CHINA: class 3. INDUSTRIAL ACTIVITY GOOD NEWS.

CHINA: class 3

INDUSTRIAL ACTIVITY

GOOD NEWS

-20

-10

0

10

20

30

40

Series

Chinese industrial value added (annual growth rate)

0

100

200

300

400

Series

Chinese industrial value added (1987 $US billions)

Rapid growth and efficient performance

of certain types of production unitsTypes of enterprises

State-Owned Enterprises (SOEs)Private sector firmsTownship-Village Enterprises (TVEs)

Collectively owned communal enterprises--owned by all the residents of the establishing township or village

Township-Village Enterprises

In what sense non-state???Government (central or regional) has

no financial responsibilityfinanced from collective assets of

communityno access to cheap bank loansno guaranteed jobsIf insolvent, go bankrupt or get taken

over

Considered by many to be chief growth engine of much of

reform period

0

10

20

30

40

50

1978* 1980 1985 1990 1994*

% of total industrial output

Why? More efficient than SOEs

0 20 40 60 80 100 120 140 160 180 200

Gross value per 100yuan of capital

Capita per worker(1000 yuan)

Gross value per worker(1000 yuan)

SOEs Collective Enterprises1985

1990

0 20 40 60 80 100 120 140

Gross value per 100yuan of capital

Capita per worker(1000 yuan)

Gross value perworker (1000 yuan)

SOEs Collective Enterprises

Like agricultural reform, not planned

Products of spontaneous initiatives

over time, growing private ownership component or joint ventures with foreign capital and more private firms

growing employment of migrant (non-local) workers

---BAD NEWS-- Performance of SOEs

This sector has shrunk in size but still accounted for 1/3 of industrial output and employment in mid 1990slarger fractions for construction,

transportation, telecommunicationsstandard argument. Reform

attempts have not been successful

Total Factor Productivity trends

Studies suggest1980-84---2.24% per year 1988-92---1.58% per year

attributable to???Unwise investment decisions due

to preferential access to loans with negative real interest rates.

Financial Performance trends

Typical indicatorsrate of return on assets--declined

from 15% in 1987 to 5% in 1994percent of firms incurring lossesmagnitude of fiscal subsidies being

granted

Financial Losses

01020304050607080

1978

*19

8019

8219

8419

8619

8819

9019

9219

9419

96

Percent losing money

Total losses (RMB billions)

RMB = Renminbi. Exchange: about 8 RMB to the $US (1997-98)

Alternative explanations

Distortions in price system that required some enterprises to sell at state-controlled prices far below market prices

consistent with early declines but not with recent increases

low capacity utilization rates. In 1995 <60% for 900 major industrial products

Fiscal Subsidies

0

10

20

30

40

50

60

1985

*

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

RMB billions

BUT need to remember

Most SOEs are no longer covered by grants from the state budget

due to pressure on Ministry of Finance to reduce explicit budget deficit

Loans from state-owned banks have essentially replaced state subsidies

Liabilities of State-owned enterprises,

1979-95

0

20

40

60

80

100

1978

*

1980

1988

1989

1990

1991

1992

1993

1994

1995

All SOEs

Industrial SOEs

Percent of assets

Typical of market

economies85%

Implications of these liabilities-to-assets

ratiosHalf of all SOEs in 1995 had liabilities exceeding their assets. Essentially INSOLVENT. Only access to bank loans kept them in business.

Many SOEs continually operate at a loss. Total output is worth less than cost of labor and other inputs to produce it. Loans are being used to pay wages and finance growing inventories.

Many have enough debt that an economic slowdown will produce liquidity problems.Earnings could easily fall below

levels needed to pay interest on debts.

Have higher debts than Korean chaebols that encountered this problem in mid 1990s.

AND: This data underestimates the liability

problemDoes not include inter-enterprise

debt. (TRIANGULAR DEBT)SOE assets are systematically

overvalued.Large unfunded pension liabilities

many have delayed or stopped making contributions

some borrow money from state banks to finance

FactorsExpansion of non-state firms,

especially into more profitable sectorsprice liberalization of agricultural

commodities and other raw materialsgrowth of real wages beyond

productivity growthexcess employees. 1994 World Bank

study of 142 enterprises. 60% > 10%. 33% > 20%.

Excess social expenditures

Responsibility for providing worker housinglow rent levelsunits sold below cost

responsibility for education and health services

Asset stripping

•Managers move assets of SOEs into non-state enterprises

September 1997CPC announced it would privatize

269,000 of its 370,000 SOEs

present status???