Global economy of China- The “Big Push” Era(week 4)

1. What are the key features of China’s economic model during 1950-1970s? Why did that
model not work?
-State ownership, Central planning, party-state.
Ownership Mechanism Organisation
-the state owned all large Icentrally planned -The whole economy
production,transportation,communication and controlled was set up and run
materials and facilities;eliminated private production and like a big enterprise
business and property rights every aspects of consisting of
society numerous factories

Why the model did not work?

 High investment in a capital/resources-poor country

 Heavy industry policy,squeezing resources from other sectors(agriculture)
 Monopolising production, marketing and distribution
 National self-reliance, little openess
 Resulted in instability, cyclical crises/adjustments

2. What was China’s development strategy for that period? Explain why it eventually failed?
Big push strategy
o Imbalance between invesetment-consumption, as well as city-countryside
o Production supressed service and distribution
o Persistent shortage of basic necessities
o Serious unemployment(soft-landing to the countryside)
o Massive misallocation of resources
o Heavy human cost(physical as well as intellectual)

3. What are the positive legacy(despite the high costs) of the socialist Big Push era for the
later(post-1978) reforms?
 Comprehensive industrial foundation: structure, technology,skilled labour
 Enhanced basic health care, education and infrastructure in rural area
 Commune-brigade enteprises(for TVEs)
 Managerial experience from economic adjustments
 Forced to reflect and re-think on the model and strategy
Week 5: Reforms since 1978(1): The first phase

1. When, under what circumstances, and how did China’s reform start?
-The 3rd plenum of the 11th central Committee(1978)
 Shifting focus from political struggle (Mao) to economic development(Deng).
 Shifting priority from SOE /industry/cities to food/agriculture/countryside.
 Shifting strategy from intra-sytem adjustment to extra-system
reform(experimentation outside the plan).
 Cracking the old ideology-“Emancipating the mind” “seeking truth from facts”

2. What were the undertakings in the first-phase reforms? Describe each of the undertakings
and explain their significances.
Household Responsibility System 1. Legacies from early experience (1962-1965)
2. Land was still publicly owned, but farmer
households got the right to work on a plot of it
3. A contract system: households, via contracts with
the collective, responsible for their own production
decisions and benefits/costs
4. The time-limit of contracts steadily extended (from
1, 3, 15, 30 years then to ‘indefinite’ long-term) so as
to encourage investment

Township-village Enterprises
Significance:
1. By 1984, grain output 1/3 higher than 1978; within
two years, HRS replaced the commune
2. Farmers became independent economic actors
again, this greatly increased their incentive to work
and invest
3. It was farmers’ own innovation, they willingly
accepted and promoted (unlike the imposed
collectives)
4. Out of the plan, incremental, extra-system reform:
countryside was the weakest area of the old system
5. HRS was the first significant step of post-1978
reform, it opened the door for other innovative
operations and organisations
1. Legacies of early experience (communebrigade
enterprises)
2. Collective enterprises ‘owned’ by township/village
authority/community (many ‘red hat’ enterprises
from the start)
3. Local governments as the ‘owner’ had the motives,
power and knowledge to make TVEs work, and got
the benefit
4. Variety of ‘models’: Sunan, Wenzhou, Guangdong
(diversity facilitates innovation)

Significance:
1. By 1986, over 15 million TVEs, employed 80 million
labour, contributed 20% of GDP, then 27.9% in 1998
 2. Growing out of the plan, became a significant part
of the economy
3. Outperformed SOEs, demonstrated the merit of
market and competitive enterprise
4. Dissolved (un)employment pressure: creating 126
million local non-farm jobs by 1998
5. Promoting rural industrialisation, reducing city
countryside and worker-farmer differentials
6. Many grow into powerful enterprises today
Economic Special Zones 1978: announcing ‘Opening’ policy
• 1979: Guangdong and Fujian granted flexible status
• 1979: establishing four ESZs (Shenzhen, Zhuhai,
Shantou, Xiamen)
• 1985: opening 14 seaport cities along the coast …….
• Entering the WTO

Significance:
• As ‘experimentation windows’, ESZs introduced
foreign capital, technology, management expertise,
and international trade
• Huge gain, limited risk (small scale experimentation)
• Fighting against the nationalist, ‘socialist’ ideology
and isolationist, closed mind-set at every step
• Unfair competition: benefiting from central
government’s special policies
• Benefiting from domestic (other provinces, cities,
ministries and state agencies) as well as foreign
investments
• Too ‘special’ to spread over China
Financial decentralisation To local governments:
• Decentralised economic decisions and contracting
financial responsibility to layers of local governments
• Local governments became active actors of reform
(promote local TVEs, attract investments, etc.)
To enterprises:
• Delegated decision-making rights and left more
profits to SOEs
• Changed government-subsidies to bank-loans;
experimenting company stocks (no stock market yet)

Significance:
• The centre sacrificed financial power for local
government and enterprise incentives so as to
vitalise the economy
• Greatly promoted local competition, innovation
and growth
• Deterioration of central finance
• Local protectionism, fragmented markets
• East (open, rich) – West (inland, poor) gap
Dual-track system • Co-existence of two coordination mechanisms: a
plan track and a market track
 • First applied to prices of production materials, then
also in bank interests, foreign exchange rates, etc.
• In a wider context, more dual-track policies: ESZs,
SouthEast development priority, ‘let some get rich
first’, ‘supercitizen treatment’ for FDIs, and so on
• Pros: protect existing interest groups, gain their
support for reform to proceed and ensure stability
• Cons: distort resources allocation, public power
involve in markets, rent-seeking (20-30% of GDP),
new interest groups
• Timing (to start and to end) is key

3. What are the key outcomes of the first-phase reforms?

• Expanding markets, rapid growth
• A ‘Pareto process’: reform without obvious losers
• A social consensus of no return to the old model
• Financial decentralisation and dual-track systems led to inflation and deteriorating central
finance
• Extra-system reform faces old as well as new problems: SOE ownership untouched; ‘the
plan’ dies-hard;corruption, inequality, damaged social morale, etc.
• Which led to Tiananmen accident (1989); and Deng had to undertook ‘Southern Tour’
(1992) to revitalise reforms
Week 6: Reforms since 1978(2) The second phase

1.What are the key undertakings of the Second-phase reform (since mid-1990s)?

What are the achievements and consequences of each of the undertakings?

1. Unifying (market) prices

Achievement:
(I)China’s economy is largely based on market price as the resource-allocation
mechanism
(II) Creating a level playfield for firms of various ownerships
(III) Dual-track still remains in some other areas
2. Fiscal-taxation reform
Achivement:
(I) Unifying and standardizing taxes applied to firmsof all ownership types
(II)Formalising taxes into central, local and shared categories; e.g., central/local
governments to share VAT at 75/25 ratio
(III)Creating central taxation agencies to implement these measures
(IV)The centre collects the bulk of revenue and then shares it with local governments

Consequences:
(I)Ovecoming loop-holes, broadening tax base
(II)Restructuring fiscal revenue between the central and local governments
(III)Strengthening the centre’s financial attraction ability

3. Enterprise restructuring
Achievement:
(I) SOEs laid off 40% of workforce, some 15-27 million workers (mainly old aged and low
skilled) ‘step down from their posts
(II) Creating a level competitive playfield
(III)Diversified/mixed enterprise ownerships
(IV)Almost all TVEs changed to private hands
(V)There emerged winners and losers
(VI) Empower SOEs, control the economy
(VII)SOEs still fulfil multiple objectives

4. Entering the WTO

Achievement:
(I) Harmonising laws/regulations/practices toward WTO requirements
(II) Previous reform achievements facilitated these significant steps
(III)Unifying exchange rates, RMB devalued by 57% (1994)
(IV)Over 15 years complicated negotiation

Consequences:
(I)Accelerating FDI, facilitating technology transfer and enlarged overseas markets
(II) China today: ‘Workshop of the world’, an economic superpower
(III)From inviting-in to going-out to Belt-andRoad
(IV)Advanced economies urge for ‘mutuallybeneficial conducts’, the recent US-China
trade war
week 7:Reforms since 1978(3): Strategy,process and Actors
1. What are the constraints on China’s post-1978 reforms?
• Information constraint: Lack of experience and knowledge (‘What/how to do?’)
• Structural constraint: Diverse interests and incentives (‘Shall we do it?’)

2. What are the (three) distinctive features of China’s reform process?

Explain.
Incremental Experimental Distributed
1. Not about speed (fast or 1.There was no 1.A non-ideological but
slow), but about method model/experience of pragmatic, trial-and-error
2. ‘Extra-system’: starting successful reform of a attitude
outside, the ‘edge’, the socialist economy 2.No more leadership-cult •
weakest areas of the old 2.Hence learning by doing 3.Trust people’s
system (e.g., HF in the and by trying motivation, let people
countryside) 3.Trial and error and spread make voluntary decisions
3. Not to tackle the old – low risk, great gain (e.g.,
system head-on (for the Economic Special Zones)
moment), but to develop 4.Historical legacy: the
the new (e.g., TVEs) 4. Chinese communist
During the process, reform leadership style throughout
has to tolerate ‘transitional the long revolutionary
hybrid’ and ‘sub-optimal experience
arrangements’ (e.g.,
dualtrack system)
5. So as to reduce
resistance and allow the
reform to start 6. As the
new grows (e.g., TVE and
the private sector), with its
merits it will gradually
overtake the old

3. Use Household Farming as an example to illustrate the features of China’s

early post-1978 reform process.

1. Because of the biased Big Push strategy, the imposed communes and the unfair hukou
system, the countryside was outside the planning system, the weakest area of the
economy.
2. The farmers received little input from the state,without welfare protection, living in
extreme poverty, even starved to death; they had nothing to lose but much to gain from
reforms,so they took great risk to experiment HF.
3. City workers and cadres, under the protection of dual-track system, saw no threat to their
interest from HF, instead enjoyed the new availability
and choices of agricultural products.
4. The government, under pressure of a growing population and a shortage economy, first
tolerated then promoted and finally legalised the farmers’ innovation (unlike Mao who
suppressed farmers’ similar undertakings in the early 1960s).
HF thus manifested the three features of China’s reform: incremental, experimental,
distributed.
Week 8

1. What were the Chinese farmers’ most effective innovations that (1) dramatically developed

agriculture and (2) facilitated rural industrialisation, respectively, since 1978?

Human responsibility system

 By 1984, grain output 1/3 higher than 1978; within two years, HRS replaced the commune
 Farmers became independent economic actors again,this greatly increased their incentive to
work and invest
 It was farmers’ own innovation, they willingly accepted and promoted (unlike the imposed
collectives)
 Out of the plan, incremental, extra-system reform: countryside was the weakest area of the
old system
 HRS was the first significant step of post-1978 reform, it opened the door for other
innovative operations and organisations

2. What were the ‘san-nong problem’, and its causes? What are the key government actions

to tackle the problem?

• It started in the early 1950s when the state adopted Big Push development strategy

• Which developed into city-countryside separation and worker-farmer divide

• And accelerated in the 1990s: 1994

Taxation-fiscal reform left rural local governments in dire financial situation, and

they used unauthorised taxes, fees and sub-charges to fill the gap

Causes

1998-2003 was the most difficult period of rural China since the post-1978 reform

• It was assumed that the countryside problem was solved and farmers were all right then

• The focus thus shifted to cities and industry

• As a result, as a traditional, low-margin sector agriculture received little input, while had to fulfil

heavy taxes and fees

• Farmland reduced and crop production declined year by year (given that land is limited in China!)

Government actions:

• A marriage registration, for example, would charge over 20 kinds of fees, costing a quarter of a
farmer’s annual income.
3. What are the recent challenges to China’s rural economy?

• Land ownership reform (‘Land finance’)

• Economy of scale ( vs technology and productivity)

• The city-countryside dual-structure

• Surplus labour: rural industrialisation vs unbanisation (in 2016: 57.4% of the population

already stay in cities/towns – there needs a balance between rural development and

urbanisation; can China get a soft-landing again in case of crisis?)

Week 9: The Urban Economy

1. What are the key measures of ‘incentivisation’ toward enterprises (1st-phase reform); and

what are the limitations?

• Delegating decision making to enterprises

• Profit sharing between government and enterprises

• Particularistic negotiation and contracts

• Objective: increase incentive, competition and efficiency

Limitation:Failed to delegate sufficient autonomy while induced short-term behaviour and

deterioration of state revenue, no longer considered an effective means of reforming SOEs

2. What are the key measures of ‘corporatisation’ toward enterprises (2nd-phase reform); and

what are the outcomes?

• 1994: Company Law; ‘Modern enterprise system’ program

• 1997: ‘Grasping the big, letting go the small’

• 2003: established state agencies (State Asset Supervision and Administration Commission - SASAC)
to control the largest SOEs (Yang qi, the ‘national team’)

• Injected 30%+ of GDP to state banks so as to write-off SOE bad loans; laid-off 40% of SOE
workforce

• SOEs retreat from down-stream, low margin, competitive markets and monopolise the up-stream,
highly profitable sectors such as energy and finance.

Outcome:

 Creating a level playfield, increasing competition

 Diversified and mixed ownerships
 Empowering SOEs, controlling the economy
 SOEs: still under government control,with multiple objectives
 The ‘market entrance’ issue

3. What are the positive effects of the rising private sector on SOE reforms?

• Increases competitive pressure and forces SOEs to reform

• Sets a positive example of free market and competitive enterprise

• Revenues allow the government to compensate vested interest groups so as to

reduce resistance to SOE reforms

• Absorbs ‘redundant’ labour from SOE reforms

• Supplies capital and entrepreneurship for transforming SOEs into private enterprises
Week 10: Taxation and public finance

1. What are the basic functions of public finance?

-the state collects (taxation) from, and distributes (budgeting) financial resources to, society.
-Taxation: the public pays the government for public goods
Budgeting: the government uses public money to distribute public goods
The public (via parliament) scrutinises and monitors the government’s budgets

2. What are the key measures of ‘fiscal contracting’ (the 1st-phase), and what are
the positive and negative consequences?
Local Governments Enterprises outcomes
•Exemplar effect of HF in •Exemplar effect of HF in • Considerable
the countryside the countryside local/enterprise autonomy
•Financial decentralisation •‘Profit sharing’, ‘profit-loss • The centre’s revenue
•‘Eating from different contracting’ declined, unable to fulfil
bows’, ‘grand financial •Particularistic responsibility – supplying
contracting’ bargaining/contracts public goods
•Particularistic •Still bailing out losses (‘soft • Particularistic contracting
bargaining/contracts budget constraint’, hence resulted in unfair
low incentive) treatments and corruption
•Increased local
protectionism and market
fragmentation
• Emerging interest groups
blocked formalising and
reforming public finance

3. What are the key measures of the 1994 taxation-fiscal reform (the 2nd-phase), and what
are the consequences?
Measures Outcomes
• Establishing uniform new taxes applied to • Broadening the tax base, increasing tax
firms of all ownership types revenue
• Formalising taxes into central, local and • Restructuring fiscal revenue between the
shared categories; central and local central and local governments
governments to share VAT at 75/25 ratio, • Strengthening the centre’s financial
for example attraction ability
• The centre collects the bulk of revenue • Inadequate local government revenue,
and then shares it with local governments which led to arbitrary local taxes/fees and
• Creating central taxation agencies to extra/off-budgetary funds (deepening ‘San-
implement these measures nong problem’)
• Expenditure responsibility unspecified • To gain support, the centre allowed local
governments to keep incomes from land
transaction, which sowed the seed of ‘land
finance’
1. ‘China’s financial system is ‘deep and narrow’– explain the meaning and the
consequences.
• Financial deepening/shallowing: the ratio of financial assets to national income,
measuring the extent to which savings being transformed into investment through
financial institutions
• Financial broadening/narrowing: the variety of financial institutions and instruments, the
range of choice for investors and borrowers(e.g., bank deposit/loan, bonds, stocks)

Consequences:
• SOEs: shifted from state subsidise to bank financing
• Bank lending to nonviable SOEs became ‘nonperforming loans’ (up to 40% of total), as a
result the banks became technically insolvent
• Unlimited low-interest bank loans to SOEs constituted soft budget constraint
• Indirectly, with huge saving in banks the public subsidised SOEs
• Meanwhile the private sector starved for capital

2. What is shadow banking? What are its functions? Who are the involved parties?Why do
they engage in shadow banking?
•Intermediary financial institution
Involver parties: Investor,Borrower,Intermedia
•… looks like a bank and acts like a bank but often it’s not a bank
• outside the formal regulation system

They engage because financial innovation under the dual-track regime and making financial
services cheaper, flexible and more widely available

• The investors: seek higher-yield alternative to casino-like stock markets, paltry returns
from bank deposits and capital-outflow control
• The borrowers: hunger of capital for development projects (local governments)
and running business (the private sector)
• The shadow banks: seek profit by avoiding regulations (e.g., loans-to-deposit caps)

3. Why are local governments cumulating somuch debt? What is the risk?

• Since the 1994 taxation-fiscal reform, local governments receive about 50% of taxes
collected but are responsible for 80% of public-good
expenditures
• Local governments in desperate need to rais3 funds so as to:
- Supply local public goods
- Maintain local economic growth
-Support local zombie SOEs
• Borrowed from shadow banks and other avenues
Week 11 opening to the world
1. What is ‘Export-processing’ practice’? What are the benefits of such a practice, and
how to overcome the ‘smiley curve’ effect?
• Firms engage in flexible export-oriented processing/assembly contracts
• Foreign partners brought in, and owned, the design, technology and materials
• Exempted from import duties and enjoying special tax concessions
• Products then exported to international markets
• Local partners contribute land and labour for a processing fee

2. What is Belt-and-Road initiative? What arethe expected benefits and potential risks?

• Launched in 2013 by China’s president Xi Jinping;consisting of hundreds of

interlinking trade deals and infrastructure projects; China has committed US$1.4tn
• Envisioning the construction of road and sea connections between China and other
65/68 countries in Eurasia and the Pacific, encompasses 4.4bn people and up to
40% of global GDP
• Ideally providing scope for win-win outcomes by addressing infrastructure gaps,
improving trade flows, and spurring economic growth
• Political risk: some connected governments/poliyical systems are unstable.

3. How to understand the current US-China‘trade war’?

• China's economy has slowed to its lowest growth rate in almost three decades,
suggesting the trade war with Donald Trump is taking its toll.
• The world's second-largest economy expanded by 6.2 per cent in the second
quarter compared with a year ago – the weakest reading since early 1992 when
quarterly records began.
• Demand for Chinese exports has faltered in the face of mounting US trade pressure.
Washington sharply raised tariffs on Chinese goods in May and, although the two
sides have since agreed to hold off on further punitive action and resume trade
talks, they remain at odds over key issues.
• The slackening of growth between April and June from 6.4 per cent in the first
quarter was also caused by waning domestic demand.
• Data on factory output and retail sales in June was more upbeat, offering signs of
improvement towards the end of the second quarter, although some analysts
warned the gains may not be sustainable.
Week 12: Productivity, Technology and Innovation

1. Why is innovation critically important for sustaining China’s economic growth?

• The portion of output not explained by traditionally measured inputs of labour
and capital used in production
• Which is due to (broadly defined) technology progress, including
institutional/organisation innovations
• TFP can be taken as a measure of an economy’s long-term technological
dynamism and growth

2. What are China’s advantages of innovation in terms of demand/supply sides?

•Demand side: vast and growing markets,diverse market niches, demand for simple,
inexpensive as well as sophisticated, luxury products/services
• Supply side: human resources, education and training facilities, research funds,
science parks and technology projects,Internet infrastructure, technology transfer from
outside, entrepreneurial spirit,sophisticated supply chain/ecosystem

3. Where does China perform well in terms of innovation, and where less well?
• Customer-focused: solving consumers’ problems through novel products and business
models
• Efficiency-driven: process improvements to reduce costs and times, and to enhance quality
• Engineering-based: designing and engineering new products by integrating technologies
from suppliers and partners
• Science-based: developing new products through commercial application of basic
Research
Week 13: Achievements, challenges and lessons

1. What are the great achievements of China’s post-1978 reform?

-From ‘class struggle as the key’ to ‘economic construction as the focus’
-From central planning to market economy
-From isolation to comprehensive opening
-From poor-backwardness to well-being society
-From ruled by man to ruled by law

2. What are the key challenges confronting China’s transformation today?

-slowing growth
-stagnated productivity
-urban-Rural Gap
-trend of Inequality
-Demographic Challenges
-Imbalanced Sex Ratio, potential docial problem.

3. What is the core difference between a market and a plan economy?

Centrally planned economy

When the government is responsible for setting the amount produced.
market economy
An economy in which goods and services are exchanged in a free market, as opposed to a
state-controlled or socialist economy; a capitalistic economy.

4. Plan economy was formally adopted in China for just over 20-years or so, why is the
reform of it so difficult, still incomplete after 40-years of efforts?

-Two inherent constraints: dispersed/incomplete knowledge and diverse/inconsonant

interests
-Late-comer disadvantage: the short-term gain from technological catch-up may block
necessary institutional changes in the long run
-Enduring tensions: state vs society, centralisation vs decentralisation, the rich vs the poor
-Reform is to change not only production but also the distribution systems; political reform
cannot be left behind for long (vested interests, ‘crony capitalism’ )
-Boundary and interaction between the state, market
and society (the state’s power vs responsibility)