China’s Rapid Industrial Growth: Institutional Change & Regional Specialization of Production CHINA’S GEOGRAPHY

Rapid Growth of China’s Industries While China’s industries grew rapidly in early Maoist period, they were not operating on a market basis in a command economy. Phantom balance sheets Low product quality with little quality control Since 1980, the avg. growth rate in ind. output is 15%/annum Creation & growth of new industries since 1980

Institutional changes for Industrial growth Shift from Plan >>>> Market SOEs were core of the command economy & plan In 1978, SOEs comprised 77%, urban collectives 14%, & rural collectives TVEs 9% of industrial output Initially there was little change in ownership Early 1990s Zhu Rongji begins the reforms to close SOEs

Early Shift to TVEs By 1996, SOEs have dropped to 33% of output, and collectives have increased to 36% with private at 19 % and foreign 12% The TVEs have provided a very competitive new style particularly suited to the low hanging fruit of low capital, labor intensive mfg. such as garments and toys, etc.

Corporatizing the SOEs The Company Law Goal is to create a new more competitive framework Allow gradual transition for SOEs to become corporate and operate like privates yet remain state controlled Enterprises will be larger, more efficient, & more competitive Small firms can remain under local control

Financing the Industrial Enterprises Show me the money and where it comes from! In 1978 enterprises had profit and it went to the state which then returned it to the enterprises (soft constraint). By 1997 these state enterprises had morphed into joint stock companies, and the profits had disappeared. SOEs turn to banks for capital as central state declined to finance them. Slowing economy in 2014 leads to severe challenges in SOES as government needs to reduce industrial production.

Enterprise Balance Sheets Banks begin to loan -- assume they will be repaid, but NO! Debt to equity ratios rise rapidly: ‘78 – 12: by 1994 they reach a high of 211 and then begin to decline until they reach 146 by ‘04. Debt rises again to even higher levels that become a challenge to fiscal stability as economy slows in 2014.

Government Bailout Banks are bailed out by the central govt. and write off the bad loans. Lack of transparency in balance sheets is a problem; see the audit dilemma with global accounting firms. Efforts to create competitive world class companies remains a problem. Some good successes: Lenovo, Huawei, ZTE, Hai’er

Structural Change in Industries Maoist Period: High growth in heavy industry Heavy Industry Sector was capital and energy intensive. Reforms of 1978 were easy for labor-intensive, low capital mfg: food processing, plastics, garments, leather goods, etc. After 1995 light diversified mfg. no longer dominates Shift to more electronics and energy related products

Regional Patterns Coastal Areas Dominate from key benefits of location Based on foreign trade, investment and can absorb world technologies more easily Coastal areas also are better endowed with infrastructure and skilled human resources More experienced in light mfg., and new firms can more easily enter. Contrast with the Northeast, China’s “Rust Belt” Coal, Steel, and Cement industries face severe stress as they reduce production.

Shifting Regional Patterns of Industry Early Years,’52-’57 saw increasing concentration despite rhetoric GLF and later saw some decentralization of industries 1960s and the Third Line: Conflicting policies and a mixed regional pattern Industry specific pattern vary: Iron & Steel; cement; Energy (coal & petrol); machines

Key Regional Centers Shanghai The Northeast Beijing/Tianjin Jiangsu The East coast continues its dominance after reforms

Complex Patterns of Regional Industrial Growth Heavy industrial expansion in China during the Maoist and early reform years Mixed pattern of dispersion and concentration Efficiency v Equity debate Size v Scale of Operation I Gain statistic indicate some converging pattern of industry linked to population size, although this varies by industry

Infrastructure & Telecom Telecommunications industry is a model. China has very rapid growth in the 1980s & beyond as it can use technology to “leap-frog” hurdles to advance. Govt. provides substantial funding & a good institutional & regulatory framework to avoid conflicts and problems. Overall Govt. investment for infrastructure quickens after 1990: for electricity, telecom, and transportation Under 4% of GDP and then rises to over 8% by ’98 and continues at a high rate

Items for Discussion Why does rapid economic growth in a transitional economy require institutional change? Is this a clear change in “ownership” and what does this mean? What about the financing of new enterprise structures in a transitional economy? What do we mean by “regional specialization of production”? How does this relate to the idea of comparative advantage in a market economy? Is the efficiency vs equity argument useful in discussing China’s industrial location policies? If so, how?