Thematic Areas

Industrial Restructuring and Regional Development

Overview

Industrial restructuring and regional development, especially reform of State Owned Enterprises (SOEs), have become vital issues for sustainable social and economic development in China.

Since the reforms initiated in 1978, China has generally been successful in establishing conditions for a basic market economy to begin evolving in both the agricultural and industrial sectors. After 1981, more and more non state-owned enterprises, including collectively owned, individually owned, Sino-foreign joint ventures, and wholly foreign-owned enterprises, emerged and their industrial output has increased rapidly. State-owned enterprises have increased their industrial output too but the rate of increase in this sector declined after 1995. Since then a serious attempt has been made at streamlining several industrial sectors including textiles, coal, metallurgy, equipment manufacturing and light industry.

In 1997, the 15th Chinese Communist Party (CCP) Congress paved the way for invigorating the SOEs and developing non-state enterprises. Firstly, public ownership could now take diversified forms, including shareholding companies and cooperatives. Secondly, the central government gave up its monopoly on business and commerce by stating that the state did not have to hold more than 50% of those SOEs that had taken the “gufenhua” path. (This means, essentially, turning business units into joint-stock companies, which has a significant meaning for diversification of share holders and the separation of management from the shareholder).

Assessment

China has made a start in the area of industrial restructuring and regional development, but there are many challenges ahead before it can reach the goal of sustainable, equitable economic and social development. Rapid growth and structural changes have created new problems such as employment insecurity, environmental pollution, uneven regional development, and has magnified the poor performance of SOEs.

The problems are compounded by increasing urbanization, the incompleteness of reforms in areas of ownership diversification, macroeconomic reform, rapid industrialization with lacks in technological and management levels, and a regional development strategy that has favoured of the coastal areas since1978. The coastal regions account for around 50-60% of GDP, while the average per-capita GDP in 1994 was around 2-3 times higher than in the central and western regions.

Since the emergence of non-SOEs after 1981, their share of industrial output has increased year after year, while that of SOEs has declined, especially after 1995. Again, industrial output in coastal regions is higher than that of central and western regions. China has also streamlined the output of several industrial sectors though the real value of industrial output has declined.

Industrial restructuring has also impinged heavily on the issue of full employment. According to official statistics, the number of employed persons in SOEs, township, village and urban collective enterprises has reduced dramatically from the 1980s to 1990s, while the figures for private enterprises and other forms of ownership have increased.

In 1999, the National Peoples’ Congress (NPC) changed the constitution to declare that hence forth the role of the private sector had equal importance to the state sector. However, achieving socio-economic balance depends on many factors, some of which are described below.

Analysis

The success of industrial restructuring and regional development is dependent on the success of SOE reform, the development of dynamic non-state sectors, and on the creation of a stable macroeconomic environment. At present, China faces a number of inter-linked and mutually reinforcing challenges: poor performance of SOEs; a poor functioning banking system; a rather low central government capacity to raise revenues; slow modernization of SOEs; regional disparities; unemployment pressures; and WTO accession. The old and new problems make industrial restructuring and regional development more complicated.

Poor performance of SOEs
The performance of SOEs has continued to deteriorate. The profit share of SOEs fell from almost 7 percent of gross domestic product in 1987 to only 2 percent in 1994. In 1996, the SOE sector as a whole, for the first time ever, ran in the red (Lardy 1998:34). In 1998, just over half of the SOEs were loss-makers. As a whole, the SOE industrial sector is in mass debt and is considered to be, to a large extent, insolvent.

This poor performance can be explained, partly by the policies of a planned economy and, partly, by poor technology and management. During the transitional period from a planned to a market economy, monitoring of the managementof enterprises has been inadequate. Managers and workers, who have no direct ownership over assets and bear no direct financial risk, lack incentives. In addition, SOEs are responsible for a wide range of social liabilities, such as housing, health care, childcare, pensions and unemployment insurance. In short, the business of SOEs is not simply the products they produce but also a number of social welfare responsibilities they bear.

Currently, reform of SOEs, is impeded by unfinished reform in the banking system. The four state banks show favour towards SOEs, while most collective or private enterprises are neglected and have difficulty raising credit. As a large number of SOEs make losses, the bank loans to the SOE sector are often non-performing. How to change from policy-based credit into market-based credit is one of the critical questions affecting the success of SOE reform.

Unemployment pressure
One of the reasons for economic reform is to achieve higher labour productivity, and one way to reach this goal is to streamline staff capacity. According to 1998 estimates, the redundancies in SOEs and collectively owned enterprises were about 22 million, or 15% of the total work force. In addition, the rural surplus labour force continues to move into the cities, especially after the slowdown in growth of township and village enterprises. These laid-off workers, together with migrating labour, cannot be wholly absorbed by the private sector.

WTO accession
When China becomes a member of World Trade Organisation, it will face both opportunities and challenges. On the one hand, its trade volume and economic relations with other countries will develop and ensure China's increasing role in global economic and political affairs. On the other hand, China will have to fulfil its commitments under the WTO accession agreements, which would include reducing and binding tariff rates on industrial products, and eliminating quotas and other quantitative restrictions. The industrial sector will have to compete with foreign companies within the Chinese market as well as in the global market. If China's industrial restructuring can not result in industrial renewal in the near future, its national capacity for competition in the global market will be questionable. This is a considerable challenge China has to face.

Regional Disparities
A persisting and perhaps worsening trend is the regional disparity of wealth with its multiple economic and social dimensions. The coastal region, helped by the central government's preferential policies, has seized the opportunities of development. In 1985, residents of interior China earned 75 percent as much as their coastal counterparts, by 1995 this had dropped to 50 percent. Migrants continue to arrive in the coastal regions and big cities bringing the social instability associated with a large under-employed migrant population. The Western Development Initiative, launched by the government in March 2000 is a timely and strategically important response to reverse these trends.

Priority Issues

Capacity Building
Further commercialisation of state-owned banks and the facilitation of competition between banks should be encouraged. However, it is also vital to improve the system separating the operation and administration of the banking, securities insurance and trust sectors and to channel more bank loans into small and medium enterprises and non state-owned enterprises which have been neglected for years.

Gender Equality
Industrial restructuring has caused higher unemployment among women than men. Women are also less likely to be re-hired after being laid off. They are encouraged to move into the service sector outside of government protection. Policies should be devised to give recognition to small and home-based businesses, which are increasingly operated by women. The promotion of small and medium-sized enterprises and a community-based service industry will help absorb laid-off workers and migrants from the poorer regions.

Regional Equity
In the long run, regional disparities will constrain the national economy as a whole. Thus it is urgent to reduce the gap between the regions. International donors can cooperate with the Chinese government in promoting equitable regional development by redirecting investment to less developed regions and encouraging the out-sourcing of production to small-scale industries located in these areas.

Governance Processes and Rule of Law
To be more competitive in the global market, China has to invest in more advanced technology. The Government has put resources into protecting air and water quality but the increase in industrial waste, municipal sewage and agricultural run off is taking its toll. In order to integrate environmental concerns into industrial policies, the Government must apply environmental regulations to all firms at all levels in all areas under the guidance of laws that are strictly adhered to. Technical improvement and promotion of cleaner technologies should be emphasized at the same time.

Socio-economic Diversification
Continued SOE reform, encouragement of private-owned enterprises and interior-oriented regional development are important for industrial and regional development. Proper linkages between macroeconomic and industrial policy will need to be created in order to reduce distorted or negative effects. A market-based incentive system to stimulate economic restructuring, especially after the impact of membership of the WTO will be necessary. China could benefit from experiences within developed countries, including the experience of regulatory frameworks.