BGE-CASE-STUDY-17-MarchUPDATE

BGE Case Study : Degree of Capitalism in China

Group No.1 Paresh Vaishya Savio Ferrao Ravindra Shinde Sundaresh Krishnan Haresh Pinjani

BGE - Degree of Capitalism in China ITM - XMBA 25-Group 1

Agenda of the Presentation 1. 2. 3. 4. 4. 5. 6. 7. 8. 9. 10. 11. 12. Overview of Capitalism Capitalism with Chinese characteristic Rural Biased Model - NON FORMS Sector Role of Township Village Enterprises (TVE) Urban Biased Model Lenevo¶s Success Story Economic Changes in 1980¶s and 1990¶s Size of China¶s Private Sector Huawei case study - complexities of the Chinese economy Organisation for Economic Cooperation & Development (OECD) China¶s policy environment over three decade China¶s Real Story China Vs India (Chindia)

Instead there is ³Capitalist Mixed Economy´ which is a mixture of Private and Public ownership in which the state government intervenes in market activity and provides many services ‡ . Labor and Capital are owned .Degree of Capitalism in China ITM .XMBA 25-Group 1 Overview of Capitalism ‡ ‡ Capitalism is an economic system in which wealth and means of producing wealth are privately owned and controlled For example Land .BGE . operated and traded by private industrial corporation and supply of goods and services are determined by private decisions Pure Capitalism does not exist in practice.

Degree of Capitalism in China ITM . Chinese capitalism is tending toward oligarchy and political dependency on the state and it is corrupt. and selective financial controls ‡ ‡ ‡ ‡ ‡ . In the 1980s. by far. urban China gained the upper hand due to FDI. liberalization & SOE reforms When and where rural China has the upper hand. When and where urban China has the upper hand. Chinese capitalism is entrepreneurial. in the 1990s. China has grown by relying on unique.BGE . rural China gained the upper hand but in the 1990s. the policy was reversed and many of the productive rural financial experiments were discontinued.XMBA 25-Group 1 Capitalism with Chinese Characteristic ‡ Capitalism with Chinese characteristics is a function of a political balance between two Chinas²the entrepreneurial. decentralization. the most liberal policy moment. politically-independent and vibrantly competitive in its conduct and virtuous in its effects. market-driven rural China vis-àvis the state-led and oligarchic urban China. such as ownership by the local state of township and village enterprises (TVEs). was in the 1980s. context-specific local institutional innovations.

Rural household income grew substantially faster in the liberal 1980s than in the illiberal 1990s .XMBA 25-Group 1 Rural Biased Model .BGE .Degree of Capitalism in China ITM . became directionally liberal early during the reform era. The period of 1980¶s -1991 is when the private agricultural output was more than the state farming since it was more efficient the Chinese banking system channeled a surprisingly high level of credits to the private sector in the 1980s The Chinese policy makers in the early 1980s strongly. directly and selfconsciously projected policy credibility and predictability Rural China played the major role in determining the overall character and pace of China¶s transition to Capitalism GDP growth in 1980¶s was very high than in the 1990¶s.NON FORMS Sector ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Growth rate of China has been enormous since 1978 due to development of non-farm sectors vigorously and rapidly in rural China during the 1980s This demonstrates the evidence of China¶s business environment becoming liberal in the 1980¶s The political system associated with good governance.

farmtools etc.BGE . cement..XMBA 25-Group 1 Role of Township Village Enterprises (TVE) in China ‡ ‡ ‡ TVE¶s were under the preview of local government and is the example of China¶s unique innovation TVE¶s were setup in rural areas and were involved in production of iron. steel. In the 1980¶s TVE¶s gained more prominence because farmers income was stagnating and TVE¶s provided a excellent means to simulate non grain production Employment from TVE¶s rose to 28million in 1978 to135 mill in 1996 and around 30% of China¶s population was employed by TVE¶s TVE¶s trived from 1978 to 1996 mainly due to financial reforms in 1980¶s due to which Chinese banking system channeled high level of credit to the pvt sector In 1995-96 the Chinese policy makers started favoring ³Urban Cities´ in terms of investment and heavily taxing the rural sector to provide finance for the state led urban boom(SOE¶s) ‡ ‡ ‡ .Degree of Capitalism in China ITM .

credit constraints on TVE¶s increased Hence even though GDP growth rate was constant .Degree of Capitalism in China ITM . household income rate shrank due to declining income from rural business .BGE .XMBA 25-Group 1 Role of Township Village Enterprises (TVE) in China (Contd«) ‡ ‡ Rural administration was centralized .

‡ ‡ ‡ ‡ . the size of the pvt sector business was the smallest.XMBA 25-Group 1 Urban Biased Model ± The Shanghai Story ‡ In order to bring new economic reforms the Chinese economy which favored rural development in the 1980¶s started favoring Urban cities in 1990¶s The policy changes of the 1990¶s had a very heavy urban bias i. Shanghai represents the classic urban bias model because it severely restricted development of small state rural business.Degree of Capitalism in China ITM .BGE . credit allocation was restricted and taxes were heavy on the rural sector in order to finance the state led urban boom. This happened because many of the Shanghai leaders went on to dominate Chinese politics in 1990¶s It was very surprising that even though Shanghai being the richest market in China .e. The reason was clear since all tax benefits were shifted to incoming FDI¶s and state owned enterprises (SOE¶s) Shanghai GDP increased massively but private sector household income experienced miniscule growth relative to the national growth.

XMBA 25-Group 1 Urban Biased Model ± The Shanghai Story (Contd«) ‡ ‡ Since 2000 poor segment of Shanghai has lost considerable income even though country is growing at a double digit rate Shanghai city had deep rooted corruption .Degree of Capitalism in China ITM .BGE .

As an FIE. but their legal status is foreign The rise of Lenovo has so impressed some foreign analysts that a McKinsey consultant goes so far as to claim that China has the ³best of all possible models´ ‡ ‡ ‡ ‡ . Sina. Ting Hsin. 100 percent owned by foreign investors.BGE . and AsiaInfo are wholly-owned FIEs.XMBA 25-Group 1 Lenovo¶s Success Story ? ‡ ‡ In 2004. a computer maker based in China. But the real corporate control and equity holdings of the production and technology development of Lenovo actually reside elsewhere²in Hong Kong. Lenovo.Degree of Capitalism in China ITM . identical to Lenovo They are Chinese to the extent that their managers and owners are ethnically Chinese. UTStarcom. Lenovo came under the jurisdiction of the Foreign Equity Joint Venture Law or the Wholly Foreign Equity Law. acquired the manufacturing division of IBM This is the original firm founded in 1984 under the Chinese Academy of Sciences (CAS).

heavy taxation was accompanied in the rural areas by the withdrawal and rising costs of basic government services .Degree of Capitalism in China ITM .BGE .XMBA 25-Group 1 Economic Changeover in 1980¶s and 1990¶s ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ One of the most important hallmark of a market economy is the role and magnitude of private sector In 1980¶s GDP growth rate was rapid resulting in fast personal income growth improving income distribution and declining poverty and illiteracy In the 1980¶s the economic policy was progressively liberal in rural areas as access to finance by private sector improved and rural entrepreneurship was vibrant In 1990¶s GDP rate was indeed rapid but implication were adverse due to reversal of many earlier policies Now the emphasis was on industrial policy and SOE and urban sector Private sector in rural china collapsed and pvt entrepreneurship stagnated due to weak financial system and steep rise in poverty and illiteracy was observed Chinese economy moved from 1980 era of entrepreneurial capitalism to 1990¶s era of state led capitalism which thrived on oligarchic brand of capitalism China moved from directional liberalism of 1980¶s towards directional illeberalism of the 1990¶s In 1990.

BGE . Second is that fixed-asset investments remain substantially controlled by the state The third reason is that in a poor country. but it is deeply problematic as a measure of the evolving policy environment. First. There were several advantages to using fixed-asset investment data as a measure of China¶s evolving policy environment.It shows that this is the correct measure to assess the size of the private sector in China. the data are remarkably consistent across different reporting sources.Degree of Capitalism in China ITM . by Chinese standards of statistical reporting.XMBA 25-Group 1 Size of China¶s Private Sector ‡ ‡ Analysts distinguished between two types of measurements²output-based and input-based measures of the size of China¶s private sector. The output-based measure . A better measure of the changes in the policy environment is based on an input²fixed-asset investment capital. capital is scarce relative to labor ‡ ‡ ‡ ‡ ‡ .

Mr. Huawei came into news as a result of a lawsuit against the firm in 2002. to illustrate the myriad complexities of the Chinese economy. ‡ ‡ ‡ .complexities of the Chinese economy ‡ ‡ ‡ ‡ One of the largest private-sector firms in China. is in technical violation of many of these regulations. by virtue of the fact that it is a private-sector firm. was told that Huawei would only redeem his shares at the original 1-to-1 ratio. It is all but certain that Huawei. The case was filed by Mr.Degree of Capitalism in China ITM . In addition. but the company has never issued any share certificates explicitly recognizing their ownership. who had accumulated substantial shares in the company. Upon leaving the company. Huawei mandated that all of its employees purchase shares. one of the earliest employees of the company. Liu.XMBA 25-Group 1 Huawei case study .BGE . Chinese financial regulations have stringent restrictions about issuing shares to employees. Liu Ping.

First.9% in 1990 Their methodology involves two steps.60. The share of the non-state sector in industrial output value was 68. The database covers 1.6% in 1988 to 8. individual investors.Sean Dougherty & Richard Herd in 2005. The second step is to classify all those firms in the nonstate category as those with more than 50 percent of share capital held by legal persons.Degree of Capitalism in China ITM . compared to 27. the non-state sector only accounted for 21. they divide the firms into state and non-state firms.90 % in 1998 Gross Output Value of Pvt Sector as a Ratio to the SOEs increase from 7. and foreign firms.000 Industrial Firms between 1998 & 2003 Their Conclusion ± Pvt Sector contributed 52.4 percent in 1997.XMBA 25-Group 1 Organisation for Economic Cooperation & Development (OECD) ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Some scholars have used the state and non-state categories of firms as a way to assess private-sector development in China.30 % of the Industrial Value in 2003. As per National Bureau of Statistics (NBS). .BGE .6% in 1989 & 9.2 percent of industrial value-added in the same year Study conducted by OECD Economists .

‡ Legal-person shareholding firms: . profit of 6. the size of the indigenous and foreign private sector among the largest firms grew from 0 percent to 38.Degree of Capitalism in China ITM .7% in 1998 & 28. Motor Corporation Limited (SAIC Motor) .9% in 1998 & 20. owned and operated by two of China¶s largest SOEs.8 percent.The percentage shares of FIEs were about 1.These firms accounted for 11.30% of the Output Value Indigenous Private-sector Firms vs Foreign Firms: .The Indigenous Pvt Sector Firms produced an approx.55% in 2005 .Between 1978 and 2001.They include subsidiaries of Daqing and Dagang oil-fields.6 to 2 times the percentage shares of indigenous private-sector firms .BGE . .Share of Foreign Invested Enterprises (FIEs) 11.8% in 2005 than the indigenous private sector at 22 percent ‡ .XMBA 25-Group 1 Organisation for Economic Cooperation & Development (OECD) « Cont.

5 1990-92 1993-01 2002-05 Real Annual Growth : FAI : All Pvt.9 21.7 4.5 9.1 8.4 19.3 9.6 1.5 14.6 11.7 5.4 7.3 5. = Share of Equipment Purchases : All Pvt.6 29.3 11. = Rural Pvt.8 4.1 25.3 28.2 19.1 23. = 34.9 5.1 13.5 9.1 2.8 13. = Rural Pvt. = Rural Pvt.Degree of Capitalism in China ITM .8 25.3 39.1 26 6.BGE .1 5.9 14.9 19. = SOEs = 19.4 . = Rural Pvt.8 12.9 17. = Pvt to Share ration of FAI: All Pvt.XMBA 25-Group 1 Size of China¶s Private Sector(Contd«) Fixed Asset Investment Measures of Pvt Sector Development : 1981-89 Pvt Share of Total FAI : All Pvt.8 17.

established its rule ‡ The primary difference between the two decades is the privatesector policies in rural China .Degree of Capitalism in China ITM .XMBA 25-Group 1 China¶s policy environment over three decade ‡ That baseline is China of the Cultural Revolution from 1966 to 1976. . headed by Hu Jintao and Wen Jiabao.BGE . a period during which Chinese politics can be safely described as ³nasty.´ when central planners exerted control over economic policy after the Tiananmen crackdown . brutish and short´ ‡ The reform era is broken down into four periods in the table: .2002-2005: period a new leadership.1993-2001: The 1993-2001 period carries the unmistakable policy stamp of Jiang Zemin and Zhu Rongji .1981-1989: period was the era of Hu Yaobang and Zhao Ziyang.1990-1992: is often described as the ³Tiananmen interlude.

China¶s economic achievements were a result of pvt sector developments. pvt ownership. financial liberalization and property rights security .they observed that economic policies of china were second best after Norway and USA. economic agents-financial liberalization.XMBA 25-Group 1 China¶s Real Story ‡ in 2004 wall street journal published an article based on surveys conducted by a number of economists who actually believed that china would overtake USA in 75years. FDI etc. security of property rights. poverty were very less Pvt sector development was very vigorous in china¶s rural areas and broad based in the 1980¶s but the same languished in the 1990¶s . However referrals to policies. institutions. poverty and illiteracy decreased in 1980¶s however these increased in 1990¶s. ‡ ‡ .exports.BGE .house hold income.Degree of Capitalism in China ITM .economists based china¶s growth on GDP . education.

Growth of TVE¶S. decline in poverty and illiteracy which was a closer measure of economic well being of an average Chinese person than GDP figures.XMBA 25-Group 1 China¶s Real Story(Contd«) ‡ Lenovo and Huawei stories clearly indicate that while it was easy to get all facts right about Lenovo as a company ( since base of company was Hong Kong and its policies allowed company to disclose a lot of information about itself).Huawei being a Chinese pvt sector company could not give any basic info about its ownership status. ‡ .BGE . Even though china¶s pvt sector produced 71. managed to command a substantial advantage in a hostile political environment.Degree of Capitalism in China ITM . TVE¶s were solely responsible for increase in household income. personal income.2% of china¶s industrial output it was very difficult to obtain details about its companies in the pvt sector as details on ownership rights were very vague. TVE¶s were superior to purely pvt firms since they had an advantage of political protection provided by local government and biased financial system they managed to access capital as their borrowings were guaranteed by the state.

In the 1990¶s china reversed much of its financial liberalization.XMBA 25-Group 1 China¶s Real Story(Contd«) ‡ In the 1980¶s financial liberalization took place in the rural part of china.This resulted in incentive effects of pvt sector development.BGE . agricultural bank of china approved loans for Chinese pvt sector. presidents bank of china. ‡ . Chinese leaders framed policies to assist pvt entrepreneurs and also allowed pvt sector entry into financial services sector. Financial institutions like peoples bank of china. china central bank.Degree of Capitalism in China ITM . thus restricting growth of china¶s indigenous pvt sector and favored urban sector. financial liberalization being reversed and hard won credibility of the communist party of 1980¶s was negated.

Even for administering immunization shots. For this economic success rural china paid a heavy price. ‡ . Current political leaders of China Hujintao and Wen jiabao are now rethinking the policy model of 1990¶s and have signaled an intention to return back to the directional liberalism of the 1980¶s.sky scrapers and urban amenities in Beijing and Shanghai.state also increased charges for basic amenities like education and health. Result was urban boom.These leaders have now revived Policy emphasis on rural areas.These positive reforms bode well for China as these political reforms will help China return to a sustained and welfare-improving growth mode. since rural tax burdens increased . begun to address massive problems in the social sector .Degree of Capitalism in China ITM .BGE .and this was not reflected in the GDP which was still climbing up in the 1990¶s. Result was approx 30 million and is the most long lasting & damaging legacy of 1990.introduced financial reforms.XMBA 25-Group 1 China¶s Real Story(Contd«) ‡ Growth model of 1980¶s was to finance state-led urban china by heavily taxing entrepreneurial rural china. This was unveiled at the 17th party congress in Oct 2007.

China Vs India (Chindia) Source ± IIF .

China Vs India (Chindia) Source ± IIF .

China Vs India (Chindia) .

China Vs India (Chindia) .

China Vs India (Chindia) .

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