s, China gradually allowed a diversified enterprise ownership system: State owned enterprises Joint ventures Independent FDIs State and private jointly owned companies Private enterprises
Employment of State Sector, % Year % to national % to urban 1980 18. 9 76. 2 2006 8. 6 21. 7 1985 18. 0 70. 2 2007 8. 5 20. 8 1990 16. 0 60. 7 2008 8. 5 20. 1 1995 16. 5 59. 1 2009 8. 5 19. 3 2000 11. 2 35. 0 2010 8. 6 18. 8 2001 10. 5 31. 7 2011 8. 5 18. 7 2002 9. 8 28. 5 2012 8. 9 18. 4 2003 9. 3 26. 2 2013 8. 3 16. 6 2004 9. 0 24. 6 2014 8. 2 16. 0 2005 8. 7 22. 9 Source: China Statistical Yearbook.
Gross industrial output value by registration, 2009
Value added of industrial SOEs and SHEs as a share of total industrial value added, 2007
The Role of State Owned Enterprises Why does China need to keep some state owned economy? National safety and security: defense, financial and food security. Natural monopolies: minerals, railroad, telecommunications, energy supply Strategic industries: automobile industry Strategic development need: High tech.
State Owned Enterprises Dominant Industries as % of GDP (Year 2006) Mining and Washing of Coal 68 Extraction of Petroleum and Natural Gas 99 Processing of Petroleum, Coking, Processing of Nuclear Fuel 59 Smelting and Pressing of Ferrous Metals 49 Manufacture of Tobacco 100 Manufacture of Transport Equipment 48 Production and Supply of Electric Power and Heat Power 88 Production and Supply of Gas 52 Production and Supply of Water 73 Railroad transportation 100 Telecommunication* 95 Banking and Financial Service* 70 Source: China Statistical Yearbook, 2007. http: //www. stats. gov. cn/tjsj/ndsj/.
The Role of State Owned Enterprises The Role of China’s SOEs Stabilizing the key inputs for industrial production and consumption, such as electricity, oil, telecommunication, transport and minerals. Guarantees financial safety and stability. Regulating natural monopoly. National security and food safety.
The Role of State Owned Enterprises A few large SOEs in China: ICBC: Industrial and Commercial Bank of China CNPC: China National Petroleum Corporation COSCO: China Ocean Shipping (Group) Company (COSCO) CDT: China Datang Corporation
World Fortune 500 Rank: 18. At the end of 2014, ICBC had more than 408, 859 employees, provided a wide range of financial products and services to 5. 1 million corporate clients and 465 million individual customers through 17, 122 outlets across China, 338 overseas subsidiaries and a global network of more than 2, 007 correspondent banks as well as Internet Banking, Telephone Banking and Self-service Banking. At the end of 2014, total assets reached RMB 20, 610 billion. ICBC defended its position as the world’s most profitable bank and world number one bank in size.
China National Petroleum Corporation (CNPC) World Fortune 500 Rank: 4. China's largest oil and gas producer and supplier. Crude output: 2. 78 million barrels/day. Natural gas output: 6. 43 billion cubic feet/day. Crude oil production: 57. 06% of the nation's total, Natural gas production: 79. 5% of the nation's total.
Produces about 11% of the national total electricity.
The performance of China’s SOEs 1998 -2006
The Role of State Owned Enterprises Can China avoid the inefficiency problem of SOEs? China’s state-owned enterprises enjoy massive government financial support, but many still face tough economic challenges. Modern corporate governance is adopted to SOEs. Management of SOEs in China have pushed forward steadily in the following aspects.
The Role of State Owned Enterprises Measures to improve SOE management Clarify the responsibility of ownership by setting up the State-owned Assets Supervision and Administration Commission (ASSAC) in 2003. Being more transparent in assigning the managers and clearly specify their responsibility and payment structure. Open recruiting high level management people with appropriate market level incentives.
The Role of State Owned Enterprises Clearly specifying the social responsibilities of SOEs by the government. Enhancing the monitoring mechanism in accounting system and in anti-corruptions. Through publicly listing and joint venture to introduce more monitoring mechanism and wider financial resources. Investing overseas to explore the international markets.
3. 3 Development of Private Firms Private not state firms are China’s growth engine 30 November 2014 Author: Nicholas R. Lardy, PIIE. Washington ØVirtually every dimension of China’s economic success over the past three-and-a-half decades can be attributed largely to the rise of markets and private businesses. ØPrivate firms account for almost all the growth in employment, most of the expansion of output and investment in manufacturing, and in recent years for over half of the growth in exports. Because they are more productive, private firms have largely displaced state firms in sectors that are open to entry. ØState firms remain completely dominant only in natural monopolies, such as electric power and rail transport, and in sectors where entry is restricted: upstream oil and gas, financial services, and telecommunications.
China Daily: Updated: 2015 -07 -23 08: 08 More Chinese companies become world top 500 BEIJING -- A total of 106 Chinese companies made this year's Fortune Global 500 list, up from 100 firms in 2014, according to the annual ranking released Wednesday.
Case 1: Huawei Technologies World Fortune 500: 228 q Huawei Technologies Co. Ltd. is a Chinese telecom solutions provider that is reportedly owned by its employees through a stock option plan. Its products include switching, SDH/DWDM transmission, optical access network, mobile and wireless communications, ATM, data communications, intelligent network, support network (STP, BITS), intelligent power supply, video conference and CATV. The company's solutions have been deployed in over 100 countries. q The Shenzhen-based company operates in Latin America with offices in Argentina, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay, Venezuela, and Brazil, where its regional headquarters is located. In 2015, Huawei acquired from Dublin-based software developer and SDN service solutions provide Amartus its SDN software technology. The acquisition of Amartus' software assets will enable Huawei to accelerate its SDN roadmap and improve its competitiveness in SDN solutions and services by introducing fast business innovation and multivendor capability. q Performance in 2013: In 2013, Huawei EBG witnessed robust growth with annual sales revenue reaching CNY 15. 263 billion (about US$2. 5 billion), a year-on-year increase of 32%. q Global presence: As a Global Fortune 500 company, Huawei has grown steadily for more than 20 years and continues to grow with a sustainable development strategy based on its insights and vision. Business spans more than 170 countries and regions around the world, focusing on 34 major countries. q With more than 10% of its sales revenue re-invested in R&D each year and more than 12, 000 R&D staff focused on the enterprise market, Huawei is able to ensure customers are offered the most advanced products and solutions in the industry.
Case 2: Alibaba Group Listed in New York Stock Exchange Alibaba Group was founded in 1999 by 18 people led by Jack Ma, a former English teacher from Hangzhou, China. The company provides consumerto-consumer, business-toconsumer and business-tobusiness sales services via web portals. It also provides electronic payment services, a shopping search engine and data-centric cloud computing services. The group began in 1999 when Jack Ma founded the website Alibaba. com, a business-tobusiness portal to connect Chinese manufacturers with overseas buyers. In 2012, two of Alibaba’s portals handled 1. 1 trillion yuan ($170 billion) in sales. The company primarily operates in the People’s Republic of China (PRC), and at closing time, on the date of its initial public offering (IPO), 19 September 2014, Alibaba's market value was measured as US$231 billion.
Case 3: Xiaomi Mobile Phone China number 1, World number 3 : • In the last five years, a startup called Xiaomi has stormed the tech scene and taken over as the top smartphone maker in China. The company is also sitting just behind Apple and Samsung in worldwide smartphone sales. • Xiaomi, however, has been accused of copying Apple when it comes to style and design — Xiaomi phones would look like i. Phones, tablets would look like i. Pads, and even keynotes would look like Apple keynotes. • But Xiaomi's newest flagship phone, the Mi Note, doesn't look like an i. Phone. Instead, we think it borrows some design elements from the i. Phone and Galaxy Note 4 to create sort of a hybrid Apple-Samsung smartphone. Judge for yourself in our video breakdown.
3. 4 Growing Entrepreneurs and Billionaires • In the course of China’s economic reform and fast expansion, many opportunities appeared and keep emerging. • It created many successful businessmen, but quite a few of them are jailed or bankrupted. 46
Roughly, these opportunities could be classified into four types of them: Government monopolized ones: SOEs, local government SOEs, marketed public services (fee collections), permitted private banks, funds. Government related business: land development, resources mining, infrastructure projects. Traditional production. New businesses. 47
Special government permit: CITIC Group At the end of 2011, CITIC Group Corporation’s total assets stood at RMB 3. 2771 trillion, net assets RMB 205. 1 billion, operating income RMB 319 billion and net profit RMB 36. 5 billion. CITIC was enlisted in the Fortune Global 500 for the third consecutive year in 2011, ranking the 221 st. 48
• Approved by the State Council, CITIC Group has transformed into a wholly state-owned company through comprehensive restructuring and changed its name to CITIC Group Corporation, short for CITIC Group, with RMB 183. 70263 billion as the registered capital and Mr. Chang Zhenming as the legal representative. CITIC Group was established in 1979 by Comrade Rong Yiren with the initiation and support by Comrade Deng Xiaoping. 49
• Up to now, CITIC Group has developed into a large state-owned multinational conglomerate with a balanced development of both financial and nonfinancial businesses. Its financial business covers a full range of services including commercial banking, investment banking, trust, insurance, fund management and asset management and its nonfinancial business includes real estate, engineering contracting, energy and resources, infrastructure construction, machinery manufacturing and IT industry with clear overall strength and great momentum of development. 50
◎ 朱文轶 2005 -11 -01 Wang Jun, The CITIC Group Chairman Since 1995. He was CEO of CITIC during 1993 -1999. Son of General Wang Zhen. 1993. 据说这次由王军个人决定的股权出让被国 务院点名批评，王军为此被找去谈话。 “我们签 的时候股价是 32元多，33元吧，12月31日，我 记得那天的股价可能是三十八九元， 6亿股每股 差了6元钱，国有资产有 36亿的流失。特别是到 春节以后，股票不知道怎么回事涨到了 58元钱， 也就是说几百亿的流失。 ”王军回忆此事说， “当 时朱基副总理受委托跟我谈话，谈话的过程中 间，他强调了说你认为你有什么错误，我说是 无组织、无纪律的错误。他说你为什么不报告 ？ 51
China’s largest property company: Wanke: Wang Shi Annual Sales Hit a Record High of RMB 141. 2 Billion Date: 2013. 01. 08 Publisher: vanke Ø China Vanke Co. , Ltd. released data on its sales and new projects in the last month of 2012 today. In December, Vanke sold a total of 1. 168 million square meters of floor space at RMB 14. 07 billion, up 94. 9% and 141. 8% respectively year on year. Ø The whole year saw 12. 956 million square meters of floor space sold at RMB 141. 23 billion, up 20. 5% and 16. 2% respectively year on year. The new industry record makes Vanke the first real estate company achieving more than USD 20 billion of annual sales. 52
Wang Shi, born in 1951. He joined the military force in 1968. Wang Shi changed his career in 1973 and worked in the Water and Electrical supply department of Zhengzhou Railway. Wang Shi graduated from Lanzhou Railway College in 1978 majoring in water supply studies. After graduation, he had worked for Guangzhou Railway Bureau, Foreign Trade and Economic Cooperation Committee of Guangdong Province, and Shenzhen Special Region Development Company. In 1984, he established “Shenzhen Exhibition Centre for Modern Science and Education Equipment”, the predecessor of China Vanke, and acted as general manager. He became chairman and general manager of China Vanke Co. Ltd. in 1988. Mr Wang no longer acted as the general manager with effect from 1999. At present, he is the chairman of the Company. Mr Wang is also a director of Sohu. com Inc, and an independent director of China Resources Land Limited (“CRL”), Shanghai Metersbonwe Fashion & Accessories Co. , Ltd. , Central China Real Estate Limited, and Modern Media Holdings Limited respectively. 53
China’s first privately run automobile producer: Li Shufu Ø Net Worth $2. 2 B Ø Age: 49 Ø Source of Wealth: automobiles, selfmade Ø Education: Master of Science, Yanshan University Ø Marital Status: Married Forbes Lists: #670 Forbes Billionaires #37 in China #60 China Rich List 54
When he asked the government for permit to produce cars, his saying was “Please give me a chance to fail”, since he did not ask for any help from government and bank loans. 2001, he said GM would be bankrupted in 10 years. 2010, Geely used $1. 8 billion purchased 100% shares of Volvo. 1982, photographer 1984, director of factory of parts for refrigerators factory 1984, set up factory of refrigerators 1989, director of factory for decorations 1993, began producing motors 1997, set up van factory 2001, got permit to produce cars. 55
China’s second largest hotel group: New Century Tourism Group Chen Miaolin Managing 28 own hotels and franchise 25 hotels. 56
Chun Qiu Airlines China’s second privately run low price airlines: Wang Zhenghua He was a government officer in Shanghai. 1980, he was assigned to help Shanghai’s returned students from rural to find jobs. He then created six companies for them, including automobile production, logistics, and travel company. 1985, he quited the job to do his own business, was allowed to take one firm with him. He chose Chunqiu Travel. 57
Ø 2004, Chunqiu Airline was set up. The license took him seven years. Ø 2011, Chunqiu’s net profit was 470 million. Recently listed, with 32 of A 320, 2/3 are rented, 1/3 are own, with 60 domestic lines. Ø Singapore airlines tried to acquire Chunqiu with 600 million yuan, but was refused. Ø Wang Zhenghua’s declaration: if government can approve, he dares to sell standing ticket. 58
Hurun’s China Rich List 2014 Obviously many richer ones are not possibly to be listed here. 59
Discussion questions for lecture 3: 1. What are the advantages and disadvantages of household responsibility system? 2. What could be the rationale for a country to maintain certain state owned enterprises? 3. What could be the obstacles for private firms to grow in China?
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