Question number 2:

- High saving and investment (capital), developing physical infrastructure (land), human skill (labour) –
production factors
- Steady expansion of the market and open to the global economy – mechanism/system
- Revitalising an entrepreneurial society – societal spirit

Question number 1:

- Huge territory surrounded by mountains, desert, and ocean (isolation vs opening)

- Climate or rainfall imbalance demands big-scale irrigation projects (strong government, order, and stability)
- Big population or limited resources (natural endowment, comparative advantage, development strategy)
- Internal diversity and layers of authority (stability, innovation, centralization vs decentralization)

Question number 2:

Ricardo – natural endowment, comparative advantage, international trade, and development strategy

North – efficiency through time demands learning by doing and sufficient diversity (in terms of resources,
conditions, organisations and development models, etc)
Question number 1:

During the Qi State (1046 – 221 BC) of ‘salt-iron monopoly’ policy to own key resources, contracted its critical
resources out to some people to run the business, government get the benefit without raising the tax (sea and
mountain). Government intervenes in micro business.

GMT national government: nationalized Japanese industrial assets, created state monopoly: oil and metal 100%,
railway and banks 100%, electricity 67%, textile machine 60%, weaving 37% and coal 33%.

Question number 2:

The main Chinese economy was in agriculture and its natural endowment was big population, limited resources.
South-song (1127-1279) “ the peak of traditional economy “

- Intensive application of human labour to small plots of land. Every household own their land and work there.
- High yields from land, low productivity of labour. Because there are so many labours, so the productivity is
low.
- A household-based, small-scale, labour-intensive, self-sufficient, bottom-heavy economy. Small household
work on small plots of land. They put so much labour. Low specialization, and organization. So many
households at the bottom, and the top was government. There is no business economy organization. Only
one empire in the top.

Question number 3:

MING

- State policy – men farming and women weaving in household rural. Low specialization between household.
Almost all household do the same thing. It might be good for the empire, but it is not good for the economy,
thus, low motivation technology investment.
- Sea forbiddance isolated China from the outside world.
- Both policies aimed at preventing organized forces and new ideas that would threaten the dynasty
- Meanwhile, state-monopoly of business continued. All this result in a bottom-heavy economy and weak
private economic actors
- After the Song, high yield on land exclusively came from increased labour – growth without development

QING (1644-1911) fatal encounters with modern west and Japan

- There had been periodical internal crisis, reforms and rebels, as well as outside invasions throughout China’s
long history, but China’s culture prevailed
- Since 1983, China was forced to open and face the advanced outside industrial powers
- Since the opium-wars, from trade surplus to humiliating treaties, then collapse of the last dynasty (1911)
- China’s GDP reduced from 32% to 9% of the wealth total.

Question number 4:

- Household-based, small-scale, labour-intensive, low-technology, self-sufficient, “bottom-heavy” economy

- Inward-looking, suspicious of the outside world
- Fear of disintegration/disorder, respecting strong government for stability and security
- Long tradition of state intervention and state business
- Enduring tensions: state vs society, centralisation vs decentralisation, the rich vs the poor
- Survival / self-achievement / entrepreneurial spirit
- Keen on education: a poor country with reasonable human resource (skilled labour and trained officials)
Question number 1:

‘early 30-years’

Plan economy big push – state ownership, central planning, party-state Inc. Then reform to market economy –
diverse ownership, market/price, and enterprises.

The key features of the central-planning economic model

- Ownership. The state owned all large production, transportation, communication materials and facilities;
eliminated private business and property rights
- Mechanism. Centrally planned, and controlled production, covering every aspects of society
- Organisation. The whole economy was set up and run like a big firm consisting of numerous factories (china
Inc.)

The model did not work because?

Question number 2:

Big push strategy.

- High investment in a capital/resources-poor country

- Investment mainly in heavy industries
- Squeezing resources from other sectors (agriculture)
- National self-reliance, little openness

Why it failed? because it is heavy investment in heavy industries and resources-poor country not fit with national
endowment.

Question number 3:

- Comprehensive industrial foundation: structure, technology, skilled labour

- Enhanced basic health care, education and infrastructure in rural area
- Managerial experience/labour skills from commune-brigade enterprises
- Forced to reflect on the economic model and catch-up strategy
Question number 1:

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, because during Tang dynasty,
people starve to death. Heavy industry-agriculture.
- Shifting strategy from intra-system adjustment to extra-system reform (experimentation outside the plan)
- Cracking the old ideology “Emancipating the mind” and “seeking truth from facts”

Question number 2:

Household responsibility system

Many people starve to death, including family. Farmer-household. They held a secret meeting, because at
that time if u dare to do in your own way it is illegal, people will put into the jail or executed. Farmers
household came together and signed the contract “they decided to divided the plan into household” to
survive, 18years to raise their children if they are put in jail (the contract).
Household contracted responsibility system : legacies from early experience (1962-1965), land was still
publicly owned but farmer households got the right to work on a plot of it, a contract system of households,
with the responsible for their own production decision and benefit/cost, the time-limit of contracts steadily
extended so as to encourage investment

The significance:
- by 1984, grain output was 1/3 higher than 1978 within two years HRS replaced the commune;
- farmers became independent economic actors again, increased their incentive to work and invest;
- it was farmer’s own innovation, they willingly accepted and promoted
- 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 is opened the door for other innovative
undertakings

Township-village enterprises

- Legacies of early experience (‘Five-small’ commune-brigade enterprises)

- Collective enterprises ‘owned’ by township/village authority/community
- Local governments as the ‘owner’ had the motives, power, and knowledge to make it work and got the
benefit
- Variety of ‘models’: Sunan, Wenzhou, Guangdong (diversity facilitates innovation)

the significance:

- By 1986, over 15 million TVEs, employed 80 million of labour, contributed 20% of GDP, then 27.9% in 1998
- Growing out of the plan, became a significant part of the economy
 - Outperformed SOEs, demonstrated the merit of market and competitive enterprise
- Dissolved unemployment pressure: creating 126 million local non-farm job by 1998
- Promoting rural industrialisation, reducing city-countryside, and worker-farmer differentials
- Many grow into powerful enterprises today

Economic special zones

A long series of experimentations:

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.

High-tech, export-oriented in Shenzhen. GDP overtaken Hongkong. The transformation was so significant.

The significance:

- As experimentation windows, ESZs introduce foreign capital, technology, management expertise, and
international trade
- Huge gain, limited risk (small scale experimentation)
- Fighting against the nationalist, isolationist, socialist ideology at every step
- Unfair competition: benefiting from central government’s special policies
- Benefiting from domestic as well as foreign investors
- Too special to spread over China

Financial decentralization

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 right and left more profit to SOEs

- Changed government-subsidies to bank-loans; experimenting company stocks

The significance:

- The centre sacrificed financial power for local government and enterprise incentives in orer 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

Question number 3:

- Expanding market, 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 deteriorating central finance
- Extra-system reform faces old as well as new problems: SOE ownership untouched; east-west gap,
corruption, inequality, damaged social morale, etc
- Which led to Tiananmen square accident (1989), Deng in his 90s, undertook ‘southern tour’ 1992 to
revitalise reforms.
Question number 1:

- Let the market set the price (within 1992-1993, 95% of total retail goods, 90% of agriculture products, 85%
of production materials converted to market price)
- Since then, China’s economy is largely based on market price as the resource-allocation mechanism
- Creating a level playfield for firms of various ownerships
- Dual-track still remains in some other areas

Question number 2:

- Standardizing taxes applied to firms of all ownership types

- Formalising taxes into central, local and shared categories; central/local governments to share VAT at 75/25
ratio
- The centre collects the bulk of revenue and then shares it with local governments
- Strengthening central taxation agencies to implement these measures
- Expenditure responsibilities not clearly specified.

The outcomes:

- Overcoming loop-holes, broadening tax base

- Restructuring fiscal revenue between the central and local govt
- Strengthening the centre’s financial attraction ability
- Inadequate local revenue, led to decline of local services, arbitrary local taxes/fee/ sub-chargers (deepened
‘san-nong problem’)
- To gain support, the centre allowed local govt to keep incomes from land transaction (sowed the seed of
‘land finance’

Question number 3:

Measures:

- Company law
- ‘modern enterprise’ system/ ‘corporatisation’
- ‘grasp the big, let go the small’
- Tens of formal/informal methods: listing, bankruptcy, auction, merger, MBO, etc
- SOEs laid off 40% of workforce, some 15-27 million workers (mainly old aged and low skilled) ‘step down
from their posts’

Outcomes:

- Creating a level competitive playfield

- Diversified enterprise ownerships
- Almost all TVEs changed to private hands
- There emerged winners and losers
 - Empower SOEs, control the economy
- SOEs still fulfil multiple objectives

Question number 4:

Measures:

- Harmonising laws/regulations/practices toward WTO requirements

- Previous reform achievements facilitated these significant steps
- Unifying exchange rates, RMB devalued by 57% in 1994
- Over 15 years complicated negotiation

Outcomes:

- Accelerating FDI, facilitating tech transfer and enlarging overseas markets

- China today: ‘workshop of the world’ an economic superpower
- From inviting-in to going-out to Belt-and-road
- Advanced economies urge for ‘mutually beneficial conducts’ the recent US-china trade war

Still an on-going project, transforming planned economy (state ownership, central planning, party-state Inc) to
market economy (diverse ownership, market/price, enterprises).

Question number 1:

Why central planning did not work? because it has faulty assumption

- The planner: full information (knowledge)

- The society: homogenous interest, single and similar interest (incentive)

Constraint to reform:

- Information constraints: lack of experience and knowledge

- Structural constraint: diverse interest and incentives
- China is a developing country. Reform must contribute to economic growth – overcome all these constraints
(page 86)

Question number 2:

Incremental

- Not about how fast, instead of method.

- “extra-system” – starting outside, the ‘edge’, the weakest areas of the old system
- Not to tackle the old system head-on but to develop the new (TVEs)
- During the process, reform has to tolerate ‘transitional hybrid’/’sub-optimal arrangements’ (dual-track
system) so as to reduce resistance and allow the reform to start
- As the new grows (TVE and the private sector) with its merits it will gradually overtake the old
 Without damaging people’s existing interest , increase the amount of total benefit so that people gain more
from and support, the reform

Experimental

- There was no model/experience of successful reform of planned economy

- Hence learning by doing/trying
- Trial and error – low risk, great gain (economic special zones)
- Historical legacy: the Chinese communist leadership style throughout the long revolutionary experience

Distributed

Different viewpoints:

- Lin: stated-led ‘capitalism from above’

- Nee: spontaneous ‘capitalism from below’
- Oi: local corporate/development states
- Coase: state-grassroots dual reforms
- Interactive, distributed agency

Question number 3:

China’s reform process:

Because of the biased big push strategy, the coercive scissor price, the imposed communes and the unfair hukou
system, the countryside was outside the planning system, the weakest area of the economy

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 reform so they took initiative/risk to experiment HF

City workers and cadres, under the protection of dual-track system, saw no threat from HF, instead they enjoyed the
outcome, that is increasing availability and choices of agricultural products

The governments, under pressure of a growing population and a shortage economy, first tolerated the and
promoted and finally legalised the farmers’ innovation

HF thus manifested the three features of China reform: incremental, experimental; distributed

Question number 1:

Household contracted responsibility system

- Legacies from early experience (1962-1965)

- Land was still public owned, but farmer households got the right to work on a plot of it
- A contract system: households, via contracts with the collective, responsible for their own production
decisions and benefit/cost
 - The time-limit of contract steadily extended (from 1,3,15,30 years then to ‘indefinite’ long term) so as to
encourage investment

the significance:

- by 1984, grain output was 1/3 higher than 1978 within two years HRS replaced the commune;
- farmers became independent economic actors again, increased their incentive to work and invest;
- it was farmer’s own innovation, they willingly accepted and promoted
- 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 is opened the door for other innovative
undertakings

Township-village enterprises

- Legacies of early experience (‘Five-small’ commune-brigade enterprises)

- Collective enterprises ‘owned’ by township/village authority/community
- Local governments as the ‘owner’ had the motives, power, and knowledge to make it work and got the
benefit
- Variety of ‘models’: Sunan, Wenzhou, Guangdong (diversity facilitates innovation)

the significance:

- By 1986, over 15 million TVEs, employed 80 million of labour, contributed 20% of GDP, then 27.9% in 1998
- Growing out of the plan, became a significant part of the economy
- Outperformed SOEs, demonstrated the merit of market and competitive enterprise
- Dissolved unemployment pressure: creating 126 million local non-farm job by 1998
- Promoting rural industrialisation, reducing city-countryside, and worker-farmer differentials
- Many grow into powerful enterprises today

Question number 2:

‘san-nong’ means famers, countryside, agriculture.

The problems:

it started in the early 1950 when the state adopted Big push development strategy. After 10 yeaes golden age (1980)
as reform shifted toward cities/industry, agriculture was left behind again. It accelerated in 1990s: where 1994
taxation-fiscal reform left rural local govt in dire financial situation, and they used unauthorized taxes, fees, and sub-
charges to fill the gap.

After the 1980s Booming years: 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, and hence the reform focus
shifted to cities and industry. As a result, the traditional, low-margin sector agriculture received little input, while had
to fulfil heavy local taxes and fees. Farmaldn reduced and crop production declined year by year.

How bad was the situation? Immediately after the fiscal-taxation reform, rural fees increased by 38% in 1994, 51% in
1995, 21% in 1996, by 1997 sub-national fees reached 6,800 kind. A marriage registration for example would charge
over 20 kind of fees, costing a quarter of a farmer’s annual income. During 1990s, agriculture input cost rose by 34%
while output prices fell by 22.6% in 19999, the earning from crop sales per mu was -40 yuan (lost). Meanwhile,
village school and clinics coled down, social welfare, water irrigation and public transport collapsed; township had no
money to pay staff.

How to solve the issue? 2000s Rural fee-and-tax reforms

- The abolishment (low) of agriculture tax

- Financial input to the countryside: 600 billion yuan in 2008 alone, grew by 38%. To help the farmers

Question number 3: ???

Question number 1:

1st phase reforms: incentivisation measures and outcomes

- Delegating decision making to enterprises

- Profit sharing between govt and enterprises
- Particularistic negotiation and contracts
- Objective : to increase incentive, competition and efficiency.

It was failed to delegate sufficient autonomy while induced short-term behavior and deteriorating state revenue, no
longer considered an effective means for reforming SOEs.

Question number 2:

2nd phase reforms: corporatisation measures

1994: company law – modern enterprise system

1997: “grasping the big, letting go the small)

2003: established state agencies (state asset supervision and administration commission SASAC) to monitor and
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 whilst monopolise the up-stream, highly
profitable sectors such as energy and finance

The outcomes:

- Creating a level playfield, increasing competition

- Diversified and mixed ownership
- Empowering SOEs, controlling the economy, competing for profits
- SOEs still under govt control with multiple objectives

Question number 3:

Re-rise of the private sector: humble experience

1978: FDI firms

1979: individual business

1981: private business

1980-1990: household farms/TVEs

1988: private sector as supplement to socialist public economy

1997: public ownership as the core, non-state sector ‘important component of socialist market economy’

2001: private business people invited into the party

Without the private sector, China’s economy cannot be vitalised, let alone developed.

Rise of the private sector: effect on SOEs

- Increases competition pressure and forces SOEs to reform

- Sets a positive example of free market and competitive enterprise
- Revenues/taxes allow the govt to compensate interest group so as to reduce resistance to SOE reforms
- Absorbs ‘redundant’ labour from SOE reforms
- Supplies capital and entrepreneurship for transforming SOEs into private enterprises.

Question number 1:

1st phase reform – toward enterprises.

Measures: exemplar effect of HF in the countryside, profit sharing and contracting, particularistic bargaining or
contracts, still bailing out losses (soft budget constraint, hence low incentive)

1st phase reform – toward local govt.

Measures: exemplar effect of HF in the countryside, profit sharing and contracting, particularistic bargaining or
contracts, financial transfer to left-behind areas

Decentralisation outcomes:

- Considerable local or enterprise autonomy

- The centre’s revenue declined, unable to supply public goods
- Particularistic contracting resulted in unfair treatments and corruption
- Increased local protectionism and market fragmentation
- Emerging interest groups blocked formalistic or reforming public finance

Question number 2:

Fiscal-taxation reforms – measures:

- Establishing uniform taxes applied to firms of all ownership types

- Formalising taxes into central, local and shared categories. Example: central and local govt to share VAT at
75/25 ratio
- The centre collects the bulk of revenue and then shares it with local govt
- Creating central taxation agencies to implement these measures
- Expenditure responsibility unspecified

The outcomes:
 - Broadening the tax base, increasing tax revenue
- Restructuring fiscal revenue between the central and local govt
- Strengthening the centre’s financial attraction ability
- Inadequate local govt revenue which led to arbitrary local taxes or fees and extra or off-budgetary funds
- To gain support, the centre allowed local govt to keep incomes from land transaction which sowed the seed
of ‘land finance’

Question number 3:

Shadow banking – central bank

Similarity: as a bank you are intermediary financial institution, meet up the investor and borrower. It is however
not a formal bank since its outside the formal regulation system.

Investors: seek higher yield alternative to casino-like stock markets. Paltry returns from bank deposit and capital-
outflow control

Borrowers: capital hunger for social services development projects (local govt) and running business (private
sector)

Shadow bank: seek higher profit by avoiding regulations.

Risks and trends:

- These financial instruments are uninsured

- Borrower’s project are often dubious
- The central govt is not behind such investment
- Scale: figure wide-ranging from 8% to 80% of GDP
- Increase rapidly more than 20% in 2016, particularly the e-commerce companies’ financial service platforms
- The central govt has taken actions to handle the situation

Question number 4:

Local govt debt was total US$2.2 trillion at the end of 2016. Why ?

Since 1994 taxation-fiscal reform, local govt receive about 50% of collected tazes but are responsible for 80% of
public-good expenditures.

Local govt need to raise funds so as to supply local public goods, support local zombie SOEs, support
development projects. And it borrowed from shadow banks and other avenues.
Question number 1:

Measures:

- Sino-foreign partners established business joint venture

- Foreign partners brought in, and owned, the design, tech, equipment, and materials
- Exempted from import duties and enjoyed special tax concessions
- Products then exported to global markets
- Local partners contributed land and labour for a processing fee

Outcomes and conditions:

- Favorable timing: global supply chain restructuring and global market opening
- ‘reform and opening’ policy
- China’s then comparative advantage (motivated, skilled, low-cost labour)
- Started in coast open areas (Guangdong, proxy to Hongkong)
- Result: booming export and the economy accumulating capital, tech and traditional channels; facilitating
learning-by-doing

Question number 2:

China has low value-added of assembly.

Question number 3:

It was launched by China’s president Xi Jinping in 2013. Road and sea connection between Chna and other 60
countries in Eurasia and the Pacific. It encompassed 4.4 bn people and up to 40% of global GDP. Consisting of
hundreds of infrastructure projects and interlinking trade deals. Addressing infrastructure gaps, improving trade
flows, spurring economic growth, promoting social-cultural links. Host countries borrow funds from China, which
will paid back when projects complete and run by the host.

Challenges and noises:

Economic risk: some connected countries are lack experience or capacity of managing constructin project

Political risk: some connected govt and political systems are unstable

Security risk: some projects are facing terrorist threats

Need cooperation, co-ownership and localisation.

Question number 4: ???

Question number 1:

- Change the growth model from investment or export-driven to innovation or domestic consumption-
oriented
 Challenge: improving productivity and changing growth model.

- Climb up the technology ladder (along the global value chain, smiley curve)
- Overcome the decoupling effect that hinders technology transfer.
- Handling less-friendly global environment and achieve self-led innovation

Question number 2:

Demand side: vast, growing, diverse market

Supply side: human resources (education and trained entreprenurial spirit), infrastructure (research funds,
science parks, technology projects, the internet), sophisticated supply chian/ industrial ecosystem, tech transfer
thanks to opening market.

Question number 3:

China’s strength and wekaness:

Customer-focused: solving consumer’s problem through novel products and business models

Efficiency-driven: process improvements to reduce cost and times, and to enhcance quality

Govt-backed, engineering based new industries and mega project

Science-based: developing new products throug commercial application of basic research.

Question number 3:

- Demographic dividend – low-cost labor, moving from agricuture to industry or service sectors
- Tech transfer – thanks to opening policy and favorable global condition
- Economic vitality - thanks to reform undertakings and measures (from plan to market)

Question number 4:

Great transformation from central planned economy to a socialist market economy

- Overcoming constraints: incomplete knowledge, diverse interest, promoting economic growth

- Enduring tensions: state vs society, centralisation vs decentralisation, the rich vs the poor
- Late-comer disadvantage: the short-term gain from tech catch-up may block necessary institution reforms

Why did big push worked for a while but not in the long run ? increasing production input from a low base
increases short-term output but not long-term productivity. Learning divisio of labor/tech from advanced
economies without comprehensive reform has limits : late comer disadvantage

- Reform is to change not only production but also distribution; political reform cannot be left behind for long
-