1. CHINA: class 3

2. INDUSTRIAL ACTIVITY GOOD NEWS

5. Rapid growth and efficient performance of certain types of production units q Types of enterprises q State-Owned Enterprises (SOEs) q Private sector firms q Township-Village Enterprises (TVEs) q Collectively owned communal enterprises--owned by all the residents of the establishing township or village

6. Township-Village Enterprises q In what sense non-state??? q Government (central or regional) has no financial responsibility q financed from collective assets of community q no access to cheap bank loans q no guaranteed jobs q If insolvent, go bankrupt or get taken over

7. Considered by many to be chief growth engine of much of reform period

11. Why? More efficient than SOEs 1985

12. 1990

13. Like agricultural reform, not planned q Products of spontaneous initiatives q over time, growing private ownership component or joint ventures with foreign capital and more private firms q growing employment of migrant (non-local) workers

14. ---BAD NEWS-- Performance of SOEs q This sector has shrunk in size but still accounted for 1/3 of industrial output and employment in mid 1990s q larger fractions for construction, transportation, telecommunications q standard argument. Reform attempts have not been successful

15. Total Factor Productivity trends q Studies suggest q 1980-84---2.24% per year q 1988-92---1.58% per year q attributable to??? q Unwise investment decisions due to preferential access to loans with negative real interest rates.

16. Financial Performance trends q Typical indicators q rate of return on assets--declined from 15% in 1987 to 5% in 1994 q percent of firms incurring losses q magnitude of fiscal subsidies being granted

17. Financial Losses RMB = Renminbi. Exchange: about 8 RMB to the $US (1997-98)

18. Alternative explanations q Distortions in price system that required some enterprises to sell at state-controlled prices far below market prices q consistent with early declines but not with recent increases q low capacity utilization rates. In 1995 <60% for 900 major industrial products

19. Fiscal Subsidies

20. BUT need to remember q Most SOEs are no longer covered by grants from the state budget q due to pressure on Ministry of Finance to reduce explicit budget deficit q Loans from state-owned banks have essentially replaced state subsidies

21. Liabilities of State-owned enterprises, 1979-95 Percent of assets Typical of market economies 85%

22. Implications of these liabilities-to-assets ratios q Half of all SOEs in 1995 had liabilities exceeding their assets. Essentially INSOLVENT. Only access to bank loans kept them in business. q 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.

23. q Many have enough debt that an economic slowdown will produce liquidity problems. q Earnings could easily fall below levels needed to pay interest on debts. q Have higher debts than Korean chaebols that encountered this problem in mid 1990s.

24. AND: This data underestimates the liability problem q Does not include inter-enterprise debt. (TRIANGULAR DEBT) q SOE assets are systematically overvalued. q Large unfunded pension liabilities q many have delayed or stopped making contributions q some borrow money from state banks to finance

25. Factors q Expansion of non-state firms, especially into more profitable sectors q price liberalization of agricultural commodities and other raw materials q growth of real wages beyond productivity growth q excess employees. 1994 World Bank study of 142 enterprises. 60% > 10%. 33% > 20%.

26. Excess social expenditures q Responsibility for providing worker housing q low rent levels q units sold below cost q responsibility for education and health services

27. Asset stripping Managers move assets of SOEs into non-state enterprises

28. September 1997 CPC announced it would privatize 269,000 of its 370,000 SOEs present status???