FIN 396T/ECO 375 The Chinese Financial System
What can we learn about the Chinese economic system and the Chinese financial system.
Book 1 (part I): pp. 1-59
- The construction of Chinese highways is not necessarily for the purpose of opening up the country or to encourage development, as might have been the case in the US. (p. 8, 9). Note that there are fewer roads to the west (p. 7). Note the comment on p. 15, 16 regarding the Asian financial crisis and road building. Note also the historical background of road building and public works.
- Note the imaginative use of cars/buses to thresh grain (p. 10). Note that this happens in India, as well.
- Labor mobility and flexibility (p. 11, p. 14, p. 33). People are moving mostly to the southeast and from rural life to urban life (p. 7). “They serve on construction crews; they do roadwork; they spend time on factory assembly lines.” (p. 11)
More evidence of rural to urban migration on p. 32 when the author talks about Gao Linfeng visiting her grandmother.
- Lack of space in urban areas. “The law requires most citizens to be cremated, only outlying rural regions are allowed to conduct burials.” (p. 12)
- Entrepreneurship and new businesses and industries (p. 16).
- For students to look up: even though there were a lot of inventions, what were the inventions used for? Not for practical ends, according to Rong Gao.
- Informality in dealing with automobile accident liability (p. 18). Informality in pricing hitchhikes. (p. 32)
- Cheap labor and corruption. (p. 41).
- Thirst for practical education (p. 47)
- Desertification in the north (p. 54); the need for water, which is solved by taking water from the South. Reduction in living space outside the South/Southeast.
- Myopia of local population (p. 56); disconnect between individual needs and broader social needs of sustainability. Implied need for state intervention.
Book 1 (part II): pages 6-122
- Note on the opium trade; it was forced on the Chinese by the British who were importing large quantities of tea from China and wanted a commodity that they could export to China to pay for the tea. This was opium, which was grown in India – a British possession at that time – and was forced on the Chinese. (p. 61)
- “The Communist planned economy didn’t create private consumers… Chinese factories turned out trucks and buses.” This is the nature of planned economies. (p. 62)
- State control of business and technology transfer (p. 63)
- How AMC worked out the management of the joint venture with Chinese companies. There were two sets of management, each with its own culture, goals, and values. This is relevant in terms of the problems of joint ventures and private equity deals. (See the readings on private equity.)
- Non-competitive industries to increase state profits (p. 64). This was necessary in the beginning so as to create a smooth transition from a planned economy to a market economy. However, this is still true to a certain extent in particular sectors.
- Cheating foreign partners (p. 65). “…Chinese parts suppliers who were supposedly exclusive to Volkswagen, and then they worked out deals on the side.” See Mark Turnage, “A Mind-Blowing Number of Counterfeit Goods Come From China,” June 25, 2013, http://www.businessinsider.com/most-counterfeit-goods-are-from-china-2013-6
“Supply chains for most western companies now stretch into and throughout China, encompassing hundreds and thousands of suppliers who provide the necessary ecosystem for this scale of manufacturing.
The same ecosystem also supports counterfeiters, whether directly (leakage of product out of a legitimate supply chain), or indirectly (drawing on local manufacturing expertise and suppliers to set up illegitimate manufacturing sites). The reality is that by outsourcing to China many companies lose control of their own supply chains.
- Reportedly, they paid a financial settlement to Volkswagen, which decided not to sue. This might (or might not) reflect lack of trust in the operation of the courts. See, for example, Ryan Ong, "Tackling Intellectual Property Infringement in China," China Business Review, March 2009, and the case of Schneider Electric SA. http://www.chinabusinessreview.com/tackling-intellectual-property-infringement-in-china/
- Development zone – new cities built from scratch (p. 68)
- “the average age of a company employee was twenty-four.” P. 69 and p. 70. This is sometimes known as the youth dividend. However, the situation with respect to China’s young population is fast changing.. See articles on Chinese demographics on Blackboard.
- SOEs competing – they don’t! p. 70/71. The difference between SOEs and private companies. See also Sinomaps on p. 103 and entrepreneurial truckers on p. 104
- “Carrying freight south from Inner Mongolia..” and also transportation of cotton from Xinjiang to Jiangsu, with finished clothing making the reverse trip (p. 105/106). The geographical aspects of development in China. Raw materials transported from the West to the South-east and finished goods going back. Classic exploitation strategy of colonies (cf. Indian cotton and Manchester mills).
- P. 75. Trucks stranded probably because of water in the gasoline. Adulteration and quality of products. Big problem in China, see e.g. story about Sanlu group milk adulteration in 2008. (This is probably common in third world countries due to insufficient regulation and implementation of laws, see the case of India, http://articles.timesofindia.indiatimes.com/2012-01-10/india/30611460_1_samples-milk-powder-central-food-laboratory)
- East-West divide in development (p. 78) Artificial forced investment. http://content.time.com/time/photogallery/0,29307,1975397,00.html, and http://vimeo.com/51333291). Read Michael Pettis’ article about excessive investment and insufficient consumption being a result of the financial repression.
- Microfinance is traditional and wasn’t discovered in the last part of the 20th century! P. 81
- P. 82. Forced mobility is nothing new for the Chinese; this also occurred under the Qin (with the settlement of Han peoples in the West and the South).
- P. 83. In ancient China, race was essentially cultural. Cf. Martin Jacques. And the discussion of Genghis Khan as a Chinese person on p. 85.
- P. 91: the destruction of Chinese cities; cf. the movie, A Still Life and the Three Gorges Dam.
- P. 92; preference for males even in the post-Communist era.
- P. 101: the invention of the compass. See other Chinese inventions and Chinese economic life during the Song dynasty at http://en.wikipedia.org/wiki/Economy_of_the_Song_Dynasty
Book 2 (Part I): 127-177
- P. 128: the writer signs a lease for the apartment; this is evidence of a functioning legal system. Perhaps violations of the lease may not be able to be dealt with in court, but still the parties are sufficiently confident about this that they are willing to take the trouble to sign a lease. On p.138, we also red about books with template-style legal agreements; again, this is evidence that people believe in legalities.
- P. 129: there are no restaurants or other shops to spend money in San Cha; of course, this is a particularly remote village, but still there is probably a paucity of commerce of this sort in the rural areas. All of this supports a high savings rate.
- On the other hand, we see that the villagers are growing cash crops in addition to the food that they need. This suggest some kind of a market. However, this market is not of the type of a rural fair. Trucks come from the cities to buy the villagers’ harvested crops. The villagers clearly have no marketing cooperatives that would help them get a good price for their fruits and nuts.
- P. 134: Wei Ziqi buys use rights. This suggests that there is some kind of a market for the use rights of land, although it is unlikely that Wei Ziqi will be able to use these rights to get bank loans.
- Wei Ziqi seems to be pretty entrepreneurial; he is always looking out for business opportunities. But it’s probably not only Wei Ziqi; consider that there are television programs that cater to such people who are looking for business opportunities. I remember seeing such a television program in 2012 in Xi’an, myself. On p. 137, Wei Ziqi has plans for raising money. Again, this might be a special case.
- There are several examples of socialized risk-sharing and consumption smoothing. For example, on p. 162, we are told that when there is a wedding, the gifts are in cash, to help pay for the wedding. There is even some money left over, to help the married couple set up their household. Then, on p. 175, Wei Jia’s relatives coming and give his father money to help him pay for the hospital expenses.
At the same time, we are told that Wei Ziqi has bought private insurance, so some marketed insurance is clearly available. But there is no national health insurance.
- In this context, we also see the difference between rural residents and urban residents. Rural residents have to pay cash for a medical emergency; if not for Peter Hessler’s access to an ATM, it’s not clear where Wei Ziqi would get hold of the money. The situation makes it clear that rural residents need insurance and other financial services; this is a big difference between the rural areas and the urban areas.
- We also see that most transactions are done in cash – even in the hospital, there’s a lot of cash floating around. From the description of the cashier, it’s clear that it’s not only Wei Ziqi that’s using cash.
Book 2 (Part II): pp. 178-224
- P. 179 lack of formal insurance means that villagers insure each other cooperatively.
- P. 182: guanxi – connections lead him to people that Wei Ziqi can do business with. Later on, on p. 195: we see that Wei Ziqi obtains funds from his relatives, just like in the US. This is another example of informal finance. In Wei Ziqi’s case, in contrast to the case of US entrepreneurs, he doesn’t have any alternatives.
- P. 184: in imperial times, land was leased or pawned, which changed after the Communist takeover (see slides on Rural Finance). Post-communist takeover, farmers were given control over the land that they tilled and the production thereof, which generated production incentives and consequently, increased rural production. In the 1950s, these land titles disappeared and, as a consequence, production dropped, as well. (p. 186)
- P. 187: the failure of the commune system because of the lack of possibility of personal gain. After 1978, Deng Xiaoping introduced the household responsibility system, which helped the Chinese economy transition into a market system; farmers got to keep any excess over a pre-determined amount, which gave them an incentive to produce.
- P. 187: political and economic development theories led to the prioritization of urban development over rural development. In urban areas, residents were given rights to what was built on the land, even if the land itself belonged to the government. This right could be bought, sold, leased or mortgaged, which helped the development of the real estate market.
- P. 188: in the rural areas, on the other hand, residents could not buy or sell farmland and the farmer himself couldn’t mortgage it to raise funds. His house could not be used as collateral, either. All he has is the right to till the land on a long-term lease. This keeps people on the land because moving away from the land is tantamount to giving up the lease. Hence there's a lot of underemployment in the countryside (p. 189). Furthermore, if the farmer or other rural resident needs to borrow money, he needs the support of the village authorities, who are the ones who have power.
- Village governments (p. 188) get to decide whether to acquire the land for development on the basis of eminent domain. This leads to cheap expropriation and excess development, with most of the proceeds of the sale going not to the farmer, but to the village/town government.
- Although earlier we talked about the author engaging in the writing of a contract with a villager, we see here that neither of them expects to be able to enforce the contract in court. As Hessler says: As long as I had good relations with eth Weis, I could trust the contract, but it would never hold up in court.
- P. 193: Problems with intellectual property rights means that foreign investment will be affected, particularly where intangible assets are being transferred. (Cf. the Chery)
- Prior to the second decade (as we will see later when we talk of payment mechanisms), most people used cash to pay for purchases, even something as large and as expensive as a car! On p. 207, we see that Wei Ziqi’s building project puts money into peasants’ pockets and they use that to improve their own houses. They didn’t have the possibility of borrowing money. Of course, in this case, even if the possibility of borrowing had existed, they might not have borrowed, since these wages seem to have been something of a windfall!
- On p. 208, we see that even though the Communist Party controls the economy, most people do not belong to the Party, only 5%. This was true in 2006, as well, as can be seen by the article in the NY Times written somewhere around 2006 (http://www.nytimes.com/ref/college/coll-china-politics-002.html). However, contrast this with the recent Economist article (http://www.economist.com/news/china/21596994-party-membership-does-not-necessarily-mean-better-job-prospects-rushing-join) that notes that about 40% of students are now members of the Party! Strangely enough, party membership does not seem to result in better jobs, though perhaps people think so..
- Towards the end of this section, around p. 219-221, we see glimpses of what Chinese education is like. To quote, “That’s the saving grace of Chinese education – people sincerely care, and their faith in learning runs deep.” And then in the next para, we see “But if the strength of Chinese schooling consists of good intentions, the weakness lies in the details.” On p. 221, we see that Chinese primary school education believes in focusing on detail, memorization and less on creativity, which works well for subjects like engineering, but doesn’t lead to innovation. This may be related to the lack of belief in intellectual property rights that we saw above.
Book 2 (Part III): pp. 225-276
- P. 225, p. 268: importance of ad-hoc grants from the center for regional development and their importance for business growth; the interaction of party membership and local political power with business investment. Connection between this and the current fiscal system of discretionary revenue transfers from center to state (see slides on fiscal decentralization). Campaign to Develop Modern Agriculture – more discretionary spending (p. 273)
- Signaling through cigarettes, and guanxi through cigarettes – p. 232-233 (http://en.wikipedia.org/wiki/Information_asymmetry).
- Importance of state-owned enterprises for revenues and conflicts with general health.
- Persistence of collective labor, even in 2005! P. 234.
- Lack of a proper market for walnuts, which implies that farmers are going to get less for their products. Similar to the scenario in p. 129. Lack of a convenient way of obtaining information regarding walnut prices at the national level, which would have helped farmers to get better prices. See http://www.economist.com/node/9149142 for the impact of better market and price information on fishing practices in India.
- P. 243 – the importance of guanxi for developing a successful business. Techniques for transferring information credibly.
- Negative externalities – trash (like pollution), p.250.
- “Contracts are common, but they are worthless.” P.250.
- The Shitkicker fails to get a loan even for a project that seems to be worthwhile! (p. 251)
- Local officials benefit from development (p. 251).
- Provision of public goods – good road, a cell phone tower, cable television. Not clear what the process is., p. 252
- Product market price fluctuations driven by regulation and enforcement waves. P. 252.
- Problems with information asymmetry in the used car market – a car that’s been in an accident, pp. 257- 260.
- SOEs going bankrupt (1986 bankruptcy law), p. 257.
- Cash payment for a 15000 元 car.
- Development of markets for new products due to increasing wealth – computerized name analysis, p. 264.
Book 3: Part I: 281-325
- Single product cities (p. 284, 285):
- Xiaxie: Playground equipment
- Qiaotou: Buttons
- Wuyi: Playing cards
- Yiwu: Plastic drinking straws
- Songxia: Umbrellas
- Yongkang: Scales (for weighing)
- Fenshui: pens
- Datang: socks
- Shengzhou: neckties
- Shangguan: tennis paddles
- Longwan: faucets
- Rui’an: automobile engeine accessories, brakes, steering systems
- Wenzhou: shoes
- The importance of Special Economic zones: Xiamen, Shantou, p. 300, 301
- The importance of geography and diaspora (p. 292) in the development of the Wenzhou area.
- Development zones with infrastructure provided by the government, as well as attractive tax breaks.
- The importance of expressways; Boss Gao and Boss Wang hope to use their location and proximity to the coast to obtain a price advantage, p. 302. See http://www.thomaswhite.com/global-perspectives/toll-roads-in-china-speeding-up-growth/ for information on financing of highways. The development of the Jinliwen Expressway in 2006, leading directly to the Lishui Economic Development Zone.
- Intellectual property rights or lack thereof: the dissemination of blueprints for the bra-ring machine, p. 300-303.
- Migrants arrive to work in the EDZs (p. 305)
- Provincial government investment in the EDZs – the Lishui government invests $8.8b in infrastructure from 2000 to 2005. Why? The basic strategy is: Prepare infrastructure, sell land-use rights at cut rates to factory owners, and grant tax breaks for initial years of production (so as to collect taxes later on). P. 307
- Arable land converted to manufacturing areas, p. 305.
- Human cost of industrial development, liver damage, risk of stillbirths, loss of sense of smell, pollution problems. p. 307.
- P. 315: Boss Wang wants to hire women – they are less trouble, but the one-child policy and male-child preference has increased the relative supply of men! Imbalance.
- Legal minimum wage exists (p. 320), 3.5 元 in Lishui; no nationwide standard. Workers are sophisticated – the equilibrium wage increases with the dangers of the job; pleather work pays more.
- We don’t know yet where entrepreneurs in the development zone get their financing; rumors that there is foreign investment, but this is probably not true.
Book 3: Part II: 326-367
- P. 327, we hear about young people leaving the village and sending back money. We are not given this information, but there must be remittance systems set up to accomplish this.
- P. 328, we are told that bosses don’t want workers in their forties and fifties – this may simply be that employers prefer younger blue collar labor, but it also means that experience is not relevant; even though in the case of Lishui, it’s not clear that the older workers have any relevant experience. But the fact that experience is irrelevant implies a certain kind of industry.
- Yufeng Tao is very entrepreneurial. We see time and time again, Xiao Long, Master Luo, the bosses, all of them are interested in setting up businesses – a very entrepreneurial environment. But this may simply be because we’re talking about Lishui. Beijing is probably very different, with people looking for stable government and SOE jobs.
- The travelling troupe and the Lishui Yashun bra rings company are both small businesses, but there are some interesting differences between the two..
- P. 339: Government officials have their hand out – petty government corruption.
- P. 339: the bosses have few bank loans; you need to have contacts (guanxi) or you need collateral or you need to grease palms – if you don’t have any of these, you don’t get loans! Makes it difficult for entrepreneurs. Small-level angel funds/venture capital funds did not exist at this time and/or were not efficient or widespread. We’re told, though, that Boss Gao had small bank loans – not clear how he got them!
- P. 340: Interesting comment regarding gifts like cigarettes being transferable currency.
- P. 343: this whole section (Guanxi is logical) is very illuminating and it explores the interaction between fiscal decentralization (there was relatively little money coming from the central government, they can’t issue debt), politics (every five years you change the local government officials), land use rights and the real estate market. Property taxes are an alternative to the current system, but that would involve too much change, too rapidly!
- A concrete example of how the system works with the Yintai development in Lishui.
- We also see how informal finance works – the Yintai development is funded by lending from private investors, though this is illegal.
- P. 352: the book “Square and Round” talks about how to “lie profitably, manipulate co-workers, and generally behave like a post-communist Machiavelli.” This is connected to my comments on Venture Capital and Private Capital in China – how there are no intellectual property rights, larger companies prey upon and style ideas from smaller companies – the same sort of thing that is happening in the bra ring industry – all of this makes employment contracts, as well as financing very difficult.
This is also connected to the discussion on p. 364/5 about whether Chinese companies can move beyond low-margin products to industries that require creativity and innovation.
- P. 355, 356: one difference between Chinese towns and American frontier towns – there are no institutions like churches or newspapers in Chinese development towns.
- P. 356/7: Corruption and capitalism – police officers investing in radar for speed traps and getting loans from private moneylenders for the purpose.
- P. 358: as soon as business gets bad, the bosses cut Master Luo’s salary – this indicates wage flexibility. While this is not so good for workers who are currently employed, it makes it more likely that employers will be willing to take on employees.
- P. 363: the point is made once again, that there is no rule of law: “nobody cared about legal contracts or predefined protocol.”
Book 3: part III, pages 368-415
- P. 372: intense secrecy to prevent workers stealing clients; a bit of the same problem as with start-ups, everybody stealing from everybody else – or trying to.
- P. 377: Tankeng Dam project; another instance of expelling people from their land. Fifty thousand people displaced, most of them not paid proper compensation.
- P. 378: 70% of electricity consumption in Lishui is industrial, compared to 30% in the US. This is partly because Lishui is industrialized, but Peter Hessler seems to think that this is also because the standard of living is low. Investment contributes more to GDP than consumption.
- P. 380: most of the dismantling of Baishan was done by freelance scavengers – cf. the situation in Still Life.
- P.383: evidence of resourcefulness – Old Tian switching from farming to watch-repair to bra-ring making. Similarly, everybody wants to start their own businesses.
- P. 385: the tollroad seems to be operating on the build-operate-transfer model of public-private partnerships. Most probably, local officials also got a cut.
- P. 391-393: Not sure how this fits into the finance, but it sure fits into the political strategy of the government – dealing with displaced people: keep them focused on minutiae, on details.
- P. 405: Boss Gao signs a contract for factory space.
- P. 406: The Taos sign contracts that are unenforceable – yet they seem to have some function.
- Master Luo has to save in order to start a business, he can’t get a loan.
Book 3: part IV, pages 417-424
- P. 417: most of the $900m. needed would come from loans -- this is an example of how subprovincial governments manage to borrow in spite of legally not being allowed to borrow.
- p. 419: the Wenzhou disaster -- shadow banking went into high gear in Wenzhou, but spiralled out of control and led to crisis and on the personal front, suicides.
- p. 420: liberalization of rural land-use rights, of the sort that seem to have been implemented in Anhui in 2013.
- p. 421: The government tried to increase domestic consumption, since it was needed, after the 2008 global crisis. But this seems not to have lasted very long.