Yale School of Management 1 Rise of the State in China: a financial perspective Zhiwu Chen Yale School of Management May 1, 2012.

Yale School of Management

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Rise of the State in China: a financial perspective

Zhiwu Chen

Yale School of Management

May 1, 2012

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Today’s Agenda

The re-rising of the state --- recent trends

Implications for economic growth model and legal development

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Government size in comparison

In 1766, the Qing government revenue was about 49 million taels of silver, equal to annual income of 2.05 million Beijing residents.

In 2010, U.S. Federal & local government revenue = $3.9 trillion, equal to 104 million Americans’ disposable income.

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Government revenue, urban vs rural per-capita disposable income

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100

100

200

300

400

500

600

700

800

900

1000

1100 Cumulative growth of gvnmt revenue

Cumulative growth of urban resident’s disp. income

Rural per-capita income growth

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Government revenue as multiples of urban residents’ per-capita disposable income

100 millions

0

1

2

3

4

5

3.3

2.42.7

1.91.91.91.71.71.51.51.51.71.82.02.1

2.42.52.62.8

3.03.3

3.73.94.04.3

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亿人

19781980

19851989

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

20100

2

4

6

8

10

12

14

8.5

6.15.0

4.4 4.3 4.4 4.4 4.7 4.3 4.0 3.8 4.1 4.65.2

5.96.9

7.68.3

9.09.7

11.0

12.312.913.3

14.0

Government revenue as multiples of rural residents’ per-capita disposable income

100 millions

Yale School of ManagementFiscal expansion means more state power

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1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

0

5

10

15

20

25Gvmt administrative ex-penditure as % of fiscal budget

Data source: 杨宇立、钟志文《国内国际行政支出实证比较》 , 2010. Table 1-35.

Yale School of ManagementComparison with Other Countries: Administrative

Expenditure as % of Fiscal Budget

8Data source: 杨宇立、钟志文《国内国际行政支出实证比较》 , 2010. Table 1-35.

Norway Japan Canada France USA Australia Romania Russia China0

5

10

15

20

25

9.259.92 10.02 10.47

11.1912.16

18.720.6

22.5

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Government expenditure structure

In 2007,expenditure on public health, social security and unemployment benefits = RMB 600 billion, =15% of total budget，= 2.4% of GDP， = RMB 461 per capita（ 3% of urban residents’ disposable income）

In the U.S.， Federal expenditure on same items = $1.5 trillion， =61% of Federal Budget， =11.5% of GDP, =$5000 per capita (18% per-capita disposable income

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Consequences of government as investor/consumer

Economic growth driven more by investments, and less by consumption

Hence, more by exports and less by domestic demand

More by resources-intensive and energy-intensive industries, and less by the service sector

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Fixed investment as % of GDP

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35%33% 32% 32%

34% 33% 33% 34%36%

41%44%

48%51% 52%

55%

66%

70%

0%

10%

20%

30%

40%

50%

60%

70%

80%

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Investment as % of GDP

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Fixed investment divided by disposable annual per-capita income

12

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

0

0.2

0.4

0.6

0.8

1

1.2

1.4(in billions)

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Household consumption elasticity in GDP ： how does it relate to SOE share?

70 countries from 1980 --2003

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3.0 6.2 9.8 13.5 29.90.75

0.8

0.85

0.9

0.95

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Quintiles based on SOE share in GDP as of 1980

Cg = a + b * GDPg + eb

Yale School of ManagementState owning and spending too much: detrimental to rule of law

4.183.77

2.79

2

3

4

5

10.3% 15.8% 30.0%

SOE investment as % of GDP in 1980

Rule of law ratings in 1995, for three groups each with 21 countries.

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China’s long tradition: state as grabbing hand, via state-owned lenders and traders

Government Loans Private Loans

Years Legal Limit Legal Limit

600-650 84% 72%

650-728 84% 72%

728-960 60% 48%

960-1260 60% 48-60%

1260-1368 36%

Data: Yang (1952), Homer and Stylla (1996)

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Other Remarks

Crowding out private firms in industries where SOEs are present

Privatizing state-owned assets and limiting taxation power as the way to go

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