Download Chinese economic reform

Reviewing 1990s: a
comparative study of
reform transition
Governor ZHOU Xiaochuan
People’s bank of China
on April 26, 2004
world bank
OUTLINE
 Theoretical
market economy
 The centrally-planned economy
 Radical correction Vs Gradual correction



Trade
Banking
Capital market
 Summary
 What
should have?
Theoretical market economy
 General
equilibrium & partial equilibrium
 Based on production function:



everybody makes his own money according
to fair market prices:
No cross-sector transfer of interest
No cross-sector subsidy
 Specific
development strategy and income
distribution are realized by fiscal policies
The centrally-planned Economy



Top priority was the industrialization (including military
industry)
prices were tools to mobilize resources for
industrialization.
The industrialization strategy realized via:




Farmers subsidized industries
consumer-goods industries subsides heavy industries
Exporters subsidized importers, ( especially heavy industries
importers)
Other controls : hurdles to the free movements of
resources: capital, labor
Radical Correction
 Unemployment
↑
 Per capita income↓
 Savings rate ↓
• Opportunity of restructuring: low
 qualified companies as borrowers: few
 Redistribution may cause instability
Gradual correction
 Reducing
the repression on agriculture,
consumer goods industries or exporters
 Find some other resources to subsidize,
giving room and time for restructuring
 Need additional resources to undertake
the reform
 Banks were needed to play intermediary
roles in relatively low standard
GATT & CMEA
 Some
idea about labor division,
comparative advantage and trade
 GATT was based on market rules
 CMEA was based on plan & negotiation
rules


Negative sentiment: USSR was a superpower
with Chauvinism
Small economies wanted to escape
Changing trade partners
 From
CMEA to EC
 Many sectors could not swiftly follow to
change the production
 Many consumers were somewhere
between sky and ground
 There should not be the same standards
Typical CMEA Foreign Trade:
Romania: Exports/ GDP
19
80
A1
19
82
A1
19
84
A1
19
86
A1
19
88
A1
19
90
A1
19
92
A1
19
94
A1
19
96
A1
19
98
A1
20
00
A1
20
02
A1
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
19
60
19
70
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
Czech External Trade
50
40
30
20
10
0
-10
-20
CZECH EXPORTS
CZECH IMPORTS
exports-imports
Russia: External Trade
120
100
80
60
40
20
0
1960 1970 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
-20
-40
RUSSIA EXPORTS
RUSSIA IMPORTS
exports-imports
Poland External Trade
70
60
50
40
30
20
10
0
1960 1970 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
-10
-20
-30
POLAND EXPORTS
POLAND IMPORTS
exports-imports
CIS Unemployment Rates
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
19
90
A
19 1
91
A
19 1
92
A
19 1
93
A
19 1
94
A
19 1
95
A
19 1
96
A
19 1
97
A
19 1
98
A
19 1
99
A
20 1
00
A
20 1
01
A
20 1
02
A
20 1
03
A1
0.00
Georgia
Kazakhstan
Kyrgyz Republic
Moldova
Russia
Ukraine
Central & east Europe:
Unemployment Rates
25.00
20.00
15.00
10.00
5.00
0.00
1990A1
1991A1
1992A1
1993A1
1994A1
1995A1
1996A1
1997A1
1998A1
1999A1
Bulgaria
Czech Republic
Hungary
Latvia
Poland
Romania
Slovak Republic
Slovenia
2000A1
2001A1
2002A1
Lithuania
2003A1
Growth rate in GDP(%)
20
15
10
5
0
-5
-10
-15
-20
-25
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Russia
Ukraine
Belarus
Hungary
Poland
Vietuam
China
Border Trade Debate in Early 90s

Reality:





Western dream





Goods: high quality, high brand
Hard currency payments
Bank settlement and finance
Formal customs inspection or tariff
Difficulty:





Goods: low quality, low brand
Trade : barter trade, contertrade,normal trade
Customs: concessionary
Payments: any currency or no hard currency
who can afford?
Who was in shortage of FX
What banks were incapable?
What the custom did?
Result: GDP down, western dream UP
Gradual Correction: financial
resources needs
•



Liberalized the prices of agricultural goods,
meanwhile subsidies to the wholesale and
industrialization
Encouraged exporters, meanwhile subsidies to
specific importers
Liberalized the prices of consumer goods, meanwhile
subsidies to heavy industries
Thus to bring immediate benefit, to maintain
reform momentum
 Sequencing the reform with finance constraint
Did China have the fiscal
resources?



Subsidy↑
Tax exemption and tax reduction↑
Poor financial discipline, low accounting
standards, slow tax reform and legislation,
corruption in tax collectors→tax revenue↓
 China
had to use other resources
 No capital to undertake the needed
reform at all fronts
2003A1
2002A1
2001A1
2000A1
1999A1
1998A1
1997A1
1996A1
1995A1
1994A1
1993A1
1992A1
1991A1
1990A1
1989A1
1988A1
1987A1
1986A1
1985A1
1984A1
1983A1
1982A1
1981A1
1980A1

1979A1
Tax Revenue/GDP China:19792003
Data sources: IFS
0.3
0.25
0.2
0.15
0.1
0.05
0
What other resources to use?

Commercial bank: Policy loans







Allowed undercapitalized companies to borrow at very
high leverage
Supported SOEs surviving in production
Supported SOEs renewing the technologies
Supported SOEs slowing down the layoffs
Supported SOEs training new skilled workers
Directly supported the fiscal overdraw and
expenditures in industries
Supported the restructuring and welfare program
What other resources?
 Stock




market
Allowed low standards of accounting,
disclosure during IPO and secondary offering
Allowed low quality companies to issue bonds
In favor of SOEs
Relieve of inflation pressure
Possible outcomes





Easier balance among development, stability
and reform
Create bank NPL for disposing in the future
Create task to rebuild the discipline and
confidence in capital market
It depends on how much Pareto improvement it
could gain
It depends on whether saving rate could be
maintained at good level
Observed results after 1990s

Positive:
•
•
•
•
•

Economic growth maintained
Export growth maintained
Employment and Workers income maintained
Savings rate maintained
Reform momentum maintained
Negative:


Banks NPL
Capital market distortion
•
•
•
•
with low standard
scandals in capital markets
Tension between government and investors
Slow openness
What happened to SOEs in
restructuring

1/3 succeeded
• partially privatized or turned to Joint ventures→
went public→ state equity enhances
however, they did not pay much to the banks!

1/3 failed
→Bank NPL
→Default of pension liability

1/3:still remain to be seen
• Low standards in product, low end of market
• Some are good, but pension burden is high
• Labor market rigidity and low mobility
Value-added output by sector:
1994-2002
percent share of total
60.00
50.00
1994
2002
40.00
30.00
20.00
10.00
0.00
state-owned or
state shareholding
collective owned foreign-invested
mixed ownership
Exports and Savings in Banks
500000.00
25000
Exports
400000.00
300000.00
20000
deposits in banks,billions of yuan
15000
200000.00
10000
100000.00
5000
19
7
19 9
8
19 0
8
19 1
8
19 2
8
19 3
8
19 4
8
19 5
8
19 6
8
19 7
8
19 8
8
19 9
9
19 0
9
19 1
9
19 2
9
19 3
9
19 4
9
19 5
9
19 6
9
19 7
9
19 8
9
20 9
0
20 0
0
20 1
02
0.00
0
Pareto Improvement: slow but
ahead
total reserves minus gold, 100 millions
tax revenues
m2/GDP
export/GDP
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
4500
4000
3500
3000
2500
2000
1500
1000
500
0
2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
Comparison with shock therapy
in banking sector





Quick raise all standard→can bank staff catch
up quickly?
Close insolvent banks → may lower the
depositors confidence → lower saving rate in
GDP
Few customers are qualified borrowers
→declined role of intermediary →less
financing for reform and development
Broad money/GDP remains low even declines
Foreign banks did not fill the gap as expected
CIS Broad Money/ GDP
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
1990A1
1991A1
1992A1
armenia
moldova
1993A1
belarus
russia
1994A1
1995A1
kazakhstan
ukraine
1996A1
1997A1
kyrgyz
1998A1
Central and east Europe:
Broad Money/GDP
19
89
A
1
19
91
A
1
19
93
A
1
19
95
A
1
19
97
A
1
19
99
A
1
20
01
A
1
20
03
A
1
0.90
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
bulgaria
estonia
latvia
lithuania
poland
Poland
Bo
sn
&
Kr
yg
yz
e
ia
ia
a
ic
in
ss
s
an
ov
ol
ra
Ru
ng
Uk
Mo
bl
ld
pu
ru
a
ia
ni
st
la
kh
Mo
Re
za
Be
a
ic
ni
en
me
ov
Ar
Sl
a
a
nd
ni
ni
bl
ma
pu
Ro
y
a
ia
ar
la
do
ua
Po
ce
th
re
Ma
Li
a
ic
ni
tv
ng
La
Hu
to
a
a
ia
ti
bl
oa
pu
Es
Re
Cr
in
in
ar
ov
Ch
lg
eg
Bu
rz
Ka
ak
h
He
ec
ov
Cz
Sl
ia
Financial Resources: M2/GDP
in Transition Economies in 2002
200.00
180.00
160.00
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00
Does China have the capacity
to solve NPL

CONDITIONS


Industrial restructuring and policy loans coming to the
end
Thanks to Asian financial crises




Changed banks’ credit culture
Basically stopped the government interventions
After 1998, NPL ratio reduced 50%
Pareto improvement can be clearly identified




fiscal revenue↑
reserves↑
Broad money ↑
saving↑
It is affordable to solve the
remaining 50% NPL
 Fiscal
resources
 Future fiscal resources by growing
economy
 Foreign exchange reserves and gold
reserves
 Moderate inflation
 Reasonable interest rate spread
 Good enthusiasm of foreign investors to
join in
Stock market grew up from 0
 China
set up 2 stock exchanges in 1991
 All precondition were not met
 Rules first or practice first?
 Equity financing were badly needed.
 Some central and east European countries
also started in early 1990s.
Preconditions

Standard
• Accounting
• Disclosure
• Corporate governance

Supervision
• Professionalism
• Fraud IPO
• Price manipulation

Institutional investors
• Maturity of individual investors

Capital market services
•
•
•
•
Accounting firms
Law firms
Rating agencies
Evaluation agencies
Preconditions

Legislation & regulations
•
•
•
•
Company law
Bankruptcy law
Security law
Fund law
 Having
good companies for listing?
 Doing wrong, government has to
compensate the innocent investors→need
resources
China reached
• Total capitalization


Domestic 2 exchanges: 40-50% GDP
Overseas market: 20-30% GDP
• Equity financing > 5 trillion RMB
• Listing companies> 1300
• Daily trade volume ≈ 2.5 billion USD


Substantially improve corporate governance
and corporate culture
Substantially help SOE reform
The liability remains

Investor claim compensations because of :





Low standard
Poor supervision
Man-made distortion
Corporate scandal
The Pareto improvement done by developing
stock market ﹥﹥ total claim of compensation.
However,
 China need to find a channel and avoid moral
hazard
Some transition economies
 Started
early
 Voucher privatization
Market capitalization/GDP
0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
1990
1991
1992
1993
1994 1995 1996
Slovakia %
Czech %
1997
1998 1999 2000
Slovenia %
Poland %
2001
2002
2003
Some other transition
economies
 Romania
 Ukraine
 Bulgaria
 Central Asian
economies
Tentative conclusions
 Gradual
corrections + financing reforms +
Pareto improvement + ex post clearance +
final transition




Realistic development of trade
Not textbook type banking reform
Emphasize equity capital market function
Solve problems with growing strength based
on economic development
Tentative conclusions

The path of China in 1990s: half designed, half
compromised



Very few economists officers had position of designning
Many officers disliked shock therapy, undermined financial
problem, believed in SOEs
If the path could be better:
• A bettr and earlier round fo tax reform
• A stronger banking reform after Asia financial
crisis
• A better negotiation with CIS and Central and
east Europe about trade
Remaining Burden: Pension
Liability
 Postponed
reform, easy up the current
fiscal balance
 Demographic trend: aging population
 Implicit fiscal deficit liability
 Does economy future provide enough
resources to meet the liability?
 Reconsider the sustainability of PAYG
What should we have done or
should have never done in 1990s?
 50%
NPL for bail-out other sectors
 10% NPL caused by low standard of law
enforcement
 Pension reform before realizing aging
trend
 15% NPL caused by poor internal control
based on mistaken decentralization
 15% NPL by real estate bubble
Thanks for attention