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116 Cards in this Set

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  • Back
Extra Budgetary Funds
Fees collected by public institutions and administrative agencies + contributions to social insurance funds. Total Revenue = Budgetary revenue + Extra-budgetary revenue
dominant form of foreign investment and technology transfer in China. China’s FDI to GDP ratio is more like Malaysia/Thailand/Philippines: 4-6% typically rather than Japan/Korea/Taiwan (1-2%)
Financial system breadth
Variety of financial institutions. Chinese financial system has depth but not breadth
Financial system depth
Financial assets as % of GDP
Fiscal contracting
System of dividing govt revenues between central and provincial govts from 1980 – 1993. High marginal revenue retention rates; intended to be long-term (5 years) to minimize renegotiation
Five-Year Plan
part of central planning system where the government exercises control over investment. Govt thus comes up with five-year and annual plans to set priorities for the economy and also decides on specific projects to allocate resources to.
Floating Population
About 144m people are “floating” because they are not allowed to settle. They face employment restrictions, limited access to schools/healthcare. Only form of insurance is that they still have rights to land back home
Foreign Exchange Reserves
: China’s official foreign exchange reserves were valued at over US$1 trillion by the end of 2006. Part of an Asia-wide phenomenon: countries that do not want their currencies to appreciate vis-à-vis the U.S. dollar.
Continental economy
an economy that is relatively less dependent on foreign trade and less vulnerable to fluctuations in foreign trade because its economy is large and diverse, producing a large range of goods within its borders. These are countries like India, Brazil, the United States and not countries like Singapore.
Cooperative joint venture
a joint venture between a Chinese and a foreign company within China. The Chinese company usually provides the labor, land use rights and factory buildings, while the foreign company brings in the necessary technology and key equipment, as well as capital. Based on a cooperative joint venture contract in which matters like the terms of cooperation, division of earnings, ownership of property, sharing of risks and losses are laid down.---- Moving towards wholly foreign owned, used in roundtripping (via Hong Kong to get tax breaks in export processing regime)
Corporate governance
the set of mechanisms that induce individuals with de facto control over assets to make decisions that maximize the value of the company to the owners. These mechanisms are designed to minimize the potential conflict of interest between those with control and those with income rights. They include institutions that specify the distribution of decision-making rights and responsibilities among different participants in the corporation, paying special attention to the way that shareholders delegate responsibility to managers.
o Dual Corp Structure: Comm party still holds power
o OLD= Comm party still controls “Personnel”, Hires, Fires, Parallel Promotions w/ Comm Party
o NEW= Board of directors, Shareholders
o Manager Control vs State Stakes
• Give Managers power BUT need to protect ST funds
Corporatization is a form of economic reform which takes services from the direct control of the government, and places them in the control of government-owned corporations. This is often seen as a step towards full-scale privatization. For specifics on how China went through corporatization, read 309-311
Company Law 1994 restructures SOES into limited liability and joint-stock companies
SASAC is soon to follow the trend in 2003
CSRC (China Securities Regulatory Commission)
Commission established in July 1999, it is a centralized and unified network of securities supervisors. The CSRC holds the ultimately scarce resource of permission to list on the stock market and is accused of giving preferential access to some companies over others.
Current account convertibility
allows free inflows and outflows for all purposes other than for capital purposes such as investments and loans. In other words, it allows residents to make and receive trade-related payments – receive money for export of goods and services and pay money for import of goods and services, make sundry remittances, access foreign currency for travel, studies abroad, medical treatment, and gifts, etc. CAN EXCHANGE $ ONLY IF HAVE DEAL- avoids speculation, capitlizing on the overly low exchange rate or on the former split bw Foreign exchange certificate and current swap mkt rate (converged in 1994)
Current account surplus
the current account of the balance of payments is in surplus when a country exports more goods and services than it imports.
Danwei (work-unit)
job placement assigned to a city dweller after they graduated from school. This work unit was responsible for providing services and benefits to the urban resident. The danwei provided job security, low price access to food and scarce commodities, health care, pension and other benefits, primary and middle school education for children, low-cost housing. The danwei provided essentially permanent employment. Once a worker entered the danwei, he or she expected to remain a member of that danwei for life.
Total fertility rate (TFR)
Alternately stated, the TFR expresses the number of children a woman would have during the course of her life if her fertility in each year of her life were equal to the average fertility of all the women in the population of that age during the reference year. When the TFR falls below 2.1, fertility is below the replacement level, and population growth will eventually fall to zero.
Tradable (or circulating) shares
Shares within the stock market that are allowed to be traded or circulate. These include A-shares, B-shares, and H-shares. However, these shares only take up about 38.2% of the stock market (2005 numbers). Even the circulating shares trade in the segmented A, B and H markets. Prices differ across these segmented markets.
Intellectual Property Rights (IPR)
Legal rights entitling the holder to exclusive use with regard to certain names, media, and inventions. Jurisdictions vary widely; while much IPR is supposed to apply internationally (i.e. for software or music and video recordings) it is difficult to enforce such rights in China.
Initial Public Offering (IPO)
The first sale of a company’s common shares to investors on a public stock exchange. In China, this would most likely be through the Shanghai or Shenzhen stock exchanges, or in Hong Kong. EXAMPLES: Lenovo- bought IBM PC dept in 2004, listed in HK in 1994; Petrochina, listed in 2000, parent co= CNPC
Jiang Zemin
Held the positions of General Secretary of CCP, President, and Chairman of the Central Military Commission. He was picked by Deng Xiaoping to succeed him and was the last major leader to be from the “old guard,” those that directly participated in the Communist Revolution.
Joint-stock companies
Companies owned partly by Chinese and partly by foreigners. These companies were part of the “new corporate” entities that came into existence beginning in the 2nd Reform Period (1993→)
Laid-off (Xiagang, or furloughed) worker
In the 2nd Reform Period (1993+), then vice-premier Zhu Rongji ushered in a period of “reform with losers.” SOEs were sold mostly to its managers (privatized) and excess workers which were previously ensured employment through the “Iron Rice Bowl” were laid off. STILL GET-subsistence salary -often smooth transition by placing them in light service sector (hotels)
- continud benefits vary by region ie shaghai vs Manchuria
Was an example of the monumental success of Spin-offs (for R&D)
Set a precedent allowing the managerial team of a corporation to take a large stake in the company as founder’s equity (in this case, 20%). This set the stage for increased privatization and incorporation of start-ups, in part as a desire to emulate the highly entrepreneurial environment of Silicon Valley. Lenovo bought IBM’s PC division in 2004... Listed in 1994
Level Playing Field
A situation in which no one would be given special privileges in entrepreneurial or other ventures due to connections with local officials, etc. Still not the case in China. Attempt of POST-1993 REFORMS- reduce particularistic contracts in hopes of more equity for marketization (better corp governance)
Light Industry
The type of industry most commonly engaged in by TVEs. They are numerous and small and largely in the informal sector. ALSO was the industry that popped up in S China in treaty ports pre 1949- lots of tech spillover
3 prominent peculiarities of Chinas securities market
an almost non-existent bond market, the non-tradability of a majority of shares, and the fact that stock prices react to shifts or perceived shifts in government policy rather than fundamentals
1) . Corporate bonds, a common security in developed markets, are very rare in China; they need government permission to be issued.
2) Non-circulating shares within the Chinese stock market ensures that the government or state-owned parent can remain in control, keeps demand up by limiting supply, and reduces the risk of insider trading. Developed markets: market forces deal with demand and supply, and the legal system deals with insider trading.
3) government is still the biggest player in the Chinese economy, share prices react to changes in government policy
Fiscal Contracting and Local Gov
20. Fiscal contracting took a toll on local governments as the central government stopped funding public services that were abundant during the pre-reform era. Health care in rural areas is a good example of this. Before the reform era, the communes provided an unprecedented system of basic health services to most of China’s villages. Though primitive, this health care was an efficient way to invest in preventative care.
W. Develop Program (2000)= help alleviate pressures on local gov
Related-Party Transaction
- Selling public resources for a price slightly under the true market price to a related party.
- Setting up a subsidiary staffed by family members that receives preferential treatment from the public enterprise in a range of business activities.
- Arises because managers have wide discretion in SOEs, therefore corruption hard to detect. MANAGERIAL CONTRACT SYSTEM does not solve this problem (gov can't keep tabs...)
Reserve Requirements
- Bank regulation which sets the minimum reserves each bank must hold to customer deposits and notes. Designed to satisfy withdrawal demands.
- Weakness of Chinese banking system: insufficient reserves to address problem of non-performing loans (Basel standard not met).
Four Big Banks
1) ICBC- Industrial and Commercial Bank of China
2) ABC- Agricultural Bank of China
3) BoC- Bank of China
4) CCB- China Construction Bank
use AMC (asset management companies) to alleviate these banks legacy of NPLs
Chinese currency. Currency peg controls exchange rate. Undervalued relative to USD
HUGE FOREIGN EXCHANGE RESERVES bc buying up bonds to keep value of RMB low
1994- unite to one currency, easier to trade RMB
2005- devalued currency again but still pegged to the dollar
- Severe acute respiratory syndrome, epidemic in 2002-2003.
-Demonstrated inadequacy of China’s post-reform healthcare infrastructure. Poor detection in countrysides... 80% coverage under socialism, 15% coverage now... No collective- No public goods
Petrochina= 1/4 SASAC assets
-Established June 2003: designated as the agency responsible for exercising the central government’s rights of ownership of nonfinancial firms. Acts as Gov shareholder (good bc gov can focus on social things)
-Firms under its supervision were the largest and most highly capitalized firms in the state sector (electricity, military industry, telecommunications, petroleum).
ISSUE= SASAC focused on 1) Profit for Gov (increasing assets) AND 2) Correcting overall Mkt failures.... need ind regulators bc two roles are at odds
Slow implementation even in 2005
- National agency to address environmental issues.
- Originally below ministerial rank, therefore weak (promoted to ministerial rnak in 1998).
- Overlapping objectives with ministries like water resources, agriculture. Proposals to combine these into an energy ministry.
- Local EPAs weak because local governments are growth-oriented, no real penalties for infractions.
- Established in 1979 in Shenzhen, Zhuhai, Sahntou and Xiamen.
- Visible commitment to economic opening.
- Even today, much foreign investment still located in these zones, rules of business still subtly different.
- Contained reform experiment: wholly-owned foreign subsidies allowed in SEZs long before they were permitted elsewhere (example of dual-track reform).
- Gradually spread to the rest of China.
State Council Directive
2003: gives rural migrants legal right to work in the city. Also schools for migrant workers should be recognized by urban education departments, temporary residence permits should only cost 10 yuan.
Asset Management Company (AMC)
AMCs were established (one for each of the Big Four banks) to purchase non-performing loans at face value (loans made before 1996 and the downsizing of SOEs—therefore part of reform process). The AMCs were supposed to sell the NPLs to other parties, foreclose on assets and auction them or swap loans for equity in order to recoup as much as possible. In the end the AMCs were able to recover 13% of the face value, but acquired much debt in order to pay the banks face value. Taxpayers pay the difference
Situation in which a country is closed to the outside world and is self-sufficient. This applies to China as it was one of the elements that made Maoist communism distinct from the Soviet system. Mao destroyed the concept of comparative advantage by forcing self-sufficiency. 3rd Front Autarky
One segment of the circulating shares of equity. The B-shares were for foreign investors (although this is not the case now) and are denominated in foreign currency. A-share is valued much higher
Stock Exchanges
Issues: 1) Quota for IPOs (preferential listing by area and political spoils)
2) Gov wont sell majority stock-- mkt reacts to polocies not equity
3) almost entirely SOEs listed
4) limited shares= high prices (supply kept artificially low)

2001- Gov beginning to share non ciruculating shares
Capital account surplus
China currently has both a capital and current account surplus. It really should have a surplus in one and a deficit in the other because they should balance each other out. China is essentially not spending the money that it receives from its exports.
Capital account convertibility
capital account convertibility does not exist in China; individuals and businesses are unable to sell or buy as much foreign currency as they might want. (although through the use of alternative channels money is moved in and out of China)
CURRENT ACCOUNT CONVERTABILITY REACHED IN 1997, all importers can get foreign exchange if have proof of trade flows
a rural organizational unit formed during the Great Leap Forward (1958) to shift resources from agriculture to nonagricultural activities such as opening factories, doing construction and services. However, they were disbanded during 1961-62 (the GLF crisis) and replaced by APC (agricultural Production cooperatives= 30-40 households). Communes remained an organizational unit (market town level) until 1983 (then changed to townships).
Commune and Brigade Enterprises
created during the “new leap forward”, the enterprises were part of strategy for state-sponsored rural industrialization, but steps were taken in order to avoid another GLF-type crisis. For example, the enterprises were connected to the agricultural collectives and their purpose was to “serve agriculture” making machinery etc. After 1982 they became township and village enterprises after communes were renamed townships and brigades became villages.
TFP (Total factor productivity)
TFP increases correspond to improvements in technology for production or other changes that allow labor and capital inputs to be used more effectively. In relation to China, TFP growth as a source of economic growth accounts for 28%. Capital growth is <60% labor around 10%.
Third Front
(Mao driven) shift in development strategy (1964-1966) to focus more on the inland provinces with the objective of building an industrial base in order to give China strategic independence (in context of China being isolated).
labor allocation
agriculture as a share of GDP has declined from 42% in 1978 to 13% in 2004, industry has risen from 29% in 1978 to over 46% in 2004, and the service sector has increased from under 30% in 1978 to about 40% in 2004. China is currently industrializing, the reform process and growth. For example, services were able to grow when restrictions (and “recovery from the highly repressed conditions of the command economy era) were lifted, workers and GDP shifted away from agriculture to (especially) industry as reforms of the rural sector kicked in (more opportunities such as TVEs) and migration restrictions were somewhat lifted. Also, investment in the industrial sector (high investment rate and also reforms to allow investment inflows) contributed to the transformation. Another important force is that of globalization and the idea of China being “the world’s factory”, therefore increasing industry share of GDP and labor allocation.
Debt-equity ratio
The debt to equity ratio is a financial ratio indicating the relative proportion of equity and debt used to finance a company's assets. If the ratio is > 1, the majority of assets are financed through debt. If it is < 1, assets are primarily financed through equity. This number is very high for SOEs as vestiges of the soft budget constraint
Demographic Dividend
The demographic dividend is a rise in the rate of economic growth due to a rising share of working age people in a population. It usually occurs late in the demographic transition when the fertility rate falls and the youth dependency rate declines. China is in its window of opportunity- will face issues in 2030 when population ages (country will age bf grows rich)
Demographic transition
The term demographic transition is a theory describing a transition from high birth rates and death rates to low birth and death rates as part of the economic development of a country from a pre-industrial to an industrialized economy. 4 stages
1) pre-industrial society, death rates and birth rates are high and roughly in balance.
2) developing country, the death rates drop rapidly due to improvements in food supply and sanitation. Without a corresponding fall in birth rates this produces an imbalance, leading to a large increase in population.
3) birth rates fall due to social changes such as increased access to contraception, urbanization and an increase in the status and education of women. Population growth begins to level off.
4) Total Fertility Rate may drop to below 2.1 which means pop not replacing itself---- step 1 comes into conflict w/ step 4= problems with Demographic Dividend
Deng Xiaoping
the paramount leader of PRC from the late 1970s to the early 1990s. The only substantive title he held was that of Chairman of the Central Military
Unlike Mao, Deng prioritized economic development over political development, actively promoting economic reform after rising back to power during 1978’s Third Plenum. Under his leadership, China developed one of the fastest growing economies in the world.

Deng’s last significant influences on policies sprang from his 1992 Southern Tour, when he stressed the need to further promote economic reform.
Dual-track markets
In the first phase of China’s economic reforms between 1978 and 1992, Zhao Ziyang created dual-track markets, where the command economy existed side by side with the market economy.the market price and the planned price.
Economic shock therapy
Shock therapy refers to the rapid transition of a command economy to a free market economy. As opposed to the gradualist approach, shock therapy involves the sudden release of price and currency controls, withdrawal of state subsidies, and immediate trade liberalization. This is the approach encouraged by Woo (Diff in E Europe and China not only shock vs gradual but the growth potential or starting points of the economies)
Equity joint venture
EJVs created a new legal entity in which both the foreign and domestic firms have a stake. In theory, foreigners would benefit from the long-term partnerships with domestic firms deemed necessary to survive in the Chinese market, while locals could tap the information and technology of foreign firms. EJVs accounted for more than ½ of incoming FDI from 1987 and 1996.
However, foreign incentives (earning profits) were not aligned with local incentives (expanding employment and increasing production). Currently, more than two-thirds of FDI are in the form of wholly owned subsidiaries of foreign companies.
Export processing zones
EPZs are regions in which foreign investment are encouraged by lower tax rates, fewer and simplified administrative and customs procedures and duty free import of components and supplies.
In china= SEZs, different bc of the amount of legal autonomy (really are windows to the world, all new polocies tried here ie Wholly Foreign Owned...) SOEs much larger than EPZs
NPL's: stock and Flow and AMCs
Stock: Existing stock of NPLs
30-40% of total outstanding loans, very high by international standard → some can be recovered. In 2002: NPLs of 4 big banks plus policy banks equal to 26% of GDP (Unofficial estimates much higher than official figures)
Flow: Ability of getting banks to make new loans on commercially sound basis
Need to create a ‘credit culture’ in the banks, where risk is adequately and accurately assessed in making loan decisions
Need to create incentives such that banks are not continuously creating NEW NPL problems
AMCs buy debt from big 4 in 1998-99 (for all debts before 1996) In practice, the AMCs are supposed to recover as much value as possible from the NPLs bought from the banks by selling them to third parties, foreclosing on assets and auctioning them off, or swapping loans for equities.
Tradable (or Circulating) Shares
The shares of SOEs that can be legally traded, as opposed the majority of shares withheld from circulation to prevent insider privatization and profiteering.
Circulating shares are sold in segmented markets, denoted as A-shares, B-shares, and H-shares. “A-shares, which are the primary type of shares traded, are denominated in Chinese currency and available only to Chinese citizens. B-shares are denominated in foreign currency and were originally reserved for foreign investors, although Chinese citizens may now hold them as well. H-shares are shares listed by Chinese companies on the Hong Kong exchange or on other markets outside China.” (470)
As a result of segmentation, the Chinese market has the following inefficiencies: differences in disclosure standards, regulations, trading volume, and risk premiums across markets, and lower liquidity and pricing efficiency. More importantly, segmentation prevents private shareholders from gaining control of a company. Therefore, the market cannot serve to discipline corporate management.
Trade “Safeguards”
Conditions put on China’s accession to the WTO to protect other member states from adverse effects of China’s membership.
It was made relatively easy for states to put quantitative restrictions (quotas) on Chinese goods for the first 12 years of its membership. As an exception to the nondiscriminatory principle, restrictions may apply only on goods originating in China. Moreover, China’s ability to retaliate against such restrictions are greatly limited. Finally, textile and apparel quotas will continue until 2008, after the general expiration of quotas in 2005.
Transition Economy
Refers to states moving from a planned economy to a market economy.
Other examples of transition economies include Eastern European states and Vietnam.
Treaty Port Industrialization
TPI meant light industries (think textiles) in major coastal cities. This gave a big role to Chinese entrepreneurs, unlike the heavy industrialization in Manchuria, which was government led and dominated by Japanese industrialists. Pre-1949
TVE (Township and Village Enterprise)
1978 to mid-1990s, very rapid TVE growth (from 9% to 27% of industrial output). But TVEs part of transitional economy. China is now moving to more standard capitalism.
–low-tech, light industry, used surplus rural labor
–collectively owned, but outside the plan
–During the first 15 years of reform, TVEs made the most important contribution, changing the landscape of China’s industry, as well as its reform
–TVEs are neither state owned nor private but rather a corporate form between entrepreneurs and community (township or village) government.
–TVEs are uniquely Chinese (i.e. not in other transition economies)
–TVEs are significant because government ownership is typically considered bad and reform typically means privatization. Therefore, TVEs represent a major anomaly: government ownership is the key to reform success.
Urban-Rural Divide
A large and systematic distinction was created and sustained by administrative methods, primarily the hukou system, which restricted migration from rural to urban areas. A clear dividing line between urban and rural residence has been crucial, and only gradually dismantled during reform.
VAT (Value Added Tax)

AND VAT vs Sales Tax

Personal Income Tax
Part of 1994 fiscal reforms to combat fiscal erosion.
–Value-added tax (VAT) of 17%
–Some individual businesses pay 6% sales tax instead of VAT (if too small to keep records)
–Corporate profit tax of 33% regardless of ownership
Rebates offered to exporters, which is legal under WTO regulations but now at the heart of a recent (Feb 2007) trade dispute between the US and China in which the US complained that Chinese VAT rebates are unfairly benefiting Chinese exporters.
Value-added tax is a flat tax that is levied at every stage of transactions. The advantages of the value added tax are that it is hard to evade, and like a consumption tax it promotes hard work and savings, which are all good from an efficiency standpoint. However, from an equality standpoint, the VAT is not progressive, so it is not redistributive from rich to the poor.

Personal Income: hard to collect if ppl not used to keeping records (remnant of planned eco)
- fastest growing tax: 2007, must pay if income over $15,500
Administrative Litigation Law
in October 1990, allows collective suits (class action lawsuits) to settle disputes between citizens and the government over administrative decisions. Unfortunately, local courts primarily protect the interests of local businesses in disputes. This is because local governments control judicial appointments and funding, and these governments have strong commercial interests (through taxes, employment, and direct ownership rights) in local businesses. Finally, guanxi (connections) continues to be the most important factor in dispute settlements, undermining the rule of law. CAN DISPUTE TAKING YOUR LAND W/O PAYMENT BUT IF THIS IS POLICY, HAVE NO LEGAL RECOURSE FOR POLICY ISSUES
Foreign Trade Companies (FTCs)
There were twelve FTCs, national state-run companies that exercised monopolies over both imports and exports in the late 1970s. FTCs bought and sold domestic commodities at planned prices, and world commodities at world prices, which were then repriced for Chinese consumption. Profits were used to fund industrialization.
As reforms began the provincial branches of the FTCs in SEZs were granted autonomy, and by the mid-1980s, industrial ministries were allowed to establish FTCs and more provincial branches were made independent. By 1988 there were 5,000 FTCs. FTCs became more cost-sensitive, and import prices began to operate on a world price+commission system instead of at a planned price.
Non-tariff barriers still existed to trade, however. FTCs were still the only companies allowed direct domestic market access, and these were restricted to one product, and often to one area or category of customers.
Under a new 2004 law, China no longer restricts trade to state-owned FTCs except for a few agricultural commodities.
Foreign-Invested Enterprises (FIEs)
Under China’s 1986 “Coastal Development Strategy” and the export-processing regime set up therein, FIEs were allowed to bypass the barriers set up to control and inhibit international trade. This gave them a favored status different than most domestic firms, and they have been far more successful ay reaching world markets than regular domestic firms.
Gradualist Reform
This is a general term that refers to reform and liberalization over a long period, with slow and staggered changes. Many, including Naughton, credit China’s successes to the fact that it did not attempt to turn itself into a market-based economy in one fell swoop, as other countries did with unfortunate results, but rather slowly transitioned, peeling away layers of government control and slowly opening its markets up to international trade.
Great Leap Forward
Mao suddenly turned on liberal critics who voiced criticisms in the Hundred Flowers in 1957 and initiated a new period of radicalism in which he planned to leap towards a fully communistic society in a few years. It is during this period, 1958-1960, that Mao developed a vision of socialism different from the Soviet model. The most basic outcome of the GLF was an intensification of the transfer of resources from agriculture to industry. Innovative elements included:
-Communes in the countryside (bigger than collectives)
-Rejection of material incentives and monetary rewards
-Decentralized control of economic decision-making
-“walking on two legs” technology policy, in which simple technologies were combined with advanced ones
At first results seemed positive, a good harvest and reports of large growth from local governments. Land and labor was taken away from agriculture and put into industry. Most of what was produced was junk, and agricultural output began to fall. The end result was a massive famine that killed 25-30 million people.
Greater China
Includes HK, Taiwan, and China
In the mid-1980s, the connections between the three drove a restructuring of East Asian production networks. The opening of China created a dramatic opportunity to transfer labor-intensive export production to the PRC. HK and Taiwan began to specialize in high-value services and left basic manufacturing to China.
Green Revolution
Introduction of new technology based on traditional agricultural triad: irrigation, fertilizer, and seed varieties in the late 1970s and early 1980s. The three: electric pumps for irrigation, chemical fertilizers, and high-value yield seeds, were complementary and not fully available until the early 1980s. Some argue these technologies were as critical to output growth as the structural reforms in marketizing agricultural production.
Chinese Acadamy of Agricultural Sciences responsible for seed varietal develop.
FUTURE: changing demand, GMOs, WTO affects
Guangdong is a southern province. Throughout the reform process it has been at the forefront of attempts at marketization and integration with the world economy. It was one of the first provinces to be open to foreign trade in 1978-79. Four SEZs were set up in Guangdong in the late 70s, and exports from the province grew at twice the national rate over the next 15 years. It was transformed from an economic backwater into a powerhouse. It was also one of the centers of FDI in China in the 1980s and continues to be today.
Guanxi refers to the ‘connections’ that lead to related-party transactions that are separate from official contracts. It is generally no different from similar concepts in all economies.
Q13) Explain asymmetry of banking reform in China betwn deposit and lending side. Evaluate NPL problem in China's banking sector fr stock and flow perspectives.
• Deposit side: deposits were implicitly insured by the state. Protections were put in place for savers – banks were paying a relatively high price for the savings they controlled. “Spread” between lending and deposit rates was narrow, and often negative. This reduced bank profitability and their capital steadily eroded
• Changes since 1998: deposit rates reduced while lending rates have been kept fairly high. Banks have made good profits from the interest spread. Bank assets have also diversified → other than SOE loans, consumer lending plays a more significant role.

• Lending side: buildup of NPLs during transition: political syst had used resources in the banking syst to compensate groups that would otherwise have been losers
• Changes since 1998: Oversight of lending decisions still appears to be seriously deficient. Loan officers earn low regular salaries → potential for corruption. Not rewarded for accurately assessing future risks or making provisions for future defaults → easier to just roll over loans, no incentive to carry out overhaul of administration/procedures necessary to improve operations

• Stock: Existing stock of NPLs
• 30-40% of total outstanding loans, very high by international standard → some can be recovered. In 2002: NPLs of 4 big banks plus policy banks equal to 26% of GDP (Unofficial estimates much higher than official figures)
• Difficulty of clearing up existing stock of bad loans → generates moral hazard!

• Flow: Ability of getting banks to make new loans on commercially sound basis
• Need to create a ‘credit culture’ in the banks, where risk is adequately and accurately assessed in making loan decisions
• Need to create incentives such that banks are not continuously creating NEW NPL problems
PE ratio (price-to-earnings ratio)
“The P/E ratio (price-to-earnings ratio) of a stock … is a measure of the price paid for a share relative to the income or profit earned by the firm per share. A higher P/E ratio means that investors are paying more for each unit of income.” (Wikipedia)
The characteristics of Chinese stock markets are extremely high PE ratio, rapid turnover, and relatively high volatility.
PBOC/PBC (People’s Bank of China)
1983, PBOC or the monobank was broken up into the 4 big banks.
Was the bank during socialism, performed the duties of the gov
established as a joint stock company with limited liabilities under the Company Law of the [PRC in] 1999 as part of the restructuring of [China National Petroleum Corporation (CNPC)]. In the restructuring, CNPC injected into PetroChina most of the assets and liabilities of CNPC relating to its exploration and production, refining and marketing, chemicals and natural gas businesses.
CNPC= parent company which divided into subsidiaries (PetroChina)
Petrochina, which is China’s biggest oil producer[,] is an H-share-listed company, launched on Hong Kong exchange, but only 10% of its shares circulate.
Policy bank
8% of banking
Three policy banks were set up to take over lending in support of government policy objectives. The idea was to free the commercial banks from pressure to undertake politically popular projects. … The China Development Bank has expanded its portfolio of large-scale infrastructure projects …;the Export-Import Bank has settled into a normal export-promotion role; and the Agricultural Development Bank has foundered,
FDI by geography
GUANDONG-Fujian-Guangxi= 39% FDI
(first wave= 1978-80)
SHANGHAI-Jianjsu= 25% FDI
(third wave, Pudong= 1992-93)
BEIJING-Shandong= 22% FDI
1998- Coastal Provinces= 85% FDI
Company Law
1994= legal framework for different ownership strucutures (corporatizing SOEs)
Goals: diversify ownership, improve SOE governance
BY: increased autonomy (create board of directors), Distirbuting profits, more defined ownership rights
PPP GDP (purchasing-power parity)
“PPP exchange rates are especially useful when official exchange rates are artificially manipulated by governments. Countries with strong government control of the economy sometimes enforce official exchange rates that make their own currency artificially strong. By contrast, the currency's black market exchange rate is artificially weak. In such cases a PPP exchange rate is likely the most realistic basis for economic comparison.”
Chinese GDP per capita: $4,726 in 2003 in constant-price (year 2000) PPP compared to $1,200 w/o PPP
Primary sector
The first phase of the usual development process is a decline in the labor force in the primary sector. China is not an exception, but the majority of labor force is still in the primary sector (70% in 1978 and 45% in 2005; see the graphs in p151 (employment) and p155 (GDP)).
The creation of Pudong special zone represents the “third wave of opening of the Chinese economy” beginning in the early 1990s.
“Slightly larger than Shenzhen, the Pudong Development Zone possessed a population of 1.1 million even before development began.”
ALSO is in Shanghai- imp economic zone outside of the traditional SOEs
Qualified Foreign Institutional Investor/Investment Institutions (QFII)
At the end of 2002, QFIIs, or “mutual funds operated by foreign banks or brokerages,” were given “the permission … to invest in the market.”
“Each fund has a specific quota of foreign-currency investments it can accept; the fund is then allowed to invest in RMB-denominated A-shares up to the limits of its quota.”
“This system - pioneered in Taiwan and Korea - enables foreign investment in the domestic stock market while still retaining control over capital inflows and outflows
How did the political economy considerations discussed in Roland come up in China’s reform process?
Roland’s argument is that the development of institutions as well as initial conditions matter in transition economies. He especially emphasizes “the Pareto-improving property of the dual-track system” (p40). His statements concerning Chinese reform from the political economy point of view are as follows:
“In China, the success of decollectivization built support for later reforms” (p29);
“Dual-track liberalization … was a way to liberalize prices without eliminating preexisting rents of economic agents” (p30);
“Price liberalization can thus be achieved without creating losers and, consequently, without violating political constraints” (p40); and
“Liberalizing the small private sector is often a popular early measure that provides a supply response in emerging markets. … In China, the nonstate sector’s share of industrial output was already 22 percent in 1978, thus providing a basis for its growth to 47 percent in 1991 as liberalization occurred …” (p42)
backyard steel mills/furnaces
used by people of China during the Great Leap Forward when Mao stated that he wanted to double steel output. These furnaces were constructed in the backyards of communes and melted any steel objects they could find, including pots and pans. However, the steel was of impure and poor quality. Campaign is widely considered a failure. Part of larger MAO philsophy that economic shortcomings can be overcome by idealist fervor
barefoot doctors
part-time “paramedics” in rural areas that underwent a six-week training course at the county town, and farmed as well. 1.5 million existed by the mid-1970s. Services were generally provided free of charge, and each of the million or so villages had approximately 4-5 paramedics. System disbanded after collectivization, but 800,000 of these barefoot doctors became certified by 1992 as village doctors, and could charge for their services.
big bang
catchphrase used to describe rapid, comprehensive reform (advocated by the convergence school). Criticizes gradualists b/c mixing plan and market only creates corruption, inefficiencies, and delays the inevitable. supported by market fundamentalists like Woo.
big push
“Big Push” development included a high investment rate (>30% of GDP) and industrial investment > 80% in heavy industry. The logic was to build strategic industries, with import substitution industrialization, and to force high savings (for future development). This push for ISI vs. export-oriented was common in contemporary development thinking (soviet inspired, but more than just socialist).
breaking the iron rice bowl
iron rice bowl refers to jobs in state owned enterprises (effectively a job for life). breaking= shattering social compact that guarantees lifetime employ in state-owned enterprise.
commanding heights
catchphrase referring to the state sector’s dominance over the planned economy. Dominates strategic industries, pays more taxes, and gets more bank loans and stock market finance [despite] transitioning
export processing trade regime
originally centered around the SEZs (coastal areas), but gradually extended anywhere with foreign investment enterprises. Planners recognized the opportunities for China in the ongoing restructuring of Asian export production networks, and allowed firms to engage in processing and assembly contracts in which they were allowed to take ownership of components and raw materials imported duty-free.
ex-post coherence
catchphrase of the gradualist school (“growing out of the plan”) is another one. Strategy is to go slow and incrementally figure out what works in each country to build new institutions. Criticized fast transition, which risks dislocations and fall in output.
One of the four SEZs (the largest). Set up adjacent to Hong Kong to attract spillover investment from what was still a British colony. Theory worked; Deng Xiaoping declared it a success (1984). Shenzhen stock exchange (1991) is one of the two major stock markets in China (Shanghai is the other one). Part of Deng Xiaopings southern tour in 1992
shortage economy
(hiánygazdaság in Hungarian…thanks Wikipedia, and use to impress Peter!). Term coined by Hungarian economist Janos Kornai to criticize old centrally planned economies of E. Europe during 70s and 80s. Argued that chronic shortages were results of systematic flaws (i.e. unfairly low + set prices). Has the following characteristics: general (all spheres of economy), frequent, intensive, chronic, horizontal and vertical, replaced by occasional slacks, buyers’/sellers’ markets change, forced substitutions, forced savings, soft budget constraint, repressed inflation.
China is now a net capital outflow country (i.e. capital flowing out of China is greater than capital flowing in China). Given that China is a relatively poor country, how does this fact contradict the standard economy theory? Give one reason that might explain why there is a net capital flow from China to the U.S.
Domestic investment= domestic savings + foreign capital inflows.
Capital flowing out= claim on foreign assets. Contradicts economic theory in that a poor country should emphasize domestic savings. An economy such as China’s would be expected to have large net foreign inflows, but the need to support exports has resulted in the purchase of foreign assets.

Reason: China has to continue financing US purchases, and thus holds T-bills. The rising dollar deposits, joined by falling foreign currency loans extended by Chinese banks, have already produced a large surplus of foreign currency liquidity in China's banks (foreign currency reserves >$1 trillion). The majority of capital inflows into China are FDI based, while outflows are not necessarily FDI based.

Second major factor: China is absorbing technology, which is helping it sustain large-scale growth. Does not necessarily reflect in the flow numbers.
Han Chinese
- Ethnic group that makes up 92% of China’s population. The party tries to show that it supports minorities by enacting a number of preferential policies.
Heavy industry
- Capital intensive sector that usually provides inputs for manufactured goods.
- China focused on heavy industry during the socialist period, whereas economists would suggest it focus on labor-intensive light industry. After the reform, China moved away from heavy industry. It is only now beginning to move back into heavy industry.
PreSocialism- focus of Manchurian development by the Japenese
household responsibility system
- Farmers were allowed to keep their surplus grain instead of returning all of it to the collective.
- One of the first reforms after Mao’s death
- Gave farmers incentives to produce more efficiently.
- Companies incorporated in mainland China and are listed on either the Hong Kong exchange or other foreign stock exchanges
- Foreign stock exchanges have more rigorous standards to get listed, so not many Chinese companies can use this exit option.
Petrochina= an example
hu jintao
- Currently China’s Paramount Leader. Took over for Jiang Zemin in 2003.
- Reinstated controls on the economy trying to rein in growth
- A great deal of lip service to “sustainable development,” “Harmonious society,” and alleviating inequality.
- Increase in political controls
with Wu Jiabao
- Residency permits that identify where Chinese citizens live
- Those with a rural hukou can’t move to the city permanently – this is meant to keep city populations under control.
- Currently 150-200 million people live in cities without urban hukous. This is the “floating population” of china
o These people are not entitled to the same benefits people with urban hukous are.
import-substitution industrialization
- Method of economic development
- Protects industries from outside competition to allow them to develop before they can be out-competed by big established companies
- China used a variation of this in the pre-reform period, but after 1978 embraced and opened up to the world economy
institutional investors
- Investor that makes huge sophisticated investments
- Banks, insurance companies, retirement funds, hedge funds, etc.
- Foreign institutional investors are beginning to have a role in the Chinese economy as it opens up the financial sector.
?? Relationship to QIIF?
two basic economic roles of law
The first is citizen-citizen, which means constraining private exploitation and enforcing contracts
The second is citizen-government, which means constraining public exploitation, limiting government, and enforcing property rights.
the socialist system shared by China and the Soviet Union.
1. Fixed prices
a. Changed to a two-track system and then to mostly market pricing
2. Collective farming
a. Completely changed, although the collective was used to create TVEs
3. Closed to world trade
a. Opened up drastically
4. Emphasis on heavy industry
a. Emphasis moved to light industry (through the market) and heavy industry has recently become more important again. The government is actually trying to slow investment, especially in heavy industry, at the moment.
5. No real elections
a. Some experimentation with local elections but nothing very meaningful
6. Thought control / secret police
a. You can criticize the government about many issues now, but you can’t call for elections or changing the one-party regime
Rule by law
Rule by law is prudential: one rules by law not because the law is higher than oneself but because it is convenient to do so and inconvenient not to do so. In rule by law, the government uses law as the most convenient way to govern.
Rule of law
The rule of law is the principle that governmental authority is legitimately exercised only in accordance with written, publicly disclosed laws adopted and enforced in accordance with established procedure. The principle is intended to be a safeguard against arbitrary governance.
Tragedy of the commons
Fishing: public good but overuse can hurt others
Administrative Litigation Law
(Administrative Procedure Law): The Administrative Litigation Law is legislation passed in 1989 that authorized private suits against administrative organs and personal on the grounds of infringement of their rights. Types of administrative actions that can be challenged must be "concrete actions”. The review of state action is carried out in the local people’s courts. Court review of agency action is not permitted for state action involving national defense or foreign affairs. Moreover, the court cannot review administrative legislation. Despite these limitations, many observers have argued that the Administrative Litigation Law has greatly furthered the spread of rule of law.
Agricultural collective
The agricultural collective regards a system of agricultural organization in which farm laborers are not compensated via wages. Rather, the workers receive a share of the farm's net productivity. Collective farming began in the China under Mao. It was further pursued during the Great Leap Forward, an attempt to rapidly mobilize the country in an effort to transform China into an industrialized communist society. The policy mistakes associated with this collectivization attempt during the GLP resulted in mass starvation.
In the international trade context, dumping is defined as the act of a manufacturer in one country exporting a product to another country at a price which is either below the price it charges in its home market or is below its costs of production. Advocates of free markets see "dumping" as beneficial for consumers and believe that protectionism to prevent it would have net negative consequences. Many governments take action against dumping in order to defend their domestic industries. China has been the number one target of antidumping actions.
: Companies incorporated in mainland China and are traded in the mainland A-share markets. The prices of A-shares are quoted in Renminbi, and currently only mainlanders and selected foreign institutional investors are allowed to trade A-shares.
Southern Jiangsu Model
Southern Jiangsu model (Suzhou, Wuxi, Changzhou) is founded on the merits of the collective enterprise system. Because enterprises are owned by the state or collectives, the scale of production is larger, the capital intensity is greater, and there are more workers employed in each enterprise.
Tertiary sector
The tertiary sector of industry (also known as the service sector or the service industry) is one of the three main industrial categories of a developed economy. Services are defined in conventional economic literature as “intangible goods” and involve the provision of services to businesses as well as final consumers.
Central Planning: China vs Soviets
The differences between China and Soviet Union include: less-centralized planning, urban-rural divide, and political dominance and policy instability.
The sources of China’s differences: China had very different initial conditions. China was very agricultural with many peasants, had scarce land with labor-intensive agriculture, was resource-poor, and had lower levels of development. In addition, Mao’s had different ideas from the Soviets.