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China: The Awakening Giant
Eric Hage
“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
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
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)
• China’s 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
Continued…
• Multinationals are a dominant force in
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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
What does China need to do?...
• To continue to separate business from
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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
“China’s 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
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investment
Domestic demand contributes 90% to domestic
growth
China’s economy is continental, not an export
driven one
Urban consumers worried about investments
Freer farm trade in China will hurt farmers
In long run, potentials benefits of
WTO membership are clear…
• It will force state-owned enterprises to become
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more efficient
Encourage efforts to reform China’s 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
“Can India Overtake China?”
August 2003
• Foreign Direct Investment (FDI)- fuels export led
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manufacturing industry
Investor confidence level in India is not as high as
China
China’s diaspora vs. India’s 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
The Stifling State
• China still struggles with free market reforms
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due to old communist ways
India- Fabian socialism- intended to mitigate
social ills of capitalism, not destroy it
India’s system did not prevent entrepreneurship
from flourishing; China’s did
China imposed legal and regulatory constraints
on indigenous private firms
Continued…
• China’s state owned enterprises protected
by government
• Failure of Chinese entrepreneurs in 1990’s
• Foreign investors are benefited by system
• India calls system of advantaged foreign
investors infeasible
India is flourishing
• Government stopped monopoly over longdistance 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
Why isn’t India’s superiority
reflected in the numbers?
• Late start
• Small national savings rate and less FDI than
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China
India’s ethnic and religious tensions
India’s dispute with Pakistan over Kashmir
Meanwhile, China has been able to concentrate
more on economic development
India’s growth rate 20% less than China’sremarkable
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…
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ground up approach
Indian diaspora
potentially increasing FDI
homegrown entrepreneurship
“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
The Independent Regulator Model
• known as the benchmark of institutional models
• originated in the United States
• emphasis on administrative restructuring of state
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institutions
the regulator is independent from business
the regulator must be separate from and
impartial toward the firms it regulates
Continued…
• the regulator should have political independence
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(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
The Developmental Model
• opposite from independent regulator model
• based on Japan’s postwar regulatory system
• the developmental state model tolerates
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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
Continued…
• Idea is to create “national champions”
• The model discourages “excess competition”
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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
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
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
Examples of these organizations
- National Development and Reform
Commission (NDRC)
- State Asset Supervision Administration
Commission (SASAC)
- Chinese Communist Party (CCP)
3. Bureaucratic origins of regulatory
institutions and personnel
• The backgrounds and accompanying biases
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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
4. Fragmented, ambiguous
authority of the regulator
• Level of authority are rather undefined, creating
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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)
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
2 norms that are central to China’s
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
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
Discussion Questions
• From the given information about China’s
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 author’s assessment of
India overtaking China eventually is
premature?