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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?