Download s Rapid Industrial Growth

China’s Rapid Industrial Growth:
Institutional Change & Regional
Specialization of Production
CHINA’S GEOGRAPHY
Rapid Growth of China’s Industries
• While China’s industries grew rapidly in early Maoist period, they
were not operating on a market basis in a command economy.
• Phantom balance sheets
• Low product quality with little quality control
• Since 1980, the avg. growth rate in ind. output is 15%/annum
• Creation & growth of new industries since 1980
Institutional changes for Industrial growth
• Shift from Plan >>>> Market
• SOEs were core of the command economy & plan
• In 1978, SOEs comprised 77%, urban collectives 14%, & rural
collectives TVEs 9% of industrial output
• Initially there was little change in ownership
• Early 1990s Zhu Rongji begins the reforms to close SOEs
Early Shift to TVEs
• By 1996, SOEs have dropped to 33% of output, and collectives
have increased to 36% with private at 19 % and foreign 12%
• The TVEs have provided a very competitive new style particularly
suited to the low hanging fruit of low capital, labor intensive mfg.
such as garments and toys, etc.
Corporatizing the SOEs
The Company Law
• Goal is to create a new more competitive framework
• Allow gradual transition for SOEs to become corporate and
operate like privates yet remain state controlled
• Enterprises will be larger, more efficient, & more competitive
• Small firms can remain under local control
Financing the Industrial Enterprises
• Show me the money and where it comes from!
• In 1978 enterprises had profit and it went to the state which then
returned it to the enterprises (soft constraint).
• By 1997 these state enterprises had morphed into joint stock
companies, and the profits had disappeared.
• SOEs turn to banks for capital as central state declined to finance
them.
• Slowing economy in 2014 leads to severe challenges in SOES as
government needs to reduce industrial production.
Enterprise Balance Sheets
• Banks begin to loan -- assume they will be repaid, but NO!
• Debt to equity ratios rise rapidly: ‘78 – 12: by 1994 they reach a
high of 211 and then begin to decline until they reach 146 by ‘04.
• Debt rises again to even higher levels that become a challenge to
fiscal stability as economy slows in 2014.
Government Bailout
• Banks are bailed out by the central govt. and write off the bad
loans.
• Lack of transparency in balance sheets is a problem; see the audit
dilemma with global accounting firms.
• Efforts to create competitive world class companies remains a
problem.
• Some good successes: Lenovo, Huawei, ZTE, Hai’er
Structural Change in Industries
• Maoist Period: High growth in heavy industry
• Heavy Industry Sector was capital and energy intensive.
• Reforms of 1978 were easy for labor-intensive, low capital mfg:
food processing, plastics, garments, leather goods, etc.
• After 1995 light diversified mfg. no longer dominates
• Shift to more electronics and energy related products
Regional Patterns
• Coastal Areas Dominate from key benefits of location
• Based on foreign trade, investment and can absorb world
technologies more easily
• Coastal areas also are better endowed with infrastructure and
skilled human resources
• More experienced in light mfg., and new firms can more easily
enter.
• Contrast with the Northeast, China’s “Rust Belt”
• Coal, Steel, and Cement industries face severe stress as they
reduce production.
Shifting Regional Patterns of Industry
• Early Years,’52-’57 saw increasing concentration despite rhetoric
• GLF and later saw some decentralization of industries
• 1960s and the Third Line: Conflicting policies and a mixed
regional pattern
• Industry specific pattern vary: Iron & Steel; cement; Energy (coal
& petrol); machines
Key Regional Centers
• Shanghai
• The Northeast
• Beijing/Tianjin
• Jiangsu
• The East coast continues its dominance after reforms
Complex Patterns of Regional Industrial Growth
• Heavy industrial expansion in China during the Maoist and early
reform years
• Mixed pattern of dispersion and concentration
• Efficiency v Equity debate
• Size v Scale of Operation
• I Gain statistic indicate some converging pattern of industry
linked to population size, although this varies by industry
Infrastructure & Telecom
• Telecommunications industry is a model.
• China has very rapid growth in the 1980s & beyond as it can use
technology to “leap-frog” hurdles to advance.
• Govt. provides substantial funding & a good institutional &
regulatory framework to avoid conflicts and problems.
• Overall Govt. investment for infrastructure quickens after 1990:
for electricity, telecom, and transportation
• Under 4% of GDP and then rises to over 8% by ’98 and continues at a
high rate
Items for Discussion
Why does rapid economic growth in a transitional economy require
institutional change?
Is this a clear change in “ownership” and what does this mean?
What about the financing of new enterprise structures in a
transitional economy?
What do we mean by “regional specialization of production”? How
does this relate to the idea of comparative advantage in a market
economy?
Is the efficiency vs equity argument useful in discussing China’s
industrial location policies? If so, how?