Understanding China's Economic Transformation

Antonio Graceffo, PhD, China-MBA
安东尼博士
School of Economics Shanghai University
上海大学经济学院
Economic Development with Chinese
Characteristics (China’s post 1978 economic
transformation)
中国特色经济发展(中国1978 以后经济改革开放)
5月26日星期五
18:30至21:00我
将在芬兰芬兰上海
商业协会发言。

China is the world’s second largest economy.
1 United States 17968
2 China 11385
3 Japan 4116
4 Germany3371
5 United Kingdom 2865
6 France 2423
7 India 2183
8 Italy 1819
9 Brazil1800
10 Canada 1573
GDP by country
Antonio Graceffo (安东尼博士)

Understanding the Chinese economy
Mao Zedong
Mao era 1949-1976
The People’s Republic of China (PRC)
What kind of economy did or does the PRC have?

Command economy or planned economy
Communism
Socialism
Marxism
Leninism
What kind of economy do countries like
Cambodia and USA have?

Planned economy
Little or no private ownership of property
Very few private companies
The government owns all factors of production
State owned enterprises (SOE) dominate
Under the completely planned economy,
China was one of the poorest countries in the
world. In 1974, the per capita GDP was only
$158 Dollars per year.

Market economy
The market determines:
The price of goods
The price of raw materials
Allocation of natural resources
Availability of credit
Most companies are private and citizens are
free to choose where they want to work or
what business they wish to do.

Administered by successive levels of government
Government provided financing, and controlled the
prices of both inputs and outputs.
1954 - 1979, in China, SOEs and collectives accounted for nearly 100% of the
industrial sector.
There were almost no privately owned enterprises (POE).
Salaries were generally low, with managers earning
only slightly more than workers.
Employment for life
Numerous health and welfare benefits, free housing
and education for children
SOE output was sold to the government at prices set
by the government. Nearly all SOE profits were
turned over to the government.

Economic Reform
Deng Xiaoping
The Deng era
(1978-1989)
“In 1978, capitalists in China
were official ‘class enemies’ but
in 2001 they were welcomed
into the Chinese Communist
Party (CCP)” (Szamosszegi and Kyle
2011).

Xi Jinping: General Secretary of the
Communist Party of China
President of the People's Republic of China
Chairman of the Central Military Commission
1979, Chairman of the
Central Advisory
Commission of the
Communist Party of
China
Deng Xiaoping never held office as the
head of state, head of government or
General Secretary

"Socialism with Chinese Characteristics".
中国1978 以后经济改革开放
China Post 1978 Economic Transformation

1981, the "Economic Responsibility Policy"
after paying a share to the government, firms
could decide how to allocate profits.
1979 SOE reform, fang quan rang li policy,
SOEs were given greater autonomy and a share of the profits.
SOE managers and workers began thinking
more in terms of profits.

1980 the first special economic zone is
opened Shenzhen Special Economic Zone (深圳
经济特区)
In 1978, Deng Xiaoping’s economic reforms, China enacted
the Open-Door policy allowing for a partial liberalization of
production and private accumulation of capital.

Chinese Special Economic Zones (SEZ) allowed
the government to experiment with market
based economic policies, some of which they
would later adopt across the entire country.
China’s modern SEZs were a form of state
capitalism.

Increasing autonomy and incentives to managers. In
1992 the government began selling off smaller SOEs
(privatization)
1983 - 1987, a taxation system replaced the earlier profit sharing program.
1993, Company Law, western style corporatization of SOEs
Markets begin to determine pricing,
Finances must be raised through banks and creditors
Dividends paid to shareholders
Interest and principal paid to creditors, and tax to the
government.

1990s, Property rights established.
Many state assets became privatized
Some SOEs became joint stock companies.
Owners had more decision making authority and shared in the profits
Prior to 1993 employee associations and the enterprise branch of the
Communist Party monitored the daily activities of managers. Since
then, the law has expressly forbidden Communist Party officials
from interfering in corporate governance.
But since the government controls a large percentage
of voting stock, it still exerts a great deal of control
over companies by exercising voting rights

1 First Plan (1953–1957)
2 Second Plan (1958–
1962)
3 Third Plan (1966–1970)
4 Fourth Plan (1971–1975)
5 Fifth Plan (1976–1980)
6 Sixth Plan (1981–1985)
7 Seventh Plan (1986–
1990)
8 Eighth Plan (1991–1995)
9 Ninth Plan (1996–2000)
10 Tenth Plan (2001–2005)
11 Eleventh Plan (2006–
2010)
12 Twelfth Plan (2011–
2015)
13 Thirteenth Plan (2016–Antonio Graceffo (安东尼博士)

In the 1980s, Deng Xiaoping encouraged
entrepreneurial spirit by allowing managers of SOEs
to earn profits and even to declare bankruptcy.
Julia Ebner, Entrepreneurs: China’s Next Growth Engine?, TheDiplomat, August 07,
2014
http://thediplomat.com/2014/08/entrepreneurs-chinas-next-growth-engine/
China’s first private corporation laws
were passed in the 1990’s
In 1992, under Jiang Zemin, entrepreneurs were
permitted to join the Communist Party of China (CPC).

China’s top
entrepreneurs are:
Jack Ma (Alibaba)
Ma Huateng
(Tencent)
Robin Li (Baidu)
and
Lei Jun (Xiaomi
smartphones)
Julia Ebner, Entrepreneurs: China’s Next Growth Engine?, TheDiplomat, August 07,
2014
http://thediplomat.com/2014/08/entrepreneurs-chinas-next-growth-engine/
Current Chinese Premier Li Keqiang
offered support for new start-ups.
2006, Hu Jintao recognized innovation
and entrepreneurship as the way
forward for China

In practice, a retired government official
would usually serve as chairman of the board.
Under this new law, the Board of Directors, composed of the delegates
of the largest shareholders, would elect and monitor the directors.
This was not a privatization. The government maintained
both its ownership and ultimate control of the SOEs.
Corporatization of SOEs

“Grasping the big, and
letting go of the small”
Smaller SOEs were sold
off and larger ones were
kept. Many larger SOEs
gobbled up smaller ones.
1993-2003, the end of
lifetime employment and
the “iron rice bowl” system.

SOEs were heavily subsidized.
Extremely uneven playing field
Before 2003 it was
hard for POEs to
enter the market.
Entry costs were
high and POEs
had less access to
bank financing.
In 1997, ninety per cent of bank loans were
granted to SOEs, although two thirds of these
firms were losing money
SOEs, on the other
hand, could obtain
essentially non-
performing loans from
the state or from state
controlled banks

Socialism with Chinese characteristics
Antonio Graceffo (安东尼博士i)
Reform era (1978- Present)
Private property
Privately owned enterprises (POE)
Market driven prices
More freedom for citizens to choose
their job or business
Stock Market
Convertible currency

Some SOEs were corporatized, then privatized and
some portion of the shares were sold on the stock
exchange, although the government retained much
of the ownership.
The Shanghai Stock Exchange was reopened in 1990.

Scott Cendrowski, China’s Global 500 companies are
bigger than ever—and mostly state-owned, Forbes,
China’s largest companies are state
owned and most are publicly
traded.

From 2003 to the present western style capital management systems
Bank reforms
Market based loan approvals
Non-performing loans decreased
Entry costs dropped. Favorable loans to SOEs still existed,
but the government subsidies had decreased dramatically
Today, SOEs are still a large and important factor in the Chinese
economy. The remaining SOEs are generally very large

Today, still unbalanced allocation of
resources between SOEs and POEs
SOEs could cut staff by a third with no
impact on output
2013 “mixed ownership economy,” SOEs partially privatized but government
retained ownership control.
Exposing SOE managers to market pressures to increase their efficiency.
Professionalization and marketization of SOE managers
Fears of increasing unemployment may be one of the factors which
is hampering the government’s ability to further reform the SOEs

In total, over 100 Chinese companies
appeared on the Fortune 500 list
The three largest companies in the Forbes Global 2000
in 2016 were; Industrial and Commercial Bank of
China (ICBC) China Construction Bank (CCB), and
Agricultural Bank of China (ABC)
China is home to some of the world’s largest companies
and yet, most people are unaware.

WeChat is one of the world’s largest
communication apps with 1.1 Billion accounts
and more than 983 million users.Top WeChat stats and trends 2017, China Internet Watch

Two Chinese companies which have become
icons are Huawei and Alibaba.
Companies can become national champions based on
their size and success, but only a few Chinese
companies can become icons.
To become an icon, a Chinese company has to excel
internationally while maintaining its Chinese identity,
global–success with Chinese characteristics.

Huawei Technologies Co. Ltd. Was included in Fortune
Magazine’s 2010 Global Fortune 500. In 2012, Huawei became
the largest telecommunication company in the world.
But you will not find Huawei being traded on the New York
Stock Exchange because Huawei is not a public company. It is
owned by its employees, making it one of the largest employee
owned companies in the world.

Alibaba is the 95th largest company in
the world and the largest company in its
category. By far, Alibaba is most iconic
Chinese company, the one that took on
the world and won.
Alibaba
“Share of e-commerce in China is likely to
be the defining measure of success on the
net.” Duncan Clark

安东尼博士
China is the largest trading partner of the Association of Southeast Asian
Nations (ASEAN). China is also among the top five trading partners of each
ASEAN member taken individually.
中国是东南亚国家联盟
（ASEAN）最大的贸易伙
伴。过去十年来，中国与
东盟的贸易额增长了三倍多。
中国也是各个东盟成员国前
五大贸易伙伴之一。
By 2016, bilateral investment had reached $160 billion. And
bilateral trade had reached $472 billion (Wong 2017).

安东尼博士
The Association of Southeast Asian Nations (ASEAN) is a
regional economic cooperation between ten countries:
Indonesia, Malaysia, the Philippines, Singapore, Thailand,
Brunei, Cambodia, Laos, Myanmar (Burma), and Vietnam.
东南亚国家联盟是印度尼西
亚，马来西亚，菲律宾，新
加坡，泰国，文莱，柬埔寨，
老挝，缅甸，越南等十个国
家之间的区域经济合作。

安东尼博士
Singapore population 5.6 million per capita GDP $53,000
Brunei 417,784 per capita GDP $25,000
Malaysia 30 million per capita GDP $9,500
Vietnam 89 million Per capita GDP$2,100
Lao 6.8 million Per capita GDP less than $2,000
Cambodia 15 million Per capita GDP $1,200
ASEAN Basic economic data
Population of 608,405
GDP of $2323 trillion
The member countries have very different economies
Indonesia Population 246,864 and per capita GDP $3,600
Thailand population, 66.785 million per capita GDP less
than $6,000
东盟基本经济数据
人口608.4百万人
国内生产总值2323万亿美元

安东尼博士
State owned enterprise are not necessarily intended to earn a profit. Two
of their main purposes are to obtain raw materials (including minerals)
and energy (oil and gas).
State owned enterprises have the advantage of
borrowing from state owned banks (soft loans),
using petrol, raw materials and other inputs from
other state owned companies (at subsidized prices).
They often operate in protected sectors where
they do not have to compete and where they
can benefit from economies of scale.

安东尼博士
(1958-1960) Villages were organized into cooperatives of 20 to 40
families. The communes built backyard blastfurnaces to make iron
and steel for tools.
The quotas for iron production were so high
that the villages could not meet them. Out of
desperation, they melted down steel tools and
implements to add to their iron quota. The
resulting iron was of terrible quality and was
later used to make new tools, to replace the
good ones they had melted.

安东尼博士
China’s One Belt One Road (OBOR)
one of the largest projects ever undertaken.
Includes: roads, ports,
fiber optic cables,
and pipelines
Increased economic activity from
China to South and Southeast Asia,
Europe, The Middle East, and
Africa.

安东尼博士
A railway from Lao to Yunnan
and Singapore to Kunming
Planned infrastructure projects
Indonesia’s first high speed rail
linking Jakarta to Bandung

安东尼博士
Sri Lanka’s bilateral public debt with China is US$3.9 billion
Veasna Var, and Sovinda Po, Cambodia, Sri Lanka and the
China debt trap, East Asia Forum, March 18, 2017
China loaned Sri Lanka $301 million at 6.3% For the Hambantota Port project
World Bank and the Asian Development Bank (ADB) Interest rates are only 0.25–3%
Annual interest payments are $100–200 million

安东尼博士
Veasna Var, and Sovinda Po, Cambodia, Sri Lanka and the
China debt trap, East Asia Forum, March 18, 2017
Sri Lanka government could not keep up with payments, so they have granted a
Chinese company 80% of Hambantota port on a 99 year lease
Because of $300–400 million, the
government has also granted a Chinese
company operating and managing control of
Mattala Airport

安东尼博士
The China-Pakistan Economic Corridor
(CPEC)
(中国-巴基斯坦经济走廊)
CPEC will link China’s Northwestern Xinjiang
Province with Gwadar Port in Pakistan, and on
to Iran, where much of China’s oil comes from.
Utilizing Gwadar Port reduces the distance to less than 5,000 km

安东尼博士
CPEC is expected to cost between $54 and $71 billion financed by
concessional loans from Chinese state banks, the Asian Development
Bank (ADB) and the new, China-backed Asian Infrastructure Investment
Bank (AIIB), which Pakistan must begin repaying in 2020.
Infrastructure construction projects are carried out by Chinese
companies, often with labor and raw materials imported from
China. These companies, and many other Chinese enterprises, are
given tax free status.

(安东尼博士))
The US-China trade deficit in 2016 reached
$347,037.9 MILLLION
Antonio Graceffo
(安东尼博士))
Donald Trump’s mantra “America First”
Donald Trump has blamed the US-China trade deficit for
unemployment and slow GDP growth. Economists are not
100% convinced that a trade deficit is as bad as it may seem.

(安东尼博士))
Antonio Graceffo
(安东尼博士))
Many economists feel that China’s wages are too low, given how rich China is.
Per capita GDP
(used as average income)
China $7,924.7
Malaysia $9,766.2
Gabon$10,966
A number of countries which are much poorer than China have higher incomes.
许多经济学家认为，考虑到中国的富裕程
度,中国的工资太低。许多比中国贫穷的
国家收入更高。
人均GDP（用作平均收入）
中国7,924.7美元
马来西亚$ 9,766.2
加蓬$ 10,966
西欧经济最差的国家是希腊，人均GDP为
18,035.6美元
The country in western Europe with the worst economy is
Greece, which has a per capita GDP of $18,035.6 .
(Worldbank 2016)

安东尼博士
GDP than China
Seychelles $15,476
Equatorial Guinea
$11,120
Mauritius $9,116
Several African countries have higher per capita

安东尼博士
Falkland Island $35,400
Aruba $25,353
Trinidad and Tobago $22,400
Uruguay $15,573
Argentina $13,431
Chile $13,383
Venezuela $12,265
Latin America and Caribbean Countries

Lower wages
While the average factory worker in China earns
around 3000 RMB per month ($463) (Thayer Consulting, 2016)
Chinese products are cheaper than American products on world markets,
including inside of the US. One reasons for this is that Chinese wages are very
low compared to other developed countries.
A factory worker in Vietnam earns around $145 per
month.
The average factory worker in US earns
$11.93/hour $1,908/month (Payscale.com)
安东尼博士

安东尼博士
China alone accounts for 25% of the world’s graduates
(Ren, Zhu, & Warner, 2011 cited in Su, Zhang and Nisar 2015)
6-7 million Chinese students graduate university each year
(Su, Zhang and Nisar 2015).
41% want to work in the service sector (Statista 2014).
64.7% of graduates wanted to work in first-tier cities,
Beijing and Shanghai
29% in multinational companies
23.5% in privately owned companies (Renren.com, China.org.cn 2015).
Nearly 100% of Shanghai graduates wish to
remain in Shanghai (Echinacities.com 2015).

Increased faith in and value of the Chinese currency has
played a major role in China’s economic rise, particularly in
the field of outbound investment.
The Chinese currency
Yuan
Renminbi (RMB)
Chinese New Yuan (CNY)
Convertible Currency

The RMB as special drawing rights currency
(SDR)
In 2015, the International Monetary Fund
(IMF) agreed to include the RMB, alongside
the US Dollar, Euro, Japanese Yen, and
Great Briton Pound as a special drawing
rights currency (SDR).

Not a 100% free market economy
Socialism with Chinese characteristics
Although China’s economy is more market
oriented, the government still controls much of:
Allocation of resources
Availability of credit
The conversion of the RMB
Stock Market fluctuations
Capital flight
"The 150,000 SOEs account for 17 percent of urban
employment, 22 percent of industrial income, and 38
percent of China’s industrial assets, according to
JPMorgan Chase" (Curran 2015).

Going out policy
(1999)
Since the late 1990’s Chinese companies have
been encouraged to go abroad and invest in
minerals, new technology, energy, natural
resources, and food. Chinese companies also
list on foreign stock exchanges to obtain
foreign capital investment.

Outbound Investment by SOEs
SOEs were motivated to expand overseas to
become larger and less of a target for
liquidation under China’s policy of cutting
the smallest SOEs
By 2009, 108 SOEs had invested in 5901 foreign firms
Nearly 38% of total SOE profits were from outbound investment
SOEs invested in minerals, energy, and raw materials used in
production to support Chinese economic development

Going out policy 2007-Present
In the last few years Chinese GDP growth has
slowed down. Unemployment among young
college graduates is growing as is China’s
debt.
Approximately 7 million new graduates each
year competing for service sector jobs
New focuses of going out include
Job creation
Obtaining new markets for Chinese products

The first generation of China outbound investment was lead by
SOEs investing mostly in raw materials and energy. Often in
exchange for infrastructure investment.
The motivation may have been strategic, rather than profit-
driven.
SOEs had the advantage of operating in protected
sectors such as telecommunications, and banking
and having better access to soft loans from state
owned banks and to raw materials. Also, not having
to earn a profit gave them more competitive than
privately owned companies from other counties.

The latest generation of Chinese outbound investment has seen
increasing numbers of smaller, privately owned companies driven by
profit. Chinese businesses are doing small import export of cheap
products even into countries such as India or Cambodia where
Chinese products are cheaper than local ones.

Overseas Chinese POEs include small retail
businesses, hair cutters, hotels, and
restaurants.

Antonio Graceffo, PhD, China MBA (安东尼)
Contact: antonio_graceffo@hotmail.com
Linkedin: https://www.linkedin.com/in/antoniograceffo
Antonio Graceffo (安东尼)
谢谢大家听我的报告

Understanding China's Economic Transformation

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