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23 March 2005
CHINA 2005
Market Economy with the Instincts
of State Monopolism
Willem van Kemenade
Website: www.willemvk.org Email: kemenade@xs4all.nl
China’s Status as a
“Non-Market Economy”
• During WTO accession in 2001, China accepted
NME status until 2016.
• Now, over three years after accession, China wants
to renegotiate. Reasons:
– 230 anti-dumping cases since 2003
– Recognition of Russia as ME by EU and US
• 37 Countries, Brazil, Singapore, Malaysia, New
Zealand and Russia have recognized China as ME. .
• There is no uniform definition what an ME is. Every
WTO-member can apply its own criteria.
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Economic Realities
in China
• China is a hybrid transitional economy from dirigisme to
the free market.
• Top-economist Hu Angang says that China is a marketeconomy for 70-80 %
• Degree of state-ownership and control vary by sector.
• Transportation, grain, steel, IT/telecom, gas/oil/energy are
“strategic sectors”, still predominantly state-owned. They
dominate a rather closed market as oligopolies.
• Banking, automotive and light industrial sectors are
relatively open and have significant degrees of foreign
participation.
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The State Oil Majors
• CNPC or Petrochina; CNOOC (Offshore); Sinopec
(Refinery); Sinochem (Trading). Global oil majors have
minority-shareholdings: 2-3%
• Aggressive acquisitions in developing countries:
Indonesia, Kazakhstan, Azerbaijan, Sudan, Angola,
Gabon, Venezuela. More recently plans for acquisitions
in Canada and the US (Unocal). $ 70 bn deal with Iran !
• Petrochina spent approx. $ 40 billion on acquisitions.
State-strategy ! Oil-imports from new acquisitions
limited. Price higher than spot-market.
• Chinese have to compete in an arena where global
majors have been dominant for over a 100 years.
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Chinese State Oil Majors not
Popular Abroad
• China’s state oil firms are failing to bring enough oil home.
• CNPC was forced to drop out of a bid for Slavnet after a
Duma resolution opposed a foreign buyer.
• Russia also refused to build a pipeline from Angarsk to
China’s petro-city of Daqing, but instead chose to circle it
around China to its Far Eastern port of Nakhodka.
• In February 2005, Sinochem failed in its attempt to
purchase an oil refinery in Inchon, Korea, when
shareholders voted to oppose it.
• Fierce debate whether China should stop relying on the
big three for its oil needs or create private conglomerates,
modelled on Royal Dutch/Shell or Exxon Mobile.
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“West-Pipelineistan”
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“East
Pipelineistan”
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China Dominant Foreign
Oil Power in Sudan
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China's crude oil imports are
expected to reach a record
110 million tonnes this year, 21
% more than last year.
Half of China’s oil imports are
from the ME, half from Africa.
It is China’s strategic policy to
get oil from anywhere,
particularly there where the US
is not in control.
In 1997 US sanctions banned
US oil-companies from Sudan.
CNPC poured hundreds of
millions in Sudan’s oil industry,
took a 40 % stake in Sudan’s
“Greater Nile”, constructed oil
fields, a refinery and pipelines.
Sudan, formerly an oil-importer
now earns $ 2 bn on exports.
From Sudan, China plans to
expand to Nigeria through
Chad.
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Telecom
• Two wireless: China Mobile, China Unicom; two
fixed: China Telecom, China Netcom.
• Under the previous minister of Info Industry Wu Jichuan giant
modernisation and expansion, with participation by foreign investors:
In 10 years from African to world top level !
• Now serious management- and regulation problems. Guided
competition in an oligopoly. Recentralisation or de-regulation ?
• China Unicom has two different 2G standards: 84 m. GSM
subscribers and 27 m. CDMA.
• With Siemens China developed its own 3G standard: TD-SCDMA,
which is scheduled to be commercialised this year.
• How many licences: 2, 3 or 4 ?
• Minimal foreign participation in services due to prudential
requirements (strategic). In “Value Added” more flexibility.
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Automotive Sector
• There are 120 car manufacturers in China. Ten control 80 % of the
market. Only two produce more than 600.000 cars:
– Shanghai Automobile Industry Corporation: JV’s with VW, GM, MG
Rover; takeover of Ssangyong ;
– First Automobile Works, Changchun: JV’s with Volkswagen, Audi, Toyota
and Mazda
– Dongfeng Motor Corp, Wuhan has JV’s with Peugeot-Citroen, Nissan,
Honda and Kia. In negotiations with Renault.
• In June 2004 the “State Development Research Centre” published a
policy plan with the strategic goal to have 50 % of all automobiles to
be produced by domestic manufacturers with full proprietary rights.
• After forceful lobbying by the various international Chambers of
Commerce, this plan was rescinded.
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China’s Global
Technology Position
• China’s role in the world economy is largely defined by
its participation in global production networks, established
by others, the Multinational Corporations (MNCs).
• Their dominant role derives from their control over standards and
intellectual property. The big question is whether manufacturing
and trading giant China, will also become a technology giant.
• China now spends 1.4 % of GDP on R&D annually. The OECD
average is 2.3 %
• 85 % of high tech exports are from foreign invested firms, which
employ managerial skills and proprietary technologies of MNCs.
• China is in a “patent trap”, that requires it to pay substantial
royalties to the patent owners out of the sales of its manufactures.
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China’s Drive to Create its own
Standards
• By the time of its WTO accession in 2001, China launched a drive to
create new standards in high tech to achieve equal footing with the
world's top economic powers.
• By creating homegrown standards, China is trying to increase the
use of Chinese innovations and requires foreign companies in China
to make products that use Chinese standards.
• Siemens has helped to develop China's 3G mobile-phone standard.
• It has received central government support, but thus far none of the
major state-telecom operators have agreed to commit to it,
preferring a foreign standard, WCDMA, instead.
• IBM, Microsoft and Philips all joined the Chinese group that
introduced the new way to compress audio and video signals into
digital form.
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The WAPI Standard
Controversy
• In May 2003, China announced that it would introduce its own
standard for encryption technology in wireless services, the WLAN
Authentication and Privacy Infrastructure (WAPI) standard.
• This was clearly a protectionist measure to enable Chinese
companies to cash in on a controversial government-imposed
standard and to relieve them from making royalty payments to
companies like Intel.
• Intel announced it would not support WAPI, due to poor quality.
The move would have thrown into doubt future sales in China of
computers that use Intel's wireless-enabled Centrino chips.
• After extensive lobbying by the U.S. government, vice-premier Wu
Yi announced during a visit to Washington in April 2004 that the
introduction of WAPI would be indefinitely postponed.
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Structural Obstacles against
Technological Progress
• China does have the techno-structure – the world’s largest number
of engineering graduates annually - the national will to introduce its
own standards and to achieve technological breakthroughs.
• However, China’s “industrial-strategic culture” encourages short
term profits, and excessive diversification. Most Chinese firms focus
on developing privileged relations with party officials, spurn
horizontal association and broad networking with each other and
forgo investment in long term technological development.
• Chinese firms continue to rely heavily on imported foreign
technology and components – severely limiting the country’s ability
to wield technological or trading power for unilateral gains.
• China's best hope for overcoming its technological and economic
weaknesses lies in a renewed focus on domestic political reform.
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Banking
• Commitments under WTO for 2004 were: opening of
local currency business for foreign banks in five cities.
China gave licences for nine.
• Targets for 2005 are further reduction of bad loans to 15
% and listings for the large state-banks and
simultaneous complete opening of the financial markets
for foreign banks in 2006.
• China Construction Bank and Bank of China would list
in New York and Hong Kong this year and each raise
between $ 4 and 10 billion.
• CCB announced late January that it was reconsidering
the New York listing due to the strict requirements of the
Sarbanes-Oxley Act.
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Increasing Foreign Participation
in Chinese Banks
• The Chinese authorities recognize now that Western banks play a
positive role in “transforming the guanxi-based mindset” of China’s
banking class.
• “By investing in Chinese banks, foreign banks have already
become a factor in the improvement of their governance” said Liu
Mingkang, Chairman of the China Banking Regulatory
Commission.
• Foreign banks are now encouraged to take up to 25 %
participation in local banks.
• Deutsche Bank competes with ING for a 25 % share in Bank of
Beijing in a deal of $ 200 million; HSBC has a 19.9 % share in
Bank of Communications. Citigroup in Pudong Development
Bank, Standard Chartered in Industrial Bank.
• Western banks transfer credit culture and sometimes technical aid
to improve risk-management or the credit control system.
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UNCTAD: “China, largest receiver of FDI will
soon be fifth largest “Outbound” Investor”
• According to an UNCTAD survey - May 2004 - China will
in two years be the fifth largest worldwide investor after
the US, Germany, the UK and France, ahead of Japan.
• Chinese companies are prominent investors in Africa,
particularly in energy and raw materials
• State-enterprises account for 43 % of investments
• The Chinese Ministery of Commerce issued new
regulations in October 2004, encouraging and facilitating
foreign investments by Chinese companies, both stateand private
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China’s “Outbound” Investments
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Phase One:
• Steel: Mines in Peru ($ 312 m.); Mines and aluminumsmelter in
Australia ($ 742 m.) – 10 projects
• Forestry: Canada (paper-industry) and New Zealand:
exploitation for 30 years of 20.000 ha NZ forest
• Fisheries: 71 projecten
Phase Two: Oil and Gas – 58 projects
• Oil: Kazakhstan, Sudan, Gabon, Angola, Ecuador
• Gas: Russia, Australia, Indonesia
Phase Three:
• Industries: Consumer-electronics (M. & A.), household
appliances (Haier), telecom (Huawei), automobiles.
• Lenovo takeover of PC division of IBM.
• Largest impending deals: takeover of Canadian nickel- and
copper giant Noranda for $ 5 bn. by China Minmetals and
Unocal door Petrochina.
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China, India and the
Fortune Global 500 List
• As a result of the different paths to development, China
has 15 companies on the 2004 Fortune Global 500
List against India 4.
• The Chinese companies are state conglomerates - power, oil, steel,
insurance, telecom, chemical, grain - and state-banks.
• China accounted for a third of the world’s growth in oil demand and
it gobbled up half of the world’s cement, a third of its steel, a quarter
of its copper and a fifth of its aluminum.
• PetroChina is 35 % bigger than Norway’s Statoil but it has 53 times
as many employees
• The Indian companies on the list are 3 in the oil-sector and
industry-conglomerate “Reliance Industries”.
• However, last year’s, Forbes 200, an annual ranking of the world's
best small companies, included 13 Indian firms but just four from
China. It will be years before Indian high tech companies are big
enough to make the Global 500.
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Selected Indicators China-India
China
India
Population
1.28 bn
1.03 bn
Population Growth Rate
0.87 %
1.51 %
10 %
25 %
$ 1.4 trillion
$ 600 bn
$ 1.090
$ 582
9.6 %
5.5 %
Foreign Direct
Investment 2003
$ 53.5 bn
$ 4.6 bn
Foreign Trade 2003
$ 840 bn
$ 114 bn
Size of Diaspora
55 million
20 million
Population in Poverty
GDP 2003
GDP per capita 2001
Average annual GDP
Growth Rate 1990-2000
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World Bank Atlas 2003 + Various Internet Sources
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The best Route to Economic Progress:
The Chinese or the Indian Way ?
• Welcome foreign investment, says China. But a comparison with
India suggests that FDI is not the only path. India's homegrown
entrepreneurs may give it a long-term advantage over a China
hamstrung by bad banks and a malfunctioning stockmarket.
• At the start of “Reform Communism” in 1978, the Chinese diaspora
and later multinationals, were eager to invest. China’s state-banking
system did not lend to private entrepreneurs. As a result, China’s
economy until recently was dominated by state-enterprises and
foreign investors. Private enterprise emerged only slowly.
• Democratic India under soft Fabian socialism could not allow foreign
investors to “exploit” the Indian people and gave priority to native
entrepreneurship.
• India has spawned cutting-edge, knowledge-based industries:
software giants Infosys and Wipro, pharmaceutical and biotech
powerhouses Ranbaxy and Dr. Reddy's Labs, to name just a few.
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The 14 Chinese Companies on the
“Fortune Global 500 List”
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Transparency International
Corruption Perception Index 2004
Selected
Countries
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Ranking
Score
Singapore
5
9.3
Netherlands
10
8.7
Taiwan
35
5.6
South Korea
45
4.5
China
71
3.4
India
Russia
90
2.8
Indonesia
Georgia
133
2.0
Nigeria
144
1.6
Bangla Desh
145
1.5
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Growing Inequality
• In 1980, when the turn towards a market economy started, China
had one of the world's most even distributions of wealth.
• A study by the Chinese Academy of Social Sciences, a state thinktank in February 2004 found that after more than 20 years of
economic reform urban residents now earn 2.8 times more than
rural people, just slightly better than Zimbabwe, which has one of
the highest gaps in the world.
• China is likely to have high structural inequality for a long time, for
the very simple reason that it is going to take decades to move the
huge rural population into industry and service jobs where they can
make more money.
• Unlike many developing countries, China’s social structure doesn’t
have the shape of an “olive” but an “onion”.
• China’s “Gini-coefficient” is 0.45 and tends to get higher. The
highest in the world is Brazil: 0.61
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China effectively resisted the
“Washington Consensus”
• In 1990, the World Bank issued a list of “virtues” for emerging
economies:
• They should be open to capital flows, while moving towards
transparency, privatisation and liberalisation.
• This became a doctrine, known as “The Washington Concensus”.
• China ignored the pressure from the World Bank, the IMF and
the US and this saved it from the financial collapse that hit
Thailand, South-Korea and Indonesia during the “Asian Crisis”
of 1997.
• China now has its own independent “coordinated development”
strategy, i.e. approach privatisation and free trade with caution,
open capital markets only gradually, use “assymetric” power
like huge dollar reserves to get leverage over a recklessly
spending U.S., and befriend neighbors by massive, fast
increasing imports.
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Joshua Cooper Ramo,
The Beijing Concensus,
The Foreign Policy Centre, London, May 2004
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Business Environment
• China’s business environment is expected to improve
but only modestly over the next four years – rising from
a ranking (maximum 10) of 5.3 in 1999-2003, to 6.3 in
2004-2008. In comparison with 16 regional neighbors,
China will remain in 11th spot.
• China’s world ranking out of the top 60 countries will rise from 42 to 38.
• Political risk will increase marginally from 4.5 (1999-2003) to 4.3 (20042008), due to the specter of social unrest.
• Constitutional recognition of domestic private enterprise will be an
important factor in improving the business environment.
• The financial sector will remain weighed down by massive amounts of
NPLs, but the entrance of foreign financial institutions will raise the
quality of the banking sector as a whole.
• Problem with IPR in China is not legislation, which is world standard.
The problem is with enforcement and this depends on cooperation of
local governments, police and judiciary.
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When will China’s Economy
be bigger than the US’s ?
• In 2003 China's GDP was $1.41 trillion and America's was $11.26
trillion. At constant, average growth rates of 8 % for China and 2.5 %
for the US, China would have a bigger economy in 2043.
• These calculations are all in constant-dollar nominal terms.
• What matters is not the exact date or number but simply that China
at some point in the next several decades will probably have a
bigger economy than the US.
• Current demographic forecasts suggest that China's population will
peak around 2050 and then start to decline. Well before that, say
2030, it will be demographically one of the oldest countries in the
world, with a very high retiree-to-worker ratio.
• Various imponderables – political crisis, effect of climate change,
war, may lead to different outcomes.
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