Chinese capitalism, case studies.

[xinhui]

I am natural on this

Do people agitate to the tune of 180,000 protests a year in favour of more free market policies or as result of the excess those pro-market reforms produce ?

Classical economist sure believe so. According to them, the only way the the price can reach "equilibrium" at which quantity supplied equals quantify demanded by invisible hand of the market.

[Double Edge]

In an ideal world, yes.

But govts run deficits leading to inflation ie Tiananmen.

They try to control prices to please the people.

They introduce subsidies to protect certain sections.

Any more govt interventions in the economy and nobody knows where the equilibrium is.

Supply & demand is out of whack.

[xinhui]

In an ideal world, yes.

But govts run deficits leading to inflation ie Tiananmen.

They try to control prices to please the people.

They introduce subsidies to protect certain sections.

Any more govt interventions in the economy and nobody knows where the equilibrium is.

Supply & demand is out of whack.

If I did not see the word "Tiananmen" I would be mistaken to think you were referring to India. :red:

(Reuters) - India raised the price of heavily subsidized diesel on Thursday to rein in its fiscal deficit and counter the threat of becoming the first of the big emerging economies to be downgraded to junk.

anyways, wrong thread.

[Double Edge]

If I did not see the word "Tiananmen" I would be mistaken to think you were referring to India. :red:

no, my understanding is that inflation & rising living costs was the initial cause of that protest which then flared up into something else.

Anyways, i want to know how the author figures 180k protests a year is due to public demand for pro-market reforms. I'm thinking bad governance would be a bigger factor.

My point is the Chinese govt already intervenes in the economy like any other, to demand pro-market means they have to remove that intervention say bye to controls, subsidies etc and it seems odd that people would demand it.

[Crocodylus]

Protectionist trade policy is usual for fledging economies. Until less than 15 years ago it was rare to see anything other than Hyundai or KIA on South Korean streets and highways. Now that SK is highly affluent as a country, some foreign cars do make it into the market, but they are expensive due to the import tariffs. PRC is trying to establish indigenous industry that can compete with that of other developed countries. This might not happen until the Chinese get out of the copy & learn stage.

For some reason PRC economic model mimics the Japanese one rather closely. Interlocking cartels that dominate industry and, by extension, the economy on the national level. The national government shows preference to the biggest players, especially since they contribute large amounts of tax revenue per annum. Just as some Japanese industries were established by ex-samurai who developed close ties with the Meiji Imperial government and prospered, and continue the tradition, some Chinese industries are headed by prominent members of the CCP.

[Double Edge]

Very good, you bring up the next formidable barriers to pro-market reforms.

State monopolies : how fat is the Chinese state ? How willing are bureaucrats to trim the fat.

And vested producer interests, those that benefited greatly from the last couple of decades. They will oppose more market friendly reforms that increase competition against them.

In some cases the state & the vested interests are one & the same.

How will China tackle these issues.

[xinhui]

no, my understanding is that inflation & rising living costs was the initial cause of that protest which then flared up into something else.

Anyways, i want to know how the author figures 180k protests a year is due to public demand for pro-market reforms. I'm thinking bad governance would be a bigger factor.

My point is the Chinese govt already intervenes in the economy like any other, to demand pro-market means they have to remove that intervention say bye to controls, subsidies etc and it seems odd that people would demand it.

Generally speaking, people like'em positive externalities and why not. Since not everyone can win, the key is who has the final say.

The key here is not control, in the eye of Chinese econ planners, they view it as managing "efficiency". By the way, I am not defending them by any mean.

Before you ask about something being "good" or "bad" another way is to understand what is the goal they are trying to achieve. Some positive externalities just might be what the planners intended but the same externalities could be very negative to the public in general.


Using the case of India subsidized diesel, it might have a negative externalities to the government and bring "inefficiency" but by weighting against the poor's standard of living, the same negative externalities could be a positive externality. Lucky, I am not the one who have to weight the externalities out to see which one has the greatest overall good.

[Inst]

The protests usually have to do with land distribution; the government has a habit of requisitioning people's land in order to sell to developers at a profit. People aren't happy with their cut of the deal; they think the government could pay more, or the developers could pay more, and voila, there's your mass incident.

That is a big cause of mass incidents, which is more prolific in China than in other countries given that local governments are dependent on land sales to pay their operating expenses.

===

Croc brings up something very interesting. The state in the Chinese case is extremely similar to the Chaebol or Keiretsu of South Korean or Japanese development. Instead of having private capital act as economic elites, the Chinese Communist Party and the Chinese government takes up the role instead. The dominance of the Chinese state was described in Richard McGregor's The Party; and it adds an interesting factor to economic or political discussions of China.

One aspect I'm interested in, however, is how the state as capital in the Chinese case can contribute to lower taxes on the population. By controlling aspects of capital, it allows the Chinese to provide an alternate source of state income and consequently reduce taxes in other sectors of the economy. Is the state as capital a valid government model?

[Double Edge]

Xi Jinping's challenge for the coming decade.

To transition the chinese economy to depend less on spending on large projects and exports into one that is more sustainable based on domestic consumption and private business.

[DOR]

The protests usually have to do with land distribution; the government has a habit of requisitioning people's land in order to sell to developers at a profit. People aren't happy with their cut of the deal; they think the government could pay more, or the developers could pay more, and voila, there's your mass incident.

That is a big cause of mass incidents, which is more prolific in China than in other countries given that local governments are dependent on land sales to pay their operating expenses.

===

Croc brings up something very interesting. The state in the Chinese case is extremely similar to the Chaebol or Keiretsu of South Korean or Japanese development. Instead of having private capital act as economic elites, the Chinese Communist Party and the Chinese government takes up the role instead. The dominance of the Chinese state was described in Richard McGregor's The Party; and it adds an interesting factor to economic or political discussions of China.

One aspect I'm interested in, however, is how the state as capital in the Chinese case can contribute to lower taxes on the population. By controlling aspects of capital, it allows the Chinese to provide an alternate source of state income and consequently reduce taxes in other sectors of the economy. Is the state as capital a valid government model?

Inst,

The state as a business, making money so that it doesn’t need as much revenue from taxes, is certainly a viable model. The problems are legion, but there’s nothing inherently wrong with it.

The key challenge is inefficiency. Ownership drives the desire for profit, and no one has been able to create that same drive – in owners or workers – without financial reward. Hence, the “good enough for government work” mindset takes over.

The second challenge is competition. If the state sector is to compete on an even footing with the private sector, it is likely to lose for the same reasons of efficiency cited above. If, instead, the state sector is given an extra competitive edge, then the private sector loses. It doesn’t matter what the extra edge is, just the fact of its existence is sufficient.

The third challenge is the captive regulator. When the government regulator is part of the same structure as the government company, there is an inherent conflict of interest. Mostly, the regulation are not fully or uniformly applied, although there might be exceptions. This puts an extra regulatory burden on private companies that is not placed on the state company, or it simply lets the state company get away with murder (literal or environmental).

[xinhui]

An update on the predicted Chinese property crash.

The take away from this... or the balance act "so investors will have to look for companies there with strong balance sheets and lots of volume,” he said about international China real estate investors."



Reform Minded China Shuns Stimulus - Forbes

Reform Minded China Shuns Stimulus

This may sound like an oxymoron, but China‘s new Communist government is turning away from financial stimulus to help its slow-moving economy.

During the party’s two-day Central Economic Work Conference this weekend, party leader Xi Jinping said the country would essentially not be pursuing high growth rates through stimulus. That doesn’t mean that Beijing has turned sour on fixed asset investments on things like roads, bridges and subways. They’re still going through with major urbanization projects. But whenever the economy is slowing, the new leaders say they will be less likely to prime the pump.

Under the new leadership, cutting tax and helping more rural workers settle in cities will be among the reforms pursued through steady economic growth. Slow and steady are the two words that will best describe China’s economy going forward. Long gone are the double digit days of GDP stats. Low seven percent growth is more likely. To keep with the sustainability theme, the government said it has no intentions to relax curbs on the country’s red hot real estate market.

Stubbornly high real estate prices have been a significant source of public complaint in recent years, forcing the government to implement a string of policies to keep prices down. The property market has shown signs of warming in recent months, as the government has also taken measures to shore up growth. Official data showed that more Chinese cities saw home prices rise in October from September.

With all this talk of keeping an even keel on the economy, mainly through keeping a lid on real estate inflation and sticking to their guns on further stimulus, China investors will face a complicated and uncertain 2013. Those in attendance at the two-day Central Economic Work Conference said pressures could arise from potential inflation and asset bubbles, meaning higher interest rates could be on the horizon.

“The world economy has changed from the fast development period before the crisis to a period of deep transformation,” said a statement issued after the meeting.

“We’ re not calling for a property crash in China, but expect it will just remain stable,” said Stephen Way, portfolio manager of the Touchstone Emerging Markets Equity fund (TEMAX). ” Going forward, the government is going to be less willing to let property values rise dramatically, so investors will have to look for companies there with strong balance sheets and lots of volume,” he said about international China real estate investors.

[DOR]

Strong balance sheets that are Made (up) in China are still not worth the paper they're printed on. China needs strong accounting laws, and even more important, accountants who are more afraid of the courts than of their clients.

Xi Jinping's Grand Southern Tour (II) is an impressive shot across the bow to his colleagues on the PBSC. Since he has no allies at the top, this is a bold geasture. Let's see if he can carry through.

[xinhui]

New sheriff in town?? While Xi is a welcome break from Hu's wooden style but I am not sure his new "low key" order will have a long term effort. Wait and see.

[xinhui]

DOR, comment?




By Lucy Hornby and Xiaoyi Shao
BEIJING | Tue Feb 5, 2013 10:18am EST
(Reuters) - China unveiled sweeping tax reforms on Tuesday to make wealthy state-owned firms, property speculators and the rich pay more to narrow a yawning gap between an urban elite and hundreds of millions of rural poor.
The plans approved by the State Council - China's cabinet - also included commitments to push forward market-oriented interest rate reforms to give savers a better return and more security.

Chief among the reforms is a requirement to raise the percentage of profits contributed by state-owned firms to the government by about 5 percentage points by 2015.

Together with measures to raise wages and improve households' return on assets, the reforms signal an attempt to shift economic growth towards increased consumption and away from the current reliance on investment spending.

"The State Council is not just talking about the gap between rich and poor, they're talking about the whole economy and how income is distributed among various actors - the households, the corporations and the government," said Andrew Batson, research director of GK Dragonomics, an economic consultancy in Beijing.

"It's about changing the entire flow of income around the national economy."

One key change will make interest rates more flexible. Interest rates on savings deposits have lagged inflation for many years, depressing returns for households and pushing those who can afford it to more speculative investments.

"Push forward market-oriented interest rate reform, appropriately expand the floating range for interest rates on deposits and loans and protect depositors' interests," the announcement said.

It also called for "building a long-term mechanism" to boost rural incomes, and reiterated previous pledges to raise incomes, particularly for the poor.

Citizens would see more opportunities to earn money from assets, including increasing fund products, and expanding income from rents, dividends and bonuses.

And rural migrants will get more opportunity to transfer their official residency to cities, where wages and social services are better.

PRESSURE ON STATE-OWNED FIRMS

Trimming the power enjoyed by state-owned firms was top of the list of structural reforms submitted by think-tanks ahead of the November change of leadership in the ruling Communist Party.

State-owned firms generally transfer only a small portion of their profits to the state, but have come under increasing pressure from reformists who believe they benefit from too much support which the private sector does not share.

These profits are seen as a potential source of funding as China builds pension, health insurance and other systems to create a social safety net for its citizens.

Raising the dividend payout from state-owned enterprises will also go some way to curbing criticism from China's trading partners that Beijing unfairly supports its state-backed firms by giving them numerous tax breaks and access to cheap capital.

"For state-owned companies in some industries with overly high income, we will strictly implement the two-tier controls on firms' total salary and wage level to gradually reduce the salary gap between different industries," said the circular.

The announcement also took on powerful state-backed monopolies, calling for "enhanced supervision" to avoid improper access to public resources at low or no cost. Oil companies and others have long resisted attempts to increase the amount they pay the state for natural resources.

REINING IN THE RICH

Decades of economic reform have made some very rich and brought prosperity to an urban middle class. But many, particularly in the countryside, have been left behind.

Efforts to build a progressive individual income tax system have been stymied by undeclared sources of wealth, while pilot plans to introduce a property tax have been wildly unpopular.

The National Bureau of Statistics this month released an updated estimate that the country's Gini coefficient, a measure of income disparity, had reached 0.474 - well above the 0.40 level considered a trigger for social discontent.

"The urban-rural gap and the difference in citizens' income is relatively large, income is irregularly distributed, there are obvious problems of grey income and illegal income, and some of the masses live in difficult conditions," the circular said.

Tax reforms included expanding a pilot property tax to more cities, adjusting a property transaction tax, levying a number of luxury taxes and "studying" an inheritance tax to be introduced "at an appropriate time".

(Reporting By Xiaoyi Shao and Lucy Hornby; Editing by Nick Edwards and Stephen Nisbet)

[DOR]

On the surface, quite positive. SOEs’ failure to pay dividends is a major problem with the entire reform program, providing the state with less money than it should get but more important, seeding bubbles and the underground economy with SOEs’ surplus cash. Getting it out of their hands is a major step forward, but let’s see if the Power Li Family Business actually pays any attention.

Andrew Batson at GKD is over-reaching, however. There is very little chance that Xi & his non-allies on the PBSC have decided – pre-NPC – to suddenly redirect the entire economy’s flow of funds.

Still, a slightly positive real deposit interest rate would be a strong signal that the bubbles are too big and need breaking. How that actually takes place is likely to determine whether the global economy gets a plus sign or a minus sign in front of its medium-term growth rate.

I exaggerate. But, the implications are so big that there is some room for blue sky thinking. Rural residents being allowed to transfer residency to the cities? Big stuff.

RE: Gini coefficient – I’m not sure who thinks a number above 0.4 is “a trigger for social discontent,” but the facts don’t support that notion. Gini is the new PPP: wildly misunderstood and equally widely abused.