JPA331Y1 Lecture Notes - Durable Good, China Telecom, Hu Jintao
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Lecture#11-State Owned Enterprise Economy
SOE are divided into National level (huge SOEs) for instance, major steel companies, and
national banks. These SOEs are ruled by National Chinese government.
1) China Petroleum corporations
Provincial Level SOEsowned by provinces and large in nature
Prefecture level SOEs
Municipal Level SOEs (shanghai and Beijing as example)
County Level SOEs (even though small can have a couple hundred people employed)
At the beginning of this course, We talk about how China had a gradualist approach
1) Agriculture reform into SOEs until second decade in the mid 1990s.
2) In this lecture, we will look at WHY SOEs are so politically arduous.
There are three phases of SOEs:
1) Collectivist pre-reform periodLate 70s and early 80s. Dan Wei system (working
Unit)Pension was provided by Dan Wei as well. (provides a sense of identity)
Dan Wei system played multiple functions: political/administrative
body that extended party control to the urban grass roots level.
1. Indoctrining party ideology to its workers.
Production Unit: to centrally planned economy. Production quarters
and given necessary resources from budget to reach production targets
an guaranteed a certain amount of $ for goods.
1. StateDan Wei (Gives Dan Wei quota and raw materials)Sells
back to state
2. No FREE market and gets everything from the state.
3. Profits that Dan Wei makes must be given back to state authority.
Economic/Social WelfareHousing, healthcare, pensions to members
of this community.
People who work in the Dawei are taken care of by the Dai Wei.
1. “Cradle to grave” system
Collective identity Aside from collective identity, the system also
impeded labor mobility. Since social welfare was not portable across Dan
Wei, then it forces people to remain. (you are entitled for pensions only
after working for the companies for 25 years…if you jump ship to a new
firm, then you lose all your benefits)
1. Not a meritocratic system but rather a seniority one.
2) Post Reform period 1978-1992dual track system
One price for the state and one for the market
By the late 80s, the shares directly made by companies were significantly
higher. You have state planning constant and the market pricing larger
In the initial years, most of the products needed in the market were
produced by state but overtime while the state plan remained constant,
market grew over time. So the economy gradually grew out of the plan.
(This is for TVEs)
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It really depends on the industry. Heavy industries were non TVEs. The
SOEs dominated heavy industries. For consumer durable like food and
clothing, textiles etc…they were controlled by TVEs
The market supplies for these products were filled by TVEs. They were
small market and producing light manufacturing goods.
Contract Responsibility system Idea similar to household responsibility
1. Successful in lifting living standards of rural citizens. Beginning in
the 1997, the contracts were introduced so that the director of
the SOEs signed the contracts which linked enterprises with
profitability. If an enterprise becomes more profitable, its
employees would in theory get better pay in terms of bonuses
2. This system has provided incentives for good performance. It has
however failed bad performance. And did not do a great deal of
improving for SOEs.
3. Soft budget constraint If my salary is $5 K a month, I need to
pay 2 K for mortgage, 1 K for products, 1 K for vacay, 1K for food,
and 1K for something else. (which exceeds 5 K)
o If I have a friend who I can borrow from relentlessly, then
I’ll be operating under a soft budget constraint. (concept
of a “sugar daddy”)
4. Opposite of this is a hard budget constraint
5. All the SOEs have a “sugar daddy” and that is the state/banking
system. That is why the budget constraint that it is a soft budget.
SOEs can continue making losses and won’t be held accountable. If you
think about why Contract responsibility system as household
responsibility system, In the rural system, there is a hard budget
1. If rural household spend more than they can make, they cannot
make their ends meet.
Decentralization of system In the 1980s diminished the central
government’s fiscal capacity. Tax revenues were retained and collected
by local governments.
Up until the 1980s, the central government funded the SOEs by providing
direct subsidies and since they have so much revenue, they can fund
SOEs no problem.
In the Mid 1980s, State owned banks were created to finance the SOEs
instead of central government providing subsidies. State owned banks
were now responsible for providing the funds to SOEs.
CREATE DIAGRAM FOR THISthe state used to provide direct subsidies
to the SOEs (up until 80s). In the 80s with falling levels of state revenue,
the state owned banks were created to provide “soft loans” to the SOEs.
There were 4 big banks with designated functions.
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