China Case Study
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Transcript of China Case Study
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7/30/2019 China Case Study
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China: Building Capitalism with SocialistCharacteristics
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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 Chinas development using RostowsModel.
To analyze the impact of Banking Reforms in China and itsimpact on the overall economy.
To give a brief overview of the current Chinese economicmodel.
To understand the rising inequalities in the Chinese societyand the causes for it.
To put forward a broad outline of the strategy that Chinashould adopt in the final stage of reform.
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Hofstedes Cultural Dimensions
80
40
77
20
91
48
60 6256
4046
40
118
40
61
0
20
40
60
80
100
120
140
China USA India
Power Distance
Individualism-
Collectivism
Masculinity-Feminity
Uncertainity avoidance
Long Term Orientation
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Hofstedes Cultural Dimensions Contd.
Power Distance:At 80 China sits in the higher rankings of PDI. Thesubordinate-superior relationship tends to be polarized and there is nodefence against power abuse by superiors.
Individualism-Collectivism: At a score of20 China is a highly collectivistculture where people act in the interests of the group and not
necessarily of themselves. Masculinity / Femininity: At 66 China is a masculine society success
oriented and driven. The need to ensure success can be exemplified bythe fact that many Chinese will sacrifice family and leisure priorities towork.
Uncertainty avoidance: At 30 China has a low score on uncertainty
avoidance. The Chinese are comfortable with ambiguity; the Chineselanguage is full of ambiguous meanings that can be difficult for Westernpeople to follow. Chinese are adaptable and entrepreneurial.
Long Term Orientation: With a score of118 China is a highly long termoriented society in which persistence and perseverance are normal.
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Human Nature Orientation(HNO)
China- Negative HNO
Stability is considered as the most priced commodity by the CCP.
The Chinese govt. has always dealt with disgruntlements and
rebellions with an iron hand.
Tiananmen Square in 1989.
No national elections.
Absence of civil liberties.
Intent on maintaining their unique brand of political control.
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PDI/HNO Relationship
HIGH PDI LOW PDI
Positive
HNO
Negative
HNO
Laws challenged to a certain
degree
Pragmatic rules; most people
respect and obey
Formal, unrealistic rules.
CHINASociety does not trust people
to obey laws.
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Political RiskAnalysis
Typology of Political Risks in China
Government Risks Instability Risks
Firm Specific Risks Discriminatory
Regulations
Nepotism towardsSOEs and TVEs
Firm specific
boycotts
Example : Google
Country Level Risks Risk of mass
nationalization
(happened in 1949)
Currency
inconvertibility
Cross border issues
with India.
Instabilities
pertaining to the
issue of Tibet.
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Impact ofPolitical Risks
Uncertain, politically influenced investment climate
Poor legal protection for foreign firms
The financial system is murky and favours state-owned entities,
which, despite all the private-sector growth, still make up 40% of
Chinas 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.
E.g. Microsoft, Google.
Companies are also closely monitoring the social instabilities inChina and deferring their investments for a much favorable climate
or taking it somewhere else.
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Economic Risks
Type Prevalent in China
Exchange Control Fixed currency exchange rate
Yuan valued at 8.51 in 2005
Recent revaluation in 2010
Chinese exports are cheaper
Local Content Laws Strict censorship
Curtailing media freedom
Price Control Currently the Chinese economy follows a market driven
pricing system, thereby mitigating the inherent risks of
state-fixed prices.
Tax Control Divided tax system in 1994
Streamlined the tax system and enabled it for the socialist
market economy
Labor problems 2006 China started facing shortage of unskilled labor
Increasing labor costs has forced companies to look
towards companies like Bangladesh or Philippines.
Import Restrictions Fixed exchange rates makes it unfavorable for other
countries to export to China
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The Rostow Model asApplied 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
Stage 2: Pre-Conditions to Take-Off Slow down in agricultural production
GNP declined by a third in 1960
Tyranny of Red Guards
The famine of1960
Conflicts and fighting between
factions of Red Guards
Total Anarchy by 1976
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The Rostow Model Contd.
Stage 3: Take Off Maos death in 1976 and
subsequent leadership change
Deng Xiaoping coming into power
Breaking up of the agricultural
communes and replacing them
with Household ResponsibilitySystem
Family planning and One child
policy
Opening up of four SEZs
New tax incentives, foreign
exchange provisions to attractpotential investors
Establishing the system of Dual
Exchange Rates
More direct control over factories
and longer lease periods
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The Rostow Model Contd.Stage 4: Drive to Maturity
China is currently in the fourth stage of
Rostows Model of Development.
The fifth and final stage is the Mass
Consumption Stage . Developed
countries like the US, UK, etc are
currently in this phase.
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.
Tightening of import norms and creditavailability in the early 90s.
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 AMCs
Reduction in NPLs
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Banking Reforms
Peoples Bank Of China (PBOC ) had absolute control over the
monetary system and the four state owned banks.
Incessant lending to troubled SOEs and TVEs.
Steep increase in the number of Non Performing Loans(NPLs)
In 2004,total NPLs amounted to 1.7 trillion RMB or 13% of total GDP
The banking reforms adopted by the Chinese government can be
classified into two phases.
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Phase Reforms Impact
Phase 1 Started in early 90s
Open market operations
Interest rate controls Eliminated quotas on banking credit
Restructured internal management
system
Establishing the China Bank
Regulatory Commission(CBRC)
Recentralization of
power in PBOC, pushing
it closer to the market Failed to make an
impact on NPLs
Phase 2 Started in 1999 Govt. borrowed 1.4 trillion RMB
from PBOC and state commercial
banks
Purchased NPL equivalents from
state owned Banks
Injected $60 Bn from Forex reservesinto the banks through a new
institution named China SAFE(Huijin)
Established four new Asset
Management Companies(AMCs)
Transformed the banksinto listed companies,
ready for foreign
investments
Restructuring or
disposing of debts
Sharp fall in the numberof NPLs
Creation of modern
capital markets in China
However there was little
interest from foreign
investors
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Revaluing Yuan
China dropped the Dual exchange rate system in the late 90s
The main purpose of this was to provide the Chinese
manufacturers with an advantage in the international markets.
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 2005should be considered as an effort by the Chinese in providing
greater currency flexibility.
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Socialist MarketEconomy
After the failure of the Great Leap Forward (1958-1961), Deng Xiaopingwas willing to consider capitalist methods of economic growth so as to
revitalise China's economy.
However he remained committed to centralized control and the one-party
state.
It supplemented Chinas centrally planned economy and the high GDP
growth rate has been attributed to it.
Privately owned enterprises are a major component of this economic
system, along with the central SOEs and TVEs.
The fundamental distinction from the Western mixed-market economies
is the underlying authoritarian political philosophy of absolute control.
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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 90s and early 21st century
Revaluation of Yuan
Disinvestment of SOEs and TVEs
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Private Sector
Due to the poor performance of traditional state enterprises in themarket economy, China embarked on a massive restructuring program
of privatisation.
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 privatisedduring the formation of China's current market economy.
Under this scheme, the state retains ownership and control of large
enterprises but the central government has little direct control over the
operations of state-owned enterprises.
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End of Reforms
By 2005 the market-oriented reforms, including privatisation, was virtuallyhalted and partially reversed.
In 2006, the Chinese government announced that the armaments, powergeneration and distribution, oil and petrochemicals, telecommunications,coal, aviation and shipping industries had to remain under "absolute statecontrol" and public ownership by law.
The state retains indirect control in directing the non-state economy throughthe financial system, which lends according to state priorities.
Liberalization continues to be rolled back in the state-sector by theconsolidation of state enterprises into large "national champions" with thegoal of consolidating efforts and creating internationally-competitive
national industries.
The state sector is concentrated in the 'commanding heights' of theeconomy with a growing private sector engaged primarily in commodity
production and light industry.
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Rising Inequalities
Gini co-efficient for China has been hovering between 0.4 and 0.5.
External liberalisation may have facilitated more rapid growth, it hasalso been a major factor behind increasing inequalities.
As profitability of the SOEs declined in the reform era, the system wasmarked by chaos with local governments imposing other revenue raising
measures. Since 1984,, agricultural growth has decelerated and lagged behind
industrial and service sector growth rates.
Agriculture sector has not received much state patronage in terms ofinvestment, nor has it seen proliferation of small enterprises on thescale of the industrial and service sectors.
Restrictions on labour movements have been one important factor
behind rural-urban inequalities in China. Govt. unwilling to eliminate Hukou system.
Public resource mobilisation has shown an increasing in-equalisingtendency and a bias towards richer, coastal areas.
CCPs reluctance to slow down growth for dealing with risinginequalities.
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Dealing with Inequalities
Abolition of agricultural taxes and all surcharges for peasants.
Providing a basic standard-of-living allowance for low-income urban
citizens
Creating unemployment insurance for certain classes of employees.
Create health and pension insurance programs
Revitalizing the countrys aging system of social security.
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Strategies for the FinalPhase of Market
Reforms
Continue moving towards the market.
Device and implement massive programs for redistribution ofwealth.
Increasing inequality can lead to civil unrest.
Resort to the tried and tested strategy of controlled reforms. However the CCP has to give relaxations and move away from
absolute control.
Adopt more liberal trade policies.
Consider private partnership in the AMCs.
Encourage more foreign participation in the banking sector.
Consider the possibility of a floating exchange rate.
Less stringent norms regarding censorship, free press and contentcontrol.
Make the provincial and central government more accountable.
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Move to Democracy
Highly improbable after the existence of a single party for 63 years.
This has led to a apolitical urban youth population.
However, the growing middle class attributes their prosperity to the
current government and its policies.
Hence there is no mass consensus among the citizens of the countryabout democracy.
Sudden move to a new system can hamper the growth and
aggravate the issues in hand.
Furthering the concept of Socialist Democracy is a better
alternative for Chinas current set up.