The Importance of TVE’s in China’s Early Economic Reforms

It is a generally accepted fact that the 1978 reforms of Deng Xiaoping centered on intrinsic motivations have contributed greatly to the economic expansion of China and have secured the country’s legitimacy as an economic powerhouse.  This shift has allowed for consumption be classified as the main driver of economic growth.  But what seems to be lost in translation of this significant progress are the micro reforms and entities that contributed to the initial growth of China in the 1980s.  One major reform mechanism utilized early on were the Township and Village Enterprises (TVES, 乡镇企业), which were market-oriented public enterprises under the purview of local governments based in townships and villages in the People’s Republic of China.  It is important to remember that TVE refers to companies located in townships and villages, not owned by township and villages.  This allows us to work under the framework of consumption and intrinsic motivations driving early growth (privatization), and contributes to why the TVEs were successful in China during the 1980s.

TVE have been hailed as one of the wonders of the reforms by Chinese and foreigners alike.  There initial success came at a pivotal opportunity where farmers’ incomes by the mid 1980’s began to stagnate, and the best solution to increase income was to stimulate non-grain and non-agricultural production.  In 1978 TVEs employed amount 28 million people, but between 1984 and 1997 they created nearly 100 million non-farm jobs.  Local governments tended to and fostered the developments of these TVE’s for they saw these entities as regular sources of revenues in resource-constrained environments.  The TVE reforms also allowed for the rural area’s labor forces to more efficiently engage in industrial outputs rather than agricultural outputs.  Even Deng noted the unexpected results, “what took us by complete surprise was the development of TVEs.. All sorts of small enterprises boomed in the countryside, as if a strong army appeared suddenly from nowhere” (Renmin ribao, 13 June 1987).  The results seem quite clear for it fuels individual incentives; the decision to relax the state purchasing monopoly on agricultural goods (a hallmark of Mao’s failed policies) to make them available to local rural industry allowed for the efficient usage of excess rural labor, processed agricultural products, and diversified production of a range of consumer goods and products for export.  Statistically, the results are justified as the growth rate was exponential in its explosives, with rural industrial output growing at 21 per cent per annum from 1978 through the early 1990s.

The presence of a ready labor force that was relatively cheap compared to urban areas was crucial to the expansion of the TVEs.  A tight budget constraint meant that there was greater incentive to produce things for the market that would produce a good rate of return on investment.  The strengths of the TVEs also included their flexibility in production but also their organizational structure (some were ran by the government, but most were not).  As Wong (1988, pp. 3-30) shows, through the 1980s most of the supposedly collective TVEs in practice operated as private enterprises (instead of as collective organizations).  If one looks at ownership, of the 12 million TVEs in 1985, 10 million were private.  Though TVEs maintained a presence in areas such as Southern Jiangsu and along the Pearl River Delta (Shanghai), TVEs were most vibrant in the poorest and most agricultural provinces of China.  The role of the TVEs during the 1980s allows us to generalize that private enterprise has played a crucial role in China’s economic development.  Why they are no longer as relevant in today’s Chinese society is another topic of its own.

 

China Economic Yearbook, 1998

 

Sources Consulted:

Saich, Tony. “Governance and Politics of China”. 4th edition. Macmillan Education, Palgrave. UK. 2015.

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Shanghai’s Mobike and the Entrepreneurial Culture in China

After China’s feudal system was abolished and a republican government was formed in the 1920s, a sector of small and medium-sized enterprises (SMEs) was created. This sector was virtually eliminated in the 1950s with the collectivization of agriculture and the nationalization of industry under Mao’s Communist government. Enterprises had to seek approval from the government for all expenditures exceeding $10, and SOEs held near-monopolies in the market. China’s “iron rice bowl” system, which is now abolished, guaranteed life-long employment in SOEs and controlled nearly every aspect of employee’s lives. Thus, it was difficult for government outsiders to gain significant social and economic standing. The reforms of Deng Xiaoping and the “opening up” of China’s economy has spurned spurred private sector growth. During the last 35 years the entrepreneurial sector has grown from about zero to “more than six million registered private businesses”, which account for 70% of China’s GDP. In 2000, private sector and state-owned enterprises generated equal parts of China’s GDP: 4 trillion yuan. This number has grown 18 times for private sector companies, while state-owned companies have only grown by one-third of private sector industries.

Historically, China’s entrepreneurs have been relatively uneducated and have had little to no management experience. In modern-day China, entrepreneurs are well educated, and average about 31 years of age. They are ambitious, curious, and are aware of the historical difficulties of generating investment and company growth. One company in particular, Mobike, is reaping the benefits of the recent growth of China’s entrepreneurial sector.

http://mobike.com/sg/public/hero.jpg

Mobike is a Shanghai bike-sharing startup founded in 2015 by Hu Weiwei. The company is unlike government-owned bike-sharing companies whose bikes are free and must be placed in designated areas around cities. Mobike’s bicycles are self-locking, can be left anywhere, and users unlock the bikes by scanning a QR code through the Mobike app. It costs about 1-2 yuan to use the bikes for one hour. In September 2016, Mobike had 30,000 bikes in China’s major city hubs, and planned to expand operations to 100,000 bikes by the end of 2016 due to an undisclosed investment from internet giant Tencent. Tencent owns WeChat, which is a social media app with over 800 million users. This investment will inevitably encourage young Chinese entrepreneurs and further fuel China’s private sector, as if it were not growing quickly enough.

Sites consulted:

https://www.bloomberg.com/news/articles/2016-10-30/uber-s-bruising-battle-in-china-is-being-refought-with-bicycles

http://www.forbes.com/sites/tseedward/2016/04/05/the-rise-of-entrepreneurship-in-china/#1e7d69986d61

http://news.bbc.co.uk/2/shared/spl/hi/in_depth/china_politics/key_people_events/html/4.stm

http://journals.sagepub.com/doi/full/10.1177/0266242613517913

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On Chinese Aluminum Capacity Growth

A major complaint frequently lodged against Chinese industry, frequently by US politicians or media outlets, relates to state-subsidized industrial production that allows Chinese producers to sell below cost in international markets. Most recently these complaints are focused on the aluminum industry. In the graph below, one can see the dramatic increase in Chinese aluminum production over the past 13 years.

Source: Thomson Reuters, Andy Holm

In one of his last acts as President of the United States, Barack Obama launched a formal complaint with the WTO with regards to artificially low-interest rate loans that allow Chinese aluminum facilities to modernize their facilities and increase production. Going back to the graph, however, one can see the major dip in production in January of 2016, which many attribute to falling aluminum prices due to oversupply. Are Chinese aluminum producers really immune to market forces, as so many have suggested?

News stories  also report on subsidies for coal, electricity and other inputs for the production of aluminum. Coverage reached its shrillest pitch upon the discovery of a massive aluminum stockpile in Mexico, which was subsequently shipped to Vietnam, becoming a part of an even larger stockpile valued at over $5 billion. Some suspect Chinese aluminum producers are engaging in such movements in an attempt to avoid protective US tariffs that prevent firms from “dumping,” or selling below cost, in US markets. Such huge volume, however, has broader implications for the economics of aluminum production, as many worry the movement of a stockpile of such tremendous size has the potential to impact aluminum prices in markets around the world.

Some of these beliefs, however, do not mesh with other aluminum production numbers coming out of China at year’s end. In fact, Chinese aluminum output growth was at its lowest level since 2009 in 2016. Between decreased output growth and a global supply glut, this year may signal a shift in the global aluminum market, with stabilizing levels of production which could allow demand and prices to stabilize as well.

 

 

Sources consulted:

http://www.wsj.com/articles/u-s-launches-formal-wto-complaint-over-chinese-aluminum-1484234628

http://www.wsj.com/articles/giant-aluminum-stockpile-was-shipped-from-mexico-to-vietnam-1480588228

https://news.metal.com/newscontent/100720886/what-changes-happen-in-china-aluminum-market-in-2016-after-price-surges-smm-exclusive

http://www.wsj.com/articles/aluminum-billionaire-planning-escape-from-china-lawyer-1482953518

http://www.reuters.com/article/us-aluminium-trade-ahome-idUSKBN1501Y8

 

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Paper for Guest Speaker

Download Murphree & Breznitz

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Proofreading your own stuff

You – like this post author – are “…almost incapable of reading anything that [you’ve] written before. It’s just too boring when you already know what the next sentence is going to say; at best [you] can skim. So it’s very hard for [YOU] to catch mistakes…” WHERE – whoops, there goes a typo – where I substituted the second person in brackets for the author’s first person prose. USE THE COMMCENTER and trade papers with friends. It helps if you incentivize them. How about 25¢ for each typo? – you can probably come up with a feasible mechanism that won’t necessarily involve money. One might be “if you only find 3 typos in my paper, I’ll stop after I find the 3rd typo in your paper.” Or another might be “whoever finds the most typos…” or “can justifiably red-line the most prose” gets XXX.

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News Links

I use Del.icio.us to create a list of news items relevant for the course. You can find those on the right – I use a pre-made “widget” that includes an ad. (A second version should be at the bottom of the right; scroll down…) If any of you have programming skills I’m sure you can code a widget that uses a feed that would not have an ad. Another utility would be one that would let you embed a list from feedburner or delicious into a post.

I just added two links, one to a Council for Foreign Relations note on the 15th anniversary of China joining the World Trade Organization, another on China’s energy strategy.

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Intl Comparisons: Continued

We will continue developing our segment on exchange rates and comparisons. In the background are foreign exchange rates. We will return to the issue of why hold forex (introduced to hang in the background). Our quick discussion pointed to the following motives/needs:

1. trade: to pay for goods & services purchased from China (incl tourism there!)
2. investment: adding Chinese assets to a portfolio of stocks and bonds
• for their expected return
• for portfolio diversification
3. speculation: forex traders aiming for short-run returns (on a time horizon of a few minutes to a few hours)
4. [foreign] direct investment, to build a factory or develop a business in China

In class though we began by looking at market exchange rates, which are highly volatile (the yuan has moved 0.5% against the dollar since yesterday). China isn’t suddenly producing 0.5% less than yesterday; the average resident isn’t poorer, either. So that’s an awkward metric. In any case, in Jan 2014 one US$ bought RMB6.04, now it fetches 6.88, or about 15% more. That of course makes it harder for firms to export to China, and makes imports from China less expensive.

But that’s a bilateral metric, while China is part of the wider global economy. In terms of trade Europe is more important to them than the US. [future blog post topic: present data on the geographical composition of China’s trade] So we want to look at a trade-weighted measure (and without delving into details, one corrected for inflation in each country). Once we do that, we see that the dollar has gotten stronger over the past 3 years, so even with the depreciation of the yuan against the dollar, the RMB is about 15% stronger than it was in 2014.

That still doesn’t address the issue of volatility. It’s also a measure driven by finance and traded items, but we don’t consume money, and (untraded) services are more important than goods. So our next topic is “Purchasing Power Parity” metrics.


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Exchange rates: Updated

An early topic this term will be foreign exchange rates. After all, we need/want to be able to compare China to other countries, and to understand trade and international finance issues. So here’s a bit of perspective. We also need to develop the concept of “PPP” (purchasing power parity).

For more on this topic, see “China’s Awkward Exchange Rate Regime” by Cecchetti & Schoenholtz (Kim was a grad school classmate who chose Wall Street over academics).

Contributions to Strengthening US Dollar

To the above let me add a graph pulled from a post by Menzie Chinn (Econbrowser) which he in turn pulled from a November 2016 post by Brad Setser of the Council on Foreign Relations, China’s October Reserve Sales, And A New Reserves Puzzle. The key here is the drawdown on foreign reserves, the (mainly) US dollar balances China accumulated over the past 2 decades. Think: what should selling dollars [to buy RMB, China’s currency] do to the price (foreign exchange rate) of the RMB? Does this imply that China is deliberately pushing down the value of its currency?

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Texts: Will Update With 1-2 more

  • Peter Hessler, 2010. Country Driving. NY: HarperCollins. ISBN 978-0-06-180409-0 but also in other formats.
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Winter 2017: MWF 2:30-3:25 pm

This course is targeted at students who have had Economics 101 and 102 (the “Principles” sequence) though in the past motivated students with an interest in China but little economics background have done well.

China’s growth is slowing from real GDP growth of a heady 10+% pa to (officially) between 6%-7%. Why, and so what? Until now there were three combined drivers: the emptying out of the countryside — farm-to-city migration — combined with favorable demographics and a steady increase in labor productivity that reflected heavy investment in infrastructure, housing, and production capacity. The first inevitably peters out, and while the demographics story is more complicated, the conditions that produce a “positive” dividend inevitably give way to an era of negative benefits. Finally, technology catch-up and the investment that underlies it face diminishing returns.

Growth in GDP is paralleled by growth in incomes. Of course that is good for China’s workers, but it does mean that they no longer constitute cheap labor, despite the public persistence of that image. That is reflected in shifting trade patterns, as higher incomes affect both the structure of exports and of imports. Furthermore, higher levels of economic activity — transport, electric power generation and the like — entail negative externalities.

This course will be restructured from previous years, with only a small portion devoted to agriculture, and correspondingly more on international topics. That will be reflected in a significantly different set of readings.

Formal output will consist of several short papers and two quizzes. I have yet to decide whether there will be a final paper or a final exam.

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Heaven of Earth: Hangzhou, Zhejiang

*Hangzhou is my hometown but not many people in the U.S. have heard about it so I decided to write a third blog on it.

Hangzhou, the capital and largest city of Zhejiang Province in Easter China, is famous for its West Lake and other surrounding attractions. The permanent population was 8.9 million at the end of 2014. The city proper accounts for 4,876 square kilometers and the municipality is spread over to 16,596 square kilometers. It was also the capital of Song dynasty in 1132. The economy has been booming since 1992 when the main industries were light, agriculture, and textiles. Hangzhou has rich land, subtropical climate, lakes and mountains so it is renowned as the “Land of Fish and Rice”, “Tea Capital” and “Home of Silk.” Now e-commerce plays a vital role in Hangzhou as it is the birthplace of Alibaba, the largest e-commerce company in China. Jack Ma, a native of Hangzhou, became the richest person in the world at one point in 2015.

The West Lake.

The West Lake

There are several economic and technological development zone divided in Hangzhou. My family is from Xiaoshan development zone, where there is a strong export-oriented model based on machinery, textile and garment industries. The village my mom comes from is famous for its textile industries. Some of my mom’s friends have textile companies. However, because of the chemicals released in textile production, Xiaoshan is also severely polluted. When we go back to the village to visit my grandparents, I can tell the air smells different. For a long time, Hangzhou was considered as “second-tier city” in China. However, as my comment to Ruili’s post mentioned, it is now “new first-tier city” because of its strong economic potentials. This year G20 summit, a premier forum for international economic cooperation, is happening in Hangzhou this September.

 

http://www.g20.org/English/aboutg20/AboutG20/201511/t20151127_1609.html

http://www.forbes.com/sites/chloesorvino/2015/03/02/the-worlds-richest-tech-billionaires-jack-ma-breaks-through-to-top-google-leaders-slip/#3ebb8a0c7c97

http://www.china-briefing.com/news/2014/01/02/china-regional-focus-hangzhou-zhejiang-province.html

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PM2.5 and Public Health

According to New York State Department of Health, PM 2.5 are tiny particles in the air that reduce visibility and cause the air to appear hazy when levels are elevated. It is believed to post the greatest health risks, which includes “respiratory and cardiovascular morbidity from lung cancer, such as aggravation of asthma, respiratory symptoms”. The sources are motor vehicles, power plants, wood burning, and certain industrial processes. In Beijing, from 2008 to 2015, 49% of the days were considered as unhealthy to go out. 4% was considered hazardous.

However, not many people in China really knew about the danger of it even though people in big cities live with it until a CCTV journalist Chai Jing released the documentary “Under the Dome” to the public online, talking about how serious the issue is in China. Just the first day it came out, the film had more than 150 million viewers. One thing Chai did at the end of the film was to call out for actions. She wants Chinese citizens to “stand up” whenever they see violations of environmental laws and demand changes. Considering the great effect and panic it caused to the public, in three weeks, the documentary was censored and blocked by the Chinese government.

pm2.5

It is true that Chinese government has been doing things to solve the problem, such as shutting down some steel firms. However, it is clear that stopping these pollutant sources is also slowing down the Chinese economy.

 

Work Cited:

http://www.health.ny.gov/environmental/indoors/air/pmq_a.htmhttp://www.euro.who.int/__data/assets/pdf_file/0006/189051/Health-effects-of-particulate-matter-final-Eng.pdfhttps://www.washingtonpost.com/news/energy-environment/wp/2015/03/16/this-documentary-went-viral-in-china-then-it-was-censored-it-wont-be-forgotten/

http://www.bbc.com/news/world-asia-china-35026363

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The Designation of 1st, 2nd, 3rd tier cities in China

When thinking about meeting designations, there is just about every type and size: from major convention hubs to smaller, boutique style cities. The key for meeting planners, is finding the right fit for their specific meeting. Often times, you might hear a planner say that their annual meetings are only held in 1st tier destinations. Or that a specific destination is a 2nd tier city. How is the designation of different tier cities in China like?

National and Provincial Capitals of China

National and Provincial Capitals of China

While various criteria exist for defining a particular tier, the tiers of cities in China usually refer to key characteristics of the city, including its economic development, provincial GDP, advanced transportation systems and infrastructure, and historical and cultural significance. China’s first-tier cities usually refer to Beijing, Shanghai, Guangzhou, and Shenzhen which make “The Big 4.” Second-tier cities include capital cities of each province or coastal cities like Tianjin, Chongqing, Chengdu, Wuhan, Xiamen. Third-tier cities are usually medium-sized cities of each province. However, even third-tier cities have populations in the millions and represent a promising potential market for your business.

Tier 1 cities were the first to be opened to competitive economic development by the Chinese government.  These cities are recognized for being densely populated as well as culturally and economically influential.  Tier 1 Cities attract the attention of foreign enterprises given their large middle class representation and income levels well above the national average.  Cities that fall within this category represent China’s most developed markets in terms of consumer behavior.  First tier cities register total retail sales of around 30 billion RMB ($4.75 billion USD), and an annual per capita income of around 11,000 RMB (1,774 USD).

Tier 1 Cities are:  Shanghai, Beijing, Shenzhen, and Guangzhou.   These cities are known for being important political, cultural, industrial and financial centers in China as well as key hubs for the greater East-Asia region.

cities tier designation

cities tier designation

The rapid economic growth and rising incomes in 2nd tier cities has caught the attention of foreign investors over the past several years.  The markets in Tier 2 cities are a lot less competitive and the labor costs are substantially cheaper compared to Tier 1 cities.  A rapid increase in consumer spending in second tier cities is creating more demand for foreign brands.  However, the income of consumers in second, third, and fourth tier cities has been reported to be less than half compared to those in first tier cities.  At the end of 2011 around 60 cities in China qualified as second tier cities (China Sourcing).

There are approximately 200 county-level cities in China that fall within the category
of a 3rd tier city (China Sourcing).  Within third tier cities there is also a categorical subdivision like I mentioned above. Third tier high cities include Zhongshan and Shantou.  Third tier medium cities include cities like Xining and Baoding.

 

Work Cited:

“China’s City Tier System”, The Adventure of OSIO in Shanghai, China, Web. 16. Nov. 2012. https://osio-china.com/2012/11/16/chinas-city-tier-system/

“What is meant by first tier, second-tier, and third-tier cities?” SME Center, Resources and Referrals for Small Business. Web. http://sme.amcham-shanghai.org/en/faq/what-meant-first-tier-second-tier-and-third-tier-cities

“1st, 2nd, 3rd Tier Cities: What do the Designations Really Mean?” blog empower Mint. Com, http://blog.empowermint.com/site-venue-selection/meeting-destination-tiers/

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Chinese Manufacturing Employment

Since China’s economic reforms under the leadership of Deng Xiaoping, Chinese steel production has increased greatly and in 2015 produced 803.8 million tones of steel, over 50% of the world’s total production (World steel). Various large state-owned groups such as Baosteel, Angang Steel Company, Tangshan, and Hebei Iron and Steel lead the Chinese steel industry. However, due to lowered demand and the 2015-2016 Chinese stock market crash, the Chinese government announced large-scale closures and downsizing of China’s steel industry.

One of the first areas to be hit by steel production downsizing was the Tangshan district, which itself produces more steel than the US (abc). As a result, production is to be cut by two thirds resulting to a loss of 7,000 jobs and many workers who now have no livelihood. While these workers are owed salarieschn1 by the government, they have seen none of their money and fear for their future.

Altogether, Chinese authorities announced 400,000 people are expected to lose their jobs by 2020 but estimates go as high as 2 million (abc). With further downsizing on the horizon, mass unemployment and social unrest may ensue until the Chinese government is able to find suitable solutions for those who lost their livelihood from the downsizing.

Sources:

https://www.worldsteel.org/statistics/crude-steel-production.html

http://www.abc.net.au/news/2016-02-19/china-steel-industry-downsize-sees-job-losses-and-social-unrest/7182696

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The Panama Papers

There is a fascinating web site put up by the consortium of journalists working with the Mossack Fonseca papers. The home page is at panamapapers.icij.org with a signup page for new updates. The files they have go back 40 years, and the information contained in them has already led to the resignation of the Prime Minister of Iceland and yet one more FIFA scandal/resignation/set of police raids.

The law firm was quite happy to assist big-time thieves (helping launder the proceeds of the $200 Heathrow Airport gold heist), jailed sex offenders and political leaders. Their papers open a window into the web of banks and other players in the big-buck game of foreign shell companies that allow money laundering and tax evasion, as well as merely hiding wealth from public scrutiny, which is not illegal. The data includes 210,000 companies, many open only briefly. Wealth management is a big business, and top European banks are active in this area. Prominent among them are the private bank arms of HSBC (the Hong Kong Shanghai Bank Corporation).

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