China: Building Capitalism with Socialist Characteristics

Agenda
‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ To analyze the different dimensions of Chinese culture. To analyze the Political risks and its impact on foreign firms. To analyze the prevalent risks in the Chinese economy. To analyze the stages of China s development using Rostow s Model. To analyze the impact of Banking Reforms in China and its impact on the overall economy. To give a brief overview of the current Chinese economic model. To understand the rising inequalities in the Chinese society and the causes for it. To put forward a broad outline of the strategy that China should adopt in the final stage of reform.

Hofstede s Cultural Dimensions 140 120 100 80 60 40 20 0 China USA India 20 80 60 40 40 62 46 40 118 Power Distance 91 77 61 56 48 40 IndividualismCollectivism Masculinity-Feminity Uncertainity avoidance Long Term Orientation .

‡ Individualism-Collectivism: At a score of 20 China is a highly collectivist culture where people act in the interests of the group and not necessarily of themselves. ‡ Uncertainty avoidance: At 30 China has a low score on uncertainty avoidance. The subordinate-superior relationship tends to be polarized and there is no defence against power abuse by superiors. ‡ Long Term Orientation: With a score of 118 China is a highly long term oriented society in which persistence and perseverance are normal.Hofstede s Cultural Dimensions Contd. ‡ Masculinity / Femininity: At 66 China is a masculine society success oriented and driven. The Chinese are comfortable with ambiguity. ‡ Power Distance: At 80 China sits in the higher rankings of PDI. . The need to ensure success can be exemplified by the fact that many Chinese will sacrifice family and leisure priorities to work. the Chinese language is full of ambiguous meanings that can be difficult for Western people to follow. Chinese are adaptable and entrepreneurial.

. ‡ The Chinese govt. ‡ Tiananmen Square in 1989.Human Nature Orientation(HNO) ‡ China. ‡ Intent on maintaining their unique brand of political control. ‡ Absence of civil liberties. has always dealt with disgruntlements and rebellions with an iron hand. ‡ No national elections.Negative HNO ‡ Stability is considered as the most priced commodity by the CCP.

most people respect and obey Positive HNO Formal. CHINA Negative HNO Society does not trust people to obey laws. . unrealistic rules.PDI/HNO Relationship HIGH PDI Laws challenged to a certain degree LOW PDI Pragmatic rules.

Instabilities pertaining to the issue of Tibet. .Political Risk Analysis ‡ Typology of Political Risks in China Government Risks Firm Specific Risks Discriminatory Regulations Nepotism towards SOEs and TVEs Instability Risks Firm specific boycotts Example : Google Country Level Risks Risk of mass nationalization (happened in 1949) Currency inconvertibility Cross border issues with India.

Google. . Microsoft. E.g. despite all the private-sector growth.Impact of Political Risks ‡ Uncertain. which. ‡ Companies are also closely monitoring the social instabilities in China and deferring their investments for a much favorable climate or taking it somewhere else. politically influenced investment climate ‡ Poor legal protection for foreign firms ‡ The financial system is murky and favours state-owned entities. still make up 40% of China s economic activity ‡ Threat of retaliatory protectionist policies deters foreign investors ‡ Foreign companies are also holding back due to the reputational risks they face in home countries due to their operations in China.

51 in 2005 Recent revaluation in 2010 Chinese exports are cheaper Local Content Laws Price Control ‡ Strict censorship ‡ Curtailing media freedom ‡ Currently the Chinese economy follows a market driven pricing system. ‡ Fixed exchange rates makes it unfavorable for other countries to export to China Tax Control Labor problems Import Restrictions . thereby mitigating the inherent risks of state-fixed prices.Economic Risks Type Exchange Control ‡ ‡ ‡ ‡ Prevalent in China Fixed currency exchange rate Yuan valued at 8. ‡ Divided tax system in 1994 ‡ Streamlined the tax system and enabled it for the socialist market economy ‡ 2006 China started facing shortage of unskilled labor ‡ Increasing labor costs has forced companies to look towards companies like Bangladesh or Philippines.

The Rostow Model as Applied to China Stage 1: Traditional Society ‡ Agriculture driven economy ‡ Ascent of Chinese Communist Party (CCP) ‡ Closed economy and protectionist policies of Mao Zedong and CCP ‡ No links to the market and no influence of market forces ‡ Great Leap Forward ‡ Massive communes of agricultural collectives ‡ Back yard steel production Slow down in agricultural production GNP declined by a third in 1960 Tyranny of Red Guards The famine of 1960 Conflicts and fighting between factions of Red Guards ‡ Total Anarchy by 1976 ‡ ‡ ‡ ‡ ‡ Stage 2: Pre-Conditions to Take-Off .

Stage 3: Take Off ‡ Mao s death in 1976 and subsequent leadership change ‡ Deng Xiaoping coming into power ‡ Breaking up of the agricultural communes and replacing them with Household Responsibility System ‡ Family planning and One child policy ‡ Opening up of four SEZs ‡ New tax incentives.The Rostow Model Contd. foreign exchange provisions to attract potential investors ‡ Establishing the system of Dual Exchange Rates ‡ More direct control over factories and longer lease periods .

Developed countries like the US. etc are currently in this phase.The Rostow Model Contd. ‡ Tightening of import norms and credit availability in the early 90 s. The fifth and final stage is the Mass Consumption Stage . Stage 4: Drive to Maturity China is currently in the fourth stage of Rostow s Model of Development. UK. ‡ Establishment of new stock exchanges ‡ Creating new institutions for an increasingly market oriented economy ‡ Introduction of Divided Tax System ‡ Adjustments in dual exchange rates ‡ Disinvestment of SOEs and TVEs ‡ More open attitude towards Privatization ‡ WTO membership ‡ Banking Reforms ‡ Setting up AMC s ‡ Reduction in NPLs . ‡ Introduction of Contract Responsibility System ‡ More control to SOEs ‡ Establishment of TVEs ‡ Easy availability of credit ‡ Move to bring the country closer to a market based system of pricing.

total NPLs amounted to 1. .Banking Reforms ‡ People s Bank Of China (PBOC) had absolute control over the monetary system and the four state owned banks.7 trillion RMB or 13% of total GDP ‡ The banking reforms adopted by the Chinese government can be classified into two phases. ‡ Steep increase in the number of Non Performing Loans(NPLs) ‡ In 2004. ‡ Incessant lending to troubled SOEs and TVEs.

borrowed 1.4 trillion RMB from PBOC and state commercial banks ‡ Purchased NPL equivalents from state owned Banks ‡ Injected $60 Bn from Forex reserves into the banks through a new institution named China SAFE(Huijin) ‡ Established four new Asset Management Companies(AMCs) Impact ‡ Recentralization of power in PBOC. pushing it closer to the market ‡ Failed to make an impact on NPLs Phase 2 ‡ Transformed the banks into listed companies.Phase Phase 1 ‡ ‡ ‡ ‡ ‡ Reforms Started in early 90 s Open market operations Interest rate controls Eliminated quotas on banking credit Restructured internal management system ‡ Establishing the China Bank Regulatory Commission(CBRC) ‡ Started in 1999 ‡ Govt. ready for foreign investments ‡ Restructuring or disposing of debts ‡ Sharp fall in the number of NPLs ‡ Creation of modern capital markets in China ‡ However there was little interest from foreign investors .

‡ The fixed exchange rate or pegged exchange rate system essentially kept the value of Yuan lower than what the market would have chosen. ‡ Chinese goods remain lower in price for purchasers in other countries thus benefitting all Chinese exporters. ‡ However a spew of revaluations and adjustments after 2005 should be considered as an effort by the Chinese in providing greater currency flexibility. .Revaluing Yuan ‡ China dropped the Dual exchange rate system in the late 90 s ‡ The main purpose of this was to provide the Chinese manufacturers with an advantage in the international markets.

. Deng Xiaoping was willing to consider capitalist methods of economic growth so as to revitalise China's economy. ‡ It supplemented China s centrally planned economy and the high GDP growth rate has been attributed to it. along with the central SOEs and TVEs. ‡ However he remained committed to centralized control and the one-party state. ‡ The fundamental distinction from the Western mixed-market economies is the underlying authoritarian political philosophy of absolute control.Socialist Market Economy ‡ After the failure of the Great Leap Forward (1958-1961). ‡ Privately owned enterprises are a major component of this economic system.

Reforms under Socialism with Chinese Characteristics ‡ Decollectivizing agriculture ‡ Allowing private businesses and foreign investment in the late 1970s and early 1980s ‡ liberalisation of trade and prices ‡ dismantling the welfare state in the late 1990s ‡ Banking reforms in the late 90 s and early 21st century ‡ Revaluation of Yuan ‡ Disinvestment of SOEs and TVEs .

Private Sector ‡ Due to the poor performance of traditional state enterprises in the market economy. ‡ Under this scheme. ‡ The private sector's share of the GDP rose from less than 1% in 1978 to 70% by 2005 ‡ Numerous sectors that were previously run by the state were privatised during the formation of China's current market economy. the state retains ownership and control of large enterprises but the central government has little direct control over the operations of state-owned enterprises. China embarked on a massive restructuring program of privatisation. .

telecommunications. coal. ‡ In 2006. ‡ Liberalization continues to be rolled back in the state-sector by the consolidation of state enterprises into large "national champions" with the goal of consolidating efforts and creating internationally-competitive national industries. ‡ The state sector is concentrated in the 'commanding heights' of the economy with a growing private sector engaged primarily in commodity production and light industry.End of Reforms ‡ By 2005 the market-oriented reforms. oil and petrochemicals. the Chinese government announced that the armaments. aviation and shipping industries had to remain under "absolute state control" and public ownership by law. . including privatisation. power generation and distribution. which lends according to state priorities. ‡ The state retains indirect control in directing the non-state economy through the financial system. was virtually halted and partially reversed.

5. ‡ As profitability of the SOEs declined in the reform era. ‡ External liberalisation may have facilitated more rapid growth.Rising Inequalities ‡ Gini co-efficient for China has been hovering between 0. ‡ CCP s reluctance to slow down growth for dealing with rising inequalities. coastal areas. ‡ Restrictions on labour movements have been one important factor behind rural-urban inequalities in China. ‡ Public resource mobilisation has shown an increasing in-equalising tendency and a bias towards richer. ‡ Govt. nor has it seen proliferation of small enterprises on the scale of the industrial and service sectors. ‡ Agriculture sector has not received much state patronage in terms of investment. the system was marked by chaos with local governments imposing other revenue raising measures. . unwilling to eliminate Hukou system. ‡ Since 1984. agricultural growth has decelerated and lagged behind industrial and service sector growth rates.4 and 0.. it has also been a major factor behind increasing inequalities.

‡ Create health and pension insurance programs ‡ Revitalizing the country s aging system of social security. ‡ Providing a basic standard-of-living allowance for low-income urban citizens ‡ Creating unemployment insurance for certain classes of employees. .Dealing with Inequalities ‡ Abolition of agricultural taxes and all surcharges for peasants.

‡ Consider the possibility of a floating exchange rate. ‡ Device and implement massive programs for redistribution of wealth. . ‡ Less stringent norms regarding censorship. ‡ Encourage more foreign participation in the banking sector. ‡ Increasing inequality can lead to civil unrest. ‡ However the CCP has to give relaxations and move away from absolute control. free press and content control. ‡ Consider private partnership in the AMCs. ‡ Resort to the tried and tested strategy of controlled reforms.Strategies for the Final Phase of Market Reforms ‡ Continue moving towards the market. ‡ Adopt more liberal trade policies. ‡ Make the provincial and central government more accountable.

‡ Sudden move to a new system can hamper the growth and aggravate the issues in hand. . ‡ Hence there is no mass consensus among the citizens of the country about democracy.Move to Democracy ‡ Highly improbable after the existence of a single party for 63 years. the growing middle class attributes their prosperity to the current government and its policies. ‡ Furthering the concept of Socialist Democracy is a better alternative for China s current set up. ‡ However. ‡ This has led to a apolitical urban youth population.

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