Opening of China Privatization Development COMPARISON CHINA US SIZE 9 640 821 km 9 631 420 km POPULATION 1 321 852 000 302 013 000 GDP PER CAPITA 7 700 43 444 Real GDP per capita in 2000 prices 40000 USA 35000 30000 US 25000 Hong Kong 20000 15000 10000 China 5000 0 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 years 1961 2004 The Cultural Revolution 1966 1976 Comparison between Market and Planned Economies Market economy Allocation of goods Market D S INCENTIVES Efficiency Planned economy Centrally planned Profit Maximization Meet social welfare responsibilities HIGH LOW China s development Recovery from Cultural Revolution 1966 1976 Dec 1978 Communist Party shifted focus from Class Struggle to Economic Development Transiting from Planned economy to Mixed economy China s development Various Reforms Agricultural Financial Fiscal Decentralization Market Liberalization Engine of Growth Expansion of Non State Owned Enterprises NonSOEs Privatized Enterprises Objectives of this talk 1 Evaluate how Welfare of various parties be affected by Privatization 2 Evaluate firm s Performance and Efficiency after Privatization 3 Effect on Growth Purpose of Privatization Downsizing Government Bureaucracy Increase Efficiency and Productivity of productive sector Comparison between SOEs non SOEs Objectives Ownership Sources of Financing SOEs Non SOEs Meet Social Welfare responsibilities 100 Government Gov t Subsidies Profit Maximizing 100 Government Debt or Equity Ownership Composition of Industrial Output 1978 SOE 78 Collectives 22 Evolution in 3 Stages 1st Stage 1979 1992 Reforming the Planning system create incentives Allow entry and expansion of Non SOEs without Privatization Ownership Composition of Industrial Output 1993 SOE 38 Collectives 53 Others 9 Evolution in 3 Stages 2nd Stage 1993 2002 Building Market System Full Blown Privatization Ownership Composition of Industrial Output 2004 Collectives 6 Limited corporations 20 SOE 11 Share holding 10 Foreign funded 31 Private Enterprises 22 Evolution in 3 Stages 3rd Stage 2002 present Attract foreign funding and investments Integrating to Global Economy Expected results 1 Decrease in Welfare 2 Increase in Efficiency Question What is the Net effect of Privatization 1 Social welfare Perspectives Factor suppliers Labor Consumers Government Employment and wage Prices of goods Subsidies and tax Revenues Welfare to Labor By the end of 1996 70 of small SOEs had been privatized 10 million workers were laid off An additional 11 5 million were laid off in 1997 Unemployment rate 1991 2005 4 5 Unemployment Rate 4 3 5 3 2 5 2 1991 1992 1993 1994 1995 1996 1997 1998 Years 1999 2000 2001 2002 2003 2004 2005 Number of employed persons in SOEs and Non SOEs sectors 16000 SOEs 14000 10000 persons 12000 10000 8000 6000 4000 Non SOEs 2000 0 1989 1990 1991 1992 1993 1994 1995 1996 1997 Years 1998 1999 2000 2001 2002 2003 2004 2005 Re employment service jointly provided by local government and private firms for laid off workers Average Real wage 120 Non SOEs 115 Yuan 110 105 100 SOEs 95 90 1989 1990 1991 1992 1993 1994 1995 1996 1997 Years 1998 1999 2000 2001 2002 2003 2004 2005 Welfare to labor From Data Workers laid off from SOEs are absorbed by nonSOEs Still unemployment rate is increasing but at a low level However workers employed in Non SOEs enjoy a higher average real wage Welfare to Consumers 2 opposing arguments 1 Greater autonomy and less price control Firms charge higher prices to increase profit 2 Rapid growth in private sector Encourage competition among producers Firms charge lower prices to attract customers Consumer Price Index 135 125 115 105 95 85 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 years Welfare to consumers From Data Even though suffered from an increase in price level in 1994 CPI adjusted to a more reasonable level with further entry of Non SOEs Government Tax Revenue and Subsidies Reduction in government subsidies in SOEs Increase in Tax revenue from Non SOEs and Privatized firms Company income tax as of total Government Revenue 40 30 SOEs Percentage 20 Non SOEs 10 0 1985 1990 1992 1994 1996 1998 2000 2002 2004 Subsidies to SOEs 10 20 30 years Government revenue From Data INCREASE in government Revenue 2 Firm s Performance Driven by incentives of Profit maximizing More efficient management Increase productivity profitability Total Profit to Total assets ratio 8 7 Non SOEs Percentage 6 5 4 SOEs 3 2 1 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Years Firm s performance From Data BOTH SOEs and Non SOEs are getting more profitable Growth rate of Real GDP 16 14 Percentage 12 10 8 6 4 2 0 1966 1968 1970 1972 1974 1976 1978 1980 1982 2 Years 1984 1986 1988 1990 1992 1994 1996 Results on growth Growth rate in China increasing from 2 8 from 1968 1978 After 1978 China s annual growth rate remain steady at 8 Conclusion Evaluated effects of privatization in 2 aspects 1 Mild impact on Social welfare of Labor Consumers Government 2 Raising Firm s Profitability Strong growth in China over the last decade Reference C E Bai J Lu Z Tao How does privatization work in China 2005 L Cao Chinese Privatization between Plan and Market 2001 Q Sun W H S Tong China Share issue privatization the extent of its success 2003 Qian Y The process of China s market Transition The evolutionary historical and comparative perspectives 1999 Qian Y The Institutional Foundations of China s Market Transition 1999 National Bureau Statistics of China http www stats gov cn english