china: class 3. industrial activity good news
Post on 22-Dec-2015
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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???