China in the Wake of Asia’s Financial Crisis This book examines China’s response to the Asian financial crisis of 1997, both in its immediate aftermath and in the years since The crisis caused turmoil throughout Asia’s economies, and precipitated wholesale reform of economic and financial policies and institutions across the region As one of Asia’s largest economies, China responded to the crisis more successfully than many others, avoiding devaluation of its currency, whilst undertaking financial reform, restructuring state-owned enterprises, rural development, and social security systems This book considers all of these issues, showing how the lessons drawn from the crisis have helped shape China’s policies of liberalization and market-orientated reform, including its attitude towards globalization and the outside world in general Based on research conducted by the China Development Research Foundation, one of China’s leading think tanks, this book includes contributions from senior policy makers in the Chinese government and from experts participating directly in the government’s policy-making process to assess the effects generated by the country’s related policies, making it an indispensable account of China’s own thinking on its response to the financial crisis Wang Mengkui is former President of the Development Research Center of the State Council, and is currently Chairman of the China Development Research Foundation Routledge Studies on the Chinese Economy Series editor: Peter Nolan University of Cambridge Founding Series Editors: Peter Nolan, University of Cambridge and Dong Fureng, Beijing University The aim of this series is to publish original, high-quality, research-level work by both new and established scholars in the West and the East, on all aspects of the Chinese economy, including studies of business and economic history The Growth of Market Relations in Post-reform Rural China A micro-analysis of peasants, migrants and peasant entrepreneurs Hiroshi Sato The Chinese Coal Industry An economic history Elspeth Thomson Sustaining China’s Economic Growth in the Twenty-First Century Edited by Shujie Yao & Xiaming Liu China’s Economic Growth Yanrui Wu The Employment Impact of China’s World Trade Organisation Accession A.S Bhalla and S Qiu Catch-Up and Competitiveness in China The case of large firms in the oil industry Jin Zhang Corporate Governance in China Jian Chen China’s Poor Regions Rural-urban migration, poverty, economic reform and urbanisation Mei Zhang 10 The Theory of the Firm and Chinese Enterprise Reform The case of China International Trust and Investment Corporation Qin Xiao China’s Large Enterprises and the Challenge of Late Industrialization Dylan Sutherland 11 Globalisation, Transition and Development in China The case of the coal industry Huaichuan Rui 12 China Along the Yellow River Reflections on rural society Cao Jinqing, translated by Nicky Harman and Huang Ruhua 21 The Chinese Communist Party in Reform Edited by Kjeld Erik Brodsgaard and Zheng Yongnian 13 Economic Growth, Income Distribution and Poverty Reduction in Contemporary China Shujie Yao 22 Poverty and Inequality among Chinese Minorities A.S Bhalla and Shufang Qiu 14 China’s Economic Relations with the West and Japan, 1949–79 Grain, trade and diplomacy Chad J Mitcham 15 China’s Industrial Policy and the Global Business Revolution The case of the domestic appliance industry Ling Liu 16 Managers and Mandarins in Contemporary China The building of an international business alliance Jie Tang 17 The Chinese Model of Modern Development Edited by Tian Yu Cao 18 Chinese Citizenship Views from the margins Edited by Vanessa L Fong and Rachel Murphy 19 Unemployment, Inequality and Poverty in Urban China Edited by Shi Li and Hiroshi Sato 20 Globalisation, Competition and Growth in China Edited by Jian Chen and Shujie Yao 23 Economic and Social Transformation in China Challenges and opportunities Angang Hu 24 Global Big Business and the Chinese Brewing Industry Yuantao Guo 25 Peasants and Revolution in Rural China Rural political change in the North China Plain and the Yangzi Delta, 1850–1949 Chang Liu 26 The Chinese Banking Industry Lessons from history for today’s challenges Yuanyuan Peng 27 Informal Institutions and Rural Development in China Biliang Hu 28 The Political Future of Hong Kong Democracy within Communist China Kit Poon 29 China’s Post-Reform Economy – Achieving Harmony, Sustaining Growth Edited by Richard Sanders and Chen Yang 30 Eliminating Poverty Through Development in China Wang Xiaolu, Li Shi and Wang Sangui 31 Good Governance in China – A Way Towards Social Harmony Case studies by China’s rising leaders Edited by Wang Mengkui 32 China in the Wake of Asia’s Financial Crisis Edited by Wang Mengkui China in the Wake of Asia’s Financial Crisis Edited by Wang Mengkui First published 2009 by Routledge Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Routledge 270 Madison Ave, New York, NY 10016 Routledge is an imprint of the Taylor & Francis Group, an informa business This edition published in the Taylor & Francis e-Library, 2008 “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” © 2009 Editorial selection and matter; The China Development Research Foundation; individual chapters the contributors All rights reserved No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data China in the wake of Asia’s financial crisis / edited by Wang Mengkui p cm — (Routledge studies on the Chinese economy series ; 32) Includes bibliographical references and index Finance—China Financial crises—Asia China—Economic policy I Wang, Mengkui HG187.C6C4336 2008 330.951—dc22 2008025471 ISBN 0-203-88532-5 Master e-book ISBN ISBN 13: 978-0-415-46469-7 (hbk) ISBN 13: 978-0-203-88532-1 (ebk) ISBN 10: 0-415-46469-2 (hbk) ISBN 10: 0-203-88532-5 (ebk) Contents List of tables and figures List of contributors Foreword Introduction ix xi xiii PART I China’s macroeconomic management after the Asian financial crisis From overcoming deflation to preventing inflation From proactive to sound fiscal policy: an improvement to China’s public finance system 22 Renminbi exchange rates and relevant institutional factors 59 China’s policy of opening up in the decade after the Asian financial crisis 68 PART II China’s financial system and reform of state-owned enterprises after the Asian financial crisis 83 Reform of state-owned commercial banks: from disposing of non-peforming assets to institutional reform 84 System reform of China’s capital market 98 Reform of state-owned enterprises: a three-year disconnect from difficulties leads to system innovation 139 China’s rural reform and development after the Asian financial crisis 163 viii Contents PART III Restructuring China’s social welfare system Proactive employment policy and labor market development 177 178 10 Social security policy 196 11 Reform and development of the public health system 219 12 Educational policies: from expansion and equity to quality 243 PART IV Reflections on the Asian financial crisis and China’s opening up to the outside world 265 13 The 1997 Asian financial crisis: review and reflections 266 14 China in the realm of the world economy 281 Index 300 Tables and figures Tables 3.1 3.2 3.3 4.1 4.2 5.1 5.2 5.3 5.4 9.1 9.2 10.1 10.2 10.3 10.4 11.1 11.2 11.3 11.4 12.1 12.2 12.3 14.1 14.2 RMB depreciation against the US dollar (1993–1994) Labor productivity (1990–2005) Total factor productivity (1990–2005) Direct foreign investment absorbed by China Imports and Exports Independent directors of joint-stock banks CBRC evaluation indicators of SOCB reform Overseas strategic investors of four joint-stock banks Main financial indicators of ICBC, BOC, CBC, and BOCOM (2006) Status quo of the urban labor market (%) Quantity and structure of the rural labor force (millions) Employees in urban areas 1992–2006 (in millions) Unemployed and laid-off workers, retirees and resignations 1992–2006 (in tens of thousands) Urban residents covered by the minimum living standard guarantee system Participants of major social insurance varieties (in tens of thousands) Changes in the main health indicators of Chinese citizens (1995–2005) Development of medical and health-care resources (1997–2006) Analysis of reasons for poverty of rural residents (%) International comparisons in public health spending (2003) Survey of educational progress in China, 1997 and 2006 Structural change of graduates as they enter the labor force Status of educational development and goals for 2010 The potential impact of a 50 percent decrease in China’s securities and market, and a 30 percent decrease in real estate Estimates of China’s exterior liabilities: size, ratio to gross domestic product, and the ratio to foreign exchange reserves 60 63 64 71 72 89 90 91 95 179 189 201 204 211 214 222 222 232 236 245 251 258 289 291 292 Li D Establishment of a firewall A main measure for dissolving financial risks is to take strict control of the ratio of exposure of the national economy to external financial risks There are many ways to measure the ratio of exposure of a country’s macro economy to external economic interference, but among the more important ones is the ratio between the total sum of funds flowing into a country as a result of the short-term capital flows from abroad and the total sum of assets possessed by the same country Under the precondition of incomplete convertibility in capital accounts, this ratio can accurately describe the degree of exposure to the international financial market Undoubtedly, such a ratio of exposure to financial risks must be strictly controlled On the premise that the ratio of exposure stated above is strictly controlled, it is necessary to restrict the influence of fluctuations in the capital market on enterprises’ operations and to control the influences on families’ consumption from a national perspective When fluctuations occur in the capital market, they can be transferred to operating practises of enterprises through various channels One of the more frequently occurring channels is seen when the capital market turns downward It then becomes hard for enterprises to issue (original) stock shares, thus making it difficult to raise funds This mechanism is not the most important option around the world because most countries still adhere to a bank-centered financial system The second channel through which the fluctuations in the capital market influence enterprises is seen when bank capital enters the capital market directly or indirectly When the capital market moves downward, bank capital falls; as a result, banks must reduce the size of related loans, which causes enterprises’ investments to drop China must set restrictions upon such a mechanism within a short amount of time Specifically, enterprises should be encouraged to go through a strict supervision, examination and approval system to become listed on the stock market and to raise funds at relatively low costs Even if stock prices go down, those companies that operate successfully and adopt proper business practises are still able to get listed on the stock market and raise a certain amount of funds Besides, commercial banks should continue to resist re-determining their statutory capital in line with share prices in the short- and medium-terms, thus cutting off the influence of price fluctuations in the stock market towards the operations of banks In this way, bank behaviors can become relatively independent of the capital market In fact, a basic lesson from the Great Depression in the United States in the 1930s is the necessity for cutting off capital market fluctuations’ influence on the entity economy, thus reducing the influence of price fluctuations in the securities market toward banks One often-used measure to reduce fluctuations in the capital market and consumption behaviors is the fostering of institutional investors, instead of mobilizing individuals and family consumers to straightforwardly enter the stock market When institutional investors become comparatively mature, consumers can participate in the capital market by buying retirement funds and insurance funds In case of price fluctuations in the capital market, because fund investments made by families are long-term, stable investments, families’ consumption will China in the realm of the world economy 293 remain constant in the face of fluctuations in the stock market, thus minimizing the influence on the entity economy In short, in this era of globalization, financial risks remain in newly emerging market-oriented economies such as that of China Despite constant economic growth in China, there is a need to carefully study and prepare for possible financial crises in the future and minimize risks The new economic order and developing countries The international economic order is more unfavorable to developing countries today than it has been since the 1990s, when globalization began to sweep across the planet In this new economic order, developing countries will inevitably fall into “development traps.” In large part, the so-called “medium-income trap” in developing countries is closely correlated with irrationality about such an order The system of trade Prior to the 1990s, unfavorable terms of trade were an important factor holding many developing countries back In those years, many developing countries’ participation in the international economic division of labor was confined mainly to exporting raw materials However, since the beginning of the 1990s, many developing countries, particularly ones that recorded rapid economic growth, have been involving themselves in the tide of economic globalization principally by providing processing services for developed countries by tapping their low-cost labor, thus earning foreign exchange In the new global economic layout, terms of trade have been stacked against developing countries; the trading system has also been irrational to toward them, as these countries (including China) must face market pressures in regard to prices of raw materials Meanwhile, market prices of products are sliding downward (see Figure 14.10) Growing protectionism in developed countries’ trade has posed a challenge to fast economic growth in developing countries In the current course of globalization even developed countries are, per se, faced with a mission of economic restructuring It is widely seen that industries whose added values are generated by cheap labor have gradually relocated from developed countries to developing ones and those with newly emerging market-oriented economies Therefore, the production outputs of these industries in developed countries are decreasing all the time This used to be the basic mode of development in the world economy Unfortunately, because the governments of many developed countries failed to perform their duties in economic restructuring, local politics have become more influential in promoting protectionism Protectionism hampers developing countries’ efforts to open up their economies and discourages improvement in their performance in the macroscopic circular flow of the world economy A frequently seen reflection of increasing trade protectionism is the rise in anti-dumping cases In recent years, developed countries lodged a growing number of anti-dumping suits against developing countries 294 Li D Figure 14.10 Evolution of China’s foreign trade parity Source: Cui Jindu and Li Chengbang (2006) (particularly against China) that employ export processing as a major means of export, thereby causing developing countries to suffer a series of setbacks in exports Another important manifestation of trade protectionism is the manipulation of exchange rates in the so-called developing countries Developed countries coerce developing countries into stemming growth of their export sales through increases in exchange rates In reality, exchange rates are a relatively minor factor in regard to trade imbalances The major cause of trade imbalances is not an exchangerate discrepancy between countries But exchange rate issues are nevertheless frequently used as a pretext by politicians in developed countries for restricting exports from developing countries Intellectual property rights With the expansion of globalization and the increasingly detailed division of labor among countries, developed countries have become more fully aware that the intellectual property rights they have accumulated over the years are now the very core of their competitive forces Therefore, developed countries often draw excessive attention to intellectual property rights, in an attempt to safeguard their economic competitiveness There have been three types of problems in protecting intellectual property rights The first of these problems deals with irrational pricing Today, developed countries persist in levying heavy fees for intellectual property rights in relation China in the realm of the world economy 295 to rather mature technologies (such as the technology for manufacturing digital video disks and mobile telephones) Such fees have intangibly impeded economic progress in developing countries (see Table 14.3) Exorbitant pricing of intellectual property rights is a reflection of deep-rooted deterioration in terms of trade between developing and developed countries over many years The truth is that developed countries paid no respect to intellectual property rights at all in the course of their own economic development For example, the United States did not respect the United Kingdom’s copyright agreement at all in the course of its own economic development in the nineteenth century and reprinted publications of the United Kingdom at will Despite this disregard for intellectual property rights of other countries, the United States still levies royalties and patent fees on developing countries Another problem in relation to intellectual property rights is that developed countries insist on fees even with core technologies essential for social development For example, giant corporations in developed countries have made no concessions on intellectual property rights related to technologies for environmental protection, energy conservation, and medicines to prevent or treat diseases such as HIV/ AIDS Overall, fees have generally impeded countries’ economic development In fact, developed countries’ persistence in levying exorbitant fees for certain core intellectual property rights benefits neither developing nor developed countries Exorbitant fees actually encourage the pirating of technologies, which are then Table 14.3 Fees charged for intellectual property rights to produce digital video disk players in China in 2004 Payee in China Patentee Ratio of patent fee 3C Philips, Sony, Pioneer 3.5% of the selling price; minimum fee: US$3.5 per unit 6C Toshiba, Hitachi, Panasonic, Mitsubishi, Times Warner, JVC 4% of the selling price; minimum fee: US$4 per unit 1C Thomson 2% of the selling price; minimum fee: US$2 per unit Dolby Dolby About US$1 per unit MPEG-LA Administrator of the patent pool comprising 23 patentees US$2.5 per unit DTD Digital Theater Systems, Inc US$2 to US$3 per unit Total patent fee on average US$19.70 per unit Average selling price About US$100 per unit Approximate percentage taken up by patent fee in the selling price 20 percent Source: Wei Yanliang (2004) 296 Li D used to churn out inferior-quality versions But such pirating and mass production of inferior goods makes it impossible for developing countries to benefit from new technologies in the long run and makes it hard for developed countries to earn revenues from charging intellectual property rights because the volume of such rights transactions is too low Therefore, when it comes to protecting intellectual property rights, developed countries should collaborate with developing countries toward a solution, which would guarantee lower costs and a greater transaction volume, thus resulting in a win-win situation In this regard, some newly emerging non-profit welfare organizations, such as the Bill and Melinda Gates Foundation, have been wielding greater influence Such organizations offer a promising perspective for the solution to problems related to intellectual property rights and toward the economic and social progress of developing countries Capital flow and risk-distribution system Developing countries have occupied unfavorable positions in the world’s economy One of the main causes of the disadvantageous positions is that developing countries have taken on the entirety of exchange rate risks arising from financial relations with developed countries because most institutions in developing countries have been unable to receive loans via valuation in their home currencies When a developing country such as India asks for a loan from abroad, the funds flowing into India are in US dollars Once these funds flow out of India’s stock market to other countries, it is necessary to convert the rupees into dollars, thus generating a pressure on India’s international revenue and expenditure system Once the rupee decreases in value, the losses will be borne by India as a whole On the contrary, today’s China has an international payments surplus, but China’s foreign exchange reserves are valuated in dollars or Euros Therefore, when the exchange rate of US dollars or Euros against the RMB Yuan drops, Chinese organizations holding RMB Yuan and US dollars will have to take the exchange rate losses Such a risk-distribution system is certainly unfavorable to developing countries The ultimate measure for changing such a risk distribution system is to allow or assist certain developing countries to conduct financial transactions via valuation in their home currencies Currency policy and coinage income Because currencies of developing countries have not yet become internationally accepted, the predominant currencies of the world’s financial scene are US dollars and Euros When the currency policies of the central bank of the United States or Europe undergo changes, these changes will naturally be passed on to developing countries in various ways For example, if the US dollar interest rate rises, the interest rates in developing countries will also rise; otherwise, funds will flow back to the United States via diversified channels Such an arrangement is unfavorable to developing countries, because the central banks in Europe or in the United States, when formulating their currency policies, naturally aim mainly to adjust their own China in the realm of the world economy 297 national or regional economies without taking into account the influence their policies have on other countries Therefore, fluctuations in currency policies will undoubtedly be passed on to developing countries, and thus generate an adverse influence upon developing countries In fact, one of triggers of the Asian financial crisis was the United States’ tightening of its currency policies in mid-1997 with the goal of taking control of the bubbles in asset prices there were brought on by overheated investments in the Internet-based economy (they did not result from any judgment about the global economic climate) As shown in Figure 14.11, the ratio of “M2” to gross domestic product in the United States bottomed out, causing the exchange rate of the US dollar to rise and triggering Asia’s financial crisis M2 is the measure of the US money stock that consists of “M1,” certain overnight repurchase agreements and certain overnight Eurodollars, savings deposits (including money market deposit accounts), time deposits in amounts of less than US$100,000 and balances in money market mutual funds (other than those restricted to institutional investors.) Coinage income is another significant factor (see Figure 14.12) The US dollar has become the world’s main currency in foreign exchange reserves and has served as a principal settlement currency for international trade The Euro, as a freshly emerging currency of international reserves and for international trade, has been issued in an increasing volume The coinage income out of such an increasing volume of issuance has been possessed by the Federal Reserve System in the United States and by the European Central Bank Such coinage income flows back to the central banks in the United States and in Europe in various forms For example, when Federal Reserve System augments its currency issuance volume, a large portion of the currency issued flows abroad, and the Federal Reserve System purchases US Government securities in the form of a currency issuance, thus Figure 14.11 Ratio of M2 to gross domestic product in the United States Source: World Development Indicators 2006 and US Bureau of Economic Analysis 298 Li D Figure 14.12 Estimated coinage income of the United States (International earnings of US dollars, 1981–2002, as a percentage of gross domestic product) Source: Chen Yulu, et al (2005) substantively protecting the US securities market Such support to the US securities market has been manifested in the fact that the earning rate on US Government securities has remained at a rather low level for a long time Such a low earning rate has boosted the long-term boom of American economy Figure 14.11 sets forth the ratio between US dollar coinage income and gross domestic product of the United States, which fluctuates around percent By the same token, the central bank of Europe can buy European bonds by means of issuing Euros, thereby keeping the interest rate of European bonds at a relatively low level while safeguarding economic development in Europe Ex-post facto aid The last front in which the international economic order is unfavorable to developing countries becomes apparent after a financial crisis – when developed countries’ aid to developing countries was not based entirely on considerations of the interests of developing countries Instead, developed countries, when offering such aid, paid more heed to how to guarantee that their creditors could recover loans Historically, developed countries’ aid agencies, represented by the IMF, have overly emphasized the necessity for developing countries to adopt tight fiscal policies in the short term after having suffered a financial crisis These policies included ones related to fiscal restraint and currencies Policies of restraint have indeed brought forth some excessive, unnecessary economic pressure on developing countries (see Ito 2007) and have aimed to reduce risks to creditors in developed countries and guarantee the recovery of their investments within a short time Ostensibly, policies that overly emphasize short-term restraint have not been accompanied by ordinary economic analysis After the occurrence of a financial China in the realm of the world economy 299 crisis, the aiding party should make its best effort to reduce economic losses and stabilize the financial scene Under certain circumstances, it is necessary to enlarge financial expenditures and to put into force various kinds of relatively loose currency policies to maintain the normal operation of the economy However, because developed countries have the absolute right of control in the ex-post facto aid mechanism, economic aid provided after a financial crisis in today’s world is often attached with overly uncharitable conditions The root cause of these occurrences has not yet been definitively identified Therefore, when the next financial crises occur in developed countries, their impacts will exceed those of a regular financial crisis Summary Despite the sweeping tide of economic globalization, the international economic order of the day remains quite unfavorable to developing countries Developing countries must repeatedly appeal to all countries and international policy makers to scrutinize irrational elements in today’s economic order Only when the international economic order becomes more rational can the world economy can step onto a path of long-term prosperity Meanwhile, developing and developed countries could embrace common prosperity and development and create a shared harmonious environment As a swiftly emerging developing economy, China has the capability and the reasons to adopt reasonable and well-structured measures to support its efforts to build a new, more rational, international economic order References Chen, Yulu; Wang, Fang; and Yang, Ming (2005) “Internationalization of Currency as a Transnational Competition Strategy: Evidential Experience of the US Dollar on the Globalization of the Renminbi.” Economic Research: Cui, Jindu and Li, Chengbang (2006) “Terms of Foreign Trade China Was Exposed To: An Analysis of the Scene from 1995 to 2005.” International Economic Cooperation: Gill, Indermit and Kharas, Homi (2007) An East Asian Renaissance: Ideas for Economic Growth Washington, DC: World Bank Ito, Takasoshi (2007) “Asian Financial Crisis and the International Monetary Fund, 10 Years After.” Asian Economic Policy Review (2): 16–49 Li, David Daokui (2006) “Large Domestic Non-Intermediated Investments (DNI) and Government Liabilities: Challenges Facing China’s Financial Sector Reform.” Working Paper, Centre for China in the World Economy, Tsinghua University Wei, Yanliang (2004) “Follow-up Report on Recent Disputes over Intellectual Property Rights of DVD players.” Electronic Intellectual Property Rights: 11 Zandi, Mark R (1999) “Wealth Worries.” Regional Financial Review, August: 1–8 Index Please note that a bold entry indicates a table or figure ABC 24, 84–6, 96 abundant liquidity 12–17 active fiscal policy 183, 219–21 ADBC 84 “Administrative Licensing Law” 74 age distribution of rural labor force 188–9, 189 Agricultural Bank of China (ABC) see ABC agricultural development 168–76, 231 Agricultural Development Bank of China (ADBC) 84 agricultural products 7, 163–4, 170–1, 173–4 agricultural structure 167, 171 agricultural tax see rural taxation Akerlof, George A 274 ample liquidity 66 anti-dumping 293–4 anti-monopoly law 155 arable land 172–3 Asian Financial Crisis 1997 7–8, 22–4, 178, 197, 266, 279–80; causes 272–7; China’s experience 7–8, 68–72, 84–5, 106, 281–7; lessons and policy implications 277–9; review 266–72; state-owned enterprises 139, 141 asset management companies 86 Assets Supervision and Administration Commission of the State Council (SASAC) see SASAC associated parties 123–4 Australia 252 Bai Chong–En 266–80 Bank of China (BOC) see BOC bank-run theory 275–6 banking 31–2, 147, 286–7, 292; Asian financial crisis 266, 272, 274–8; commercial see commercial banks; foreign see foreign banks; see also financial institutions Bankruptcy Law 93, 129, 135, 140 basic education 247–8, 261n7 basic endowment insurance system 199, 203, 206–7, 210–13, 214, 216 beggars 208 “Beijing Consensus” 150 Bill and Melinda Gates Foundation 296 bird flu 53 blood stations and transfusion network 220 board of directors see directors BOC 24, 84–8, 89, 91, 91, 94–5, 95 BOCOM 24, 84, 86–8, 89–90, 91, 91, 94, 95, 96n1 bonds 116–17, 134; corporate see corporate bonds; government 86, 219–21; national see national bonds brokerage companies see securities brokers Budget Law 25 Bureau of Industrial and Commercial Administration 190 Cai Fang 178–95 capital flow 11, 62; cross-border see crossborder capital flows capital market 98, 290–2, 292–3; main measures for boosting development 132–8; post-reform and development 113–39; risk prevention and control 98–113; state-owned commercial banks 91, 94–5; today’s market 129–32; see also stock exchanges CBC 84–8, 89, 91, 91, 94–5, 95 CBRC 88, 90, 92–3, 96n4, 96n5 CDB 84 Central Huijin Investment Co 87 chemical poisoning bases 220 childbirth insurance see maternity insurance Chile 197 China Academy of Sciences 53 China Bank of Communications (BOCOM) see BOCOM China Banking Regulatory Commission (CBRC) see CBRC China Development Bank (CDB) 84 China Financial Futures Exchange 118 China Futures Association 117 China Futures Guarantee Fund Monitoring Center 118 Index 301 China Government Securities Depository Trust & Clearing Co 116 China Network for Training and Research in Health Economics and Financing 227 China Securities Investors Protection Fund Co Ltd 125 China Securities Regulatory Commission (CSRC) see CSRC Chinese Consumers’ Association 231 Chinese Doctors Association 237 “Chinese localization” 147, 152 closed economy 14, 75 coinage income 297–8, 298 collectively owned enterprises 181, 196–202, 201, 206, 210 colleges see higher education commercial banks 9, 40–1, 135, 137, 285, 286–7, 292; laws 84, 286; state-owned see SOCBs commodity prices 8, 12–13, 16, 23, 25 Communist Party of China (CPC) 142, 144 “Company Law”: capital market 113–14, 123, 128–9, 131–2, 137; state-owned enterprises 141, 146, 152, 161n20, 161n21 compulsory education 51, 169, 246–8, 252–3, 257, 258, 261n10 Construction Bank of China (CBC) see CBC construction of infrastructure 9–10, 12, 25, 285; education 246, 250–1; health system 219–20, 238; national bonds see national bonds; rural 164–5, 175 contracting of rural lands law 166 “corner cases” 61–2 corporate bonds 99, 116–17, 126, 130, 133–4 corporate goverance 123, 130, 134, 278, 289–90; state-owned commercial banks 86, 88; stateowned enterprises 140–1, 146–8, 150–4 corporate income tax 36, 74 “Corporation Law” 154 Corsetti, Giancarlo 274 county governments 54, 58n7, 169–70, 246 CPC 142, 144 credit-rating institutions 95, 269, 271, 273 Criminal Law 123, 128–9 crop production 166–7 cross-border capital flows 8, 15, 78, 138, 286–7, 296; Asian financial crisis 70, 278, 280 “crowding-out” 40–1 CSRC 98–105, 107–10, 112–14, 119, 122–5, 127 currency policy 23–4, 30–1, 296–7 deflation and inflation 7, 22–3; halting deflation 7–10, 11; issues worthy of discussion 18–19; preventing inflation 10–18; relevant considerations 20–1 Deng Xiaoping 55 developing countries 14, 64–5, 78–9, 293–9 Development Research Centre of the State Council 224–5 Diamond, Douglas W 275 dibao 181, 185 directors 88, 89–90, 111, 123, 130, 137, 153–4 disability 199, 222 disasters 53 disease prevention and control systems 214, 220, 226, 238 doctor-patient relations 237 drugs 226, 230–1, 236, 239–40 “dualistic conflict” 61 Dybvig, Philip H 275 “e–Public Finance Project” 48, 49, 56 economic overheating see overheating economy 10–12, 16–21, 271, 281, 299; accession to the WTO see WTO; China’s experience with Asian financial crisis see Asian financial crisis; financial risks and establishment of domestic systems 287–93; new economic order and developing countries 293–9; opening up policy see opening up policy; see also macro economy education: basic 247–8, 261n; compulsory see compulsory education; higher see higher education; informal 254, 257; key schools 248, 261n11; pre-school 257, 258; rural see rural education; senior secondary 257, 258; vocational see vocational education Education for All (EFA) 243, 247, 260n1, 261n8 education laws 169, 243, 248, 260 education policies 37, 243; basic, vocational and higher education of past 10 years 247–52; equity 255–7; expenditure 253, 262n15; future policies and outlook 252, 255–60, 258–9; obstacles 252–5; quality and studying methods 247, 248, 254–6, 261n6; review of concepts and impacts of past 10 years 243–7, 245 elderly people see pensions; retirement Eleventh Five-year Plan 14–15 emergency response mechanism 53, 238 employment: informal 181, 192; proactive policy see proactive employment policy; rural see rural employment; self-employment 186, 190; urban see urban employment; see also labor market; laid-off workers; migrant laborers; unemployment employment informalization 181, 192 employment service 183–4 enrollment rates 245–6, 245, 258–9 enterprise laws 93, 129, 140, 151 enterprises 52–3, 190, 279, 288–90, 289, 292; capital market 115–17, 126; collectively owned see collectively owned enterprises; non-public 196–7; private see private enterprises; state-owned see state-owned enterprises; township and village see township and village enterprises equity separation issue 121–3 Europe 22, 66, 271–2, 296–8 European Central Bank 297–8 ex-post facto aid 298–9 302 Index exchange rate 59, 66–7, 81, 286, 294; adjustments 65–6, 67; Asian financial crisis 69–72, 266–7, 270–2, 278–80; exchange rate (continued) deflation and inflation 9, 13–17, 19; development of RMB 59–61, 60, 61, 62; institutional factors 64–5; labor and total factor productivity 62–4, 63; pegged see pegged exchange rates; risk-distribution system 296; theory and application in China 61–2 “expanded triangle” 62 expansive proactive fiscal policy see proactive fiscal policy Export-Import Bank of China 84 exports 7–11, 15–16, 27–8, 173–4; Asian financial crisis 69–70, 72; economy 279, 281, 281, 282, 294; opening up policy 77–8, 80; rebate 36–7 exterior liabilities 291, 291 external factor changes theory 277 “factory system” enterprises 151 farmers: income 163–4, 166–9, 171; land tenure 172; rights and interests 165–6, 174–5; social security 209 farmland system 165 Federal Reserve System 297 Financial Institution Development Fund (FIDF) 266–7 financial institutions 116, 266–7, 271–8, 290, see also banking financial liberalization policies 272–3, 279–80 financial panic 275–6, 279–80 financial performance 90 financial risks 287–8, 290–3; “Japanese– style” 288; “macroscopic” 288, 290–1; “microscopic” 288–90; “traditional” 287–8 financial supervision systems 277–80 financial system 8, 37–8, 92, 172, 277, 286–7, see also public finance firewall system 286–7, 292–3 fiscal policy 19, 24; active 183, 219–21; proactive see proactive fiscal policy; public functions 49–55; sound see sound fiscal policy Fitch 95 fixed interest rate system 273–4, 278–80 “flameout” 22 for-profit health institutions 236 foreign banks 73–4, 93, 95, 97n7, 116, 266–7 foreign direct investment (FDI) 281, 283 foreign investment 28, 249, 286, 288, 290; Asian financial crisis 8, 68–71, 71, 267, 269–70, 272, 275–8; banking sector 92–3; capital market 118–19, 138; deflation and inflation 10, 13–14; opening up policy 74, 80 foreign strategic investors 88–91, 91 foreign trade 22, 68, 73, 77–8, 80 foreign trade parity 293, 294 Frankel, J A 62 fund industry 127–8, 131 futures market 108, 114, 138; legislative system 131–2, 137; rebound and growth 117–19; standardization 102–4; steadfast development 136–7 Gang, Y 62 GDP 285, 287, 288, 289; deflation and inflation 10, 16; proactive fiscal policy 23, 29 Germany 20, 67, 154, 227–8 globalization 287, 293–4, 299; China’s opening up policy 68, 76–8; deflation and inflation 8, 11, 15, 20; rural reform 171–2, 173–4 governance structure 148, 150–4, 161n21, see also corporate governance government bonds 86, 219–21 Government Financial Management Information System (GFMIS) see e-Public Finance Project graduates 250–1, 251, 253 grain production 7, 12, 26, 52; rural reform 163, 166–7, 170–1, 173–4 grain risk fund 35 grain-circulation mechanism 166 gross domestic product (GDP) see GDP Gu Chujun 152 Han Jun 163–76 health resources 221–4, 222, 236–7 health security system 239, 239 health supervision system 226 health system 37, 53, 219; discussions on significant issues since 1997 224–8; funding 235–6, 236; macro policies and economic development 219–24; major contradictions and problems 233–7; management and administration 237–8; policy orientation 237–41; practical evolution since 1997 228–33; see also medical services higher education 249–52, 250, 253–4, 257, 259, 260, 261n4 Hong Kong 138, 153, 271 housing 7, 27 HSBC 88 Hu Jintao (President) 164, 226, 255 Huang Ming 98–138 human resources 78, 244–6, 245, 249, 254–6, 262n13 ICBC 24, 84–8, 89, 91, 91, 94–5, 95, 133 ideology 78–9 illegal behavior in stock market 98–100, 101, 123–5, 130, 137–8 illiteracy rate 245, 245 ILO 179–80 IMF 70, 268–72, 275, 286, 298 imports 11, 16–17, 173–4; opening up policy 72, 73, 77, 80 Index 303 “impossible triangle” 61 income distribution policy 27, 37, 54–5 income per capita 149 India 20, 250, 271, 282, 288, 296 individual account system 207, 208, 212, 216 Indonesia 267–75, 278, 286 Industrial and Commercial Bank of China (ICBC) see ICBC industrial injury insurance system 209–10, 214, 229–30 industrial products industrialization 54, 77, 155, 164, 174; deflation and inflation 7, 11–12, 14 infant mortality rates 221, 222, 232 inflation see deflation and inflation informal education 254, 257 informal employment 181, 192 information disclosure 123, 130, 134 information surveillance network system 238 Information Technology Agreement 73 infrastructure-construction sector see construction of infrastructure injury insurance system, industrial see industrial injury insurance Institute of Population and Labour Economics of the Chinese Academy of Social Sciences 185 institutional innovation 140–1, 143, 146 institutional investors 127–8, 131, 136, 292 insurance industry 38 intellectual property rights 74–5, 78, 294–6, 295 interest rate 40–1; fixed 273–4, 278–80 International Labour Organization (ILO) 179–80 International Monetary Fund (IMF) see IMF International Organization of Securities Commissions 119 international revenue and expenditure 14, 16–18, 71, 281–2, 283 investment 16–17, 40–1, 117; agriculture 168–9, 175; enterprises 147, 154–8, 288, 289; foreign see foreign investment; institutional see institutional investors; over-investment 13–14; overseas 80 Japan 20, 67, 153, 154, 162n26, 282; Asian financial crisis 269, 271, 274, 277–80 “Japanese–style” financial risks 288 Jia Kang 22–35 Jiang Yiwei 160n12 Jin Renqing (Minister of Finance) 32, 47 “job-waiting” see unemployment joint-stock companies 87, 89–90, 91 key schools 248, 261n11 Krugman, Paul 61–2, 274 labor costs 192, 193 labor force participation rate 178–9, 179 labor market 19, 178, 282; development prospects 192–3; education 250–1, 251, 253; employment service 183–4; regional distribution see regional distribution; shock 178–81, 191–2; urban and rural growth and structural changes 187–9; see also employment labor productivity 62–3, 63 laid-off workers 23, 228, 282–3, 284; labor market 178–82, 184–6, 185; social security 185, 198–206, 204–5; see also employment; minimum standard of living land contracts 165–6 land tenure 172 Lang Xianping 152 “Lang-Gu Dispute” 152 Latin America 22, 272 laws and regulations 25, 73–5, 154, 155, 166, 223–4; bankruptcy see Bankruptcy Law; commercial banks 84, 286; company see “Company Law”; criminal 123, 128–9; education see education laws; enterprise see enterprise laws; property 93–4, 159; securities see “Securities Law”; social security 212, 215–16 “Legislation Law” 74 “Lewis turning point” 192–3 Li Daokui (David D Li) 281–99 Li Lanqing 46 life expectancy 221–2, 222, 232 listed companies 99–100, 107–8, 115, 119, 121–2, 126, 137, 147; improving performance 122–4, 130; promotion of healthy development 134–5; standardization of operating practices 108–13 Liu Chunhang 84–97 Liu He 7–21 livestock products 174 living conditions and environment 221, 222 living standards 17, 149, 163, 171–3, 181–2; minimum see minimum standard of living loans 70, 86–7, 92 local governments 11, 14, 73, 74, 103, 182; education 246, 248; proactive fiscal policy 25, 31–2; state-owned enterprises 156, 167, 169–70 Long Guoqiang 68–81 Long Term Capital Management Company (LTCM) 272 McKinnon, R 65 macro economy 94, 146, 219, 268, 290; control measures 7–13, 12, 46, 285–6; deflation and inflation 7–13, 13, 17–20; opening up policy 78, 81; proactive fiscal policy 22–5, 32–3, 178, 183, 193 “macroscopic” financial risks 288, 290–1 Main Underwriter Recommendation System 126 Malaysia 8, 162n26, 268–71, 273–4, 286 market-orientated economic system 115, 187, 282, 287, 293; deflation and inflation 7, 10; proactive fiscal policy 23, 38 304 Index maternal mortality rates 221, 222, 232 maternity insurance 210, 214, 229–30 medical assistance system 223, 226, 232 medical costs 225–7, 231, 234, 235, 236 medical insurance 216, 226; urban employees 203, 208–9, 214, 223, 228–31, 235 medical organs 240 medical rescue and treatment systems 220 medical service skills 222–3, 225 medical services 37, 214, 221, 230–1; rural see rural medical services; see also health system medical technologies 222 medicines see drugs “medium-income trap” 293 micro-market mechanism 7–8, 12, 282–5 “microscopic” financial risks 288–90 migrant laborers 178, 188–9, 192 minimum standard of living 57–8n1, 228; labor market 181–2, 185, 185; social security 199–206, 208, 209, 211, 214–15 minimum wage system 193 Ministry of Commerce 74 Ministry of Finance (MOF) 28, 32–3, 87 Minoru Kobayashi 160n5 modern enterprise system 37, 140–1, 146–7, 228, 288–9 monetary policy 8–10, 16, 19, 61–2, 183, 285 Moody’s 95, 269, 271, 273 moral hazard theory 274–5, 277–8 multi-tiered stock market structure 115–16, 129–30, 133 multilateral trade system 79–80 Mundell, R A 61, 65 Mundell-Fleming model 61 mutual degree agreements 252 national bonds 24–35, 38, 40–1, 49–50, 53, 142, 183, 207; benefits 41–2; deflation and inflation 9, 12; risks associated 44–6 national economy, growth and development 149, 163, 171, 183 National Electronic Trading System (NET) 115–16 National Financial Work Conferences 86–7, 96 National People’s Congress (NPC) see NPC nationalism 79 natural resources 78 NCMS 50–1, 223, 226, 233–5, 239 nepotistic capitalism 275 new international economic order 293–9 “new public management mode” 260 new rural cooperative medical scheme (NCMS) see NCMS non-public enterprises 196–7 NPC 11, 24, 27, 105, 128 nuclear radiation rescue bases 220 opening up policy 11, 14, 68, 92–3, 149, 173–4; capital markets 118–19, 138; new situation 76–9; outlook 79–81; review 68–76 Organization for Economic Cooperation and Development 260 organs 240 original investment funds 104–5 over-investment 13–14 overheating 22, 31, 267–8, 288, 290; deflation and inflation 7–8, 12–13, 17, 19 overseas investment 80 Pakistan 271 pegged exchange rates 273–4, 276, 278 pensions 136, 186, 198–9, 203, 206–7, 210–14, see also retirement People’s Bank of China 8–9, 84, 105, 108, 116 “perfect competition scene” 283–4 performance budgeting 49 Pesenti, Paolo 274 Philippines 268–71, 274 pirating of technologies 295–6 political system, rural 172, 174–5 postgraduates 250, 251, 254, 259 poverty 54, 208; rural see rural poverty; urban see urban poverty power 153, 161–2n24 power grids 27, 169, 220 pre-school education 257, 258 pricing 19, 65–6, 284; agricultural products 164, 167, 171 private enterprises 181, 187–8, 190 proactive employment policy 178, 182–6, 187, 191–2 proactive fiscal policy 8–11, 22–30, 31–2, 49–50, 142, 285–6; “crowding–out” 40–1 “Property Law” 93–4, 159 property rights 285; state-owned 149, 160n5 public finance 46–57 public functions 49–55 public health spending 235–6, 236 public investment policy 9–10, see also construction of infrastructure public opinion 78–9 public services, rural 172–3, 176 public and societal employment service see employment service purchasing power parity (PPP) 64 QDII and QFII system 119, 138 Qiao Xinsheng 161n21 Qin Bin 98–138 Radelet, Steven 270, 273 railway projects 26 “ratchet effect” 45 re-employment 181–2, 184–6, 200 real estate industry 28, 266, 269, 288, 289 reform 11, 18, 21, 23, 36–40, 149; capital markets 98–138; education policies 51, 246–7; employment system and labor market development 178–95; health system 219–42; Index 305 public finance 47–9; rural sector 52, 163–76; social security system 196–218; state-owned commercial banks 84–97; state-owned enterprises 139–62, 191, 282 regional development 54 regional distribution: health system 233–4; labor market 179–80, 180, 188 regional integration 77, 80 research and development 52–3, 77 resident consumption 41 resignations 204–5 “responsibility theory” 78 retirement 186, 204–5, 206, 210–12, see also pensions risk-management mechanism 78, 80–1, 92, 94 RMB exchange rate see exchange rate Romer, Paul M Looting 274 Roubini, Nouriel 274 rural construction 164–5, 175 rural education 172, 247–8, 254, 261n10, see also compulsory education rural employment 167–8, 174, 176, 193, 210, 282; non-agricultural 187–8; transfer 187–9, 189 rural medical assistance system 223, 226, 232 rural medical services 169–70, 172, 209, 217n6, 220–1, 231–3; new rural cooperative medical scheme see NCMS rural poverty 208, 223, 232–3, 232 rural reform 163; basic policies 163–5; future policies 173–6; policies and measures to address since Asia’s financial crisis 165–73 rural social security system 209, 212 rural taxation 36, 52, 165, 247–8 rural township health centers (THCs) 234 Russia 22, 250, 271–2 Sachs, Jeffrey 270, 273, 276 “Sannong issues” 164–5 “Sarbanes-Oxley Act” (US) 154162n25 SARS 13, 29, 53, 208, 224 SASAC 144, 146, 148–9 Scandinavian models 65 science and technology see technology Securities Association of China 115–16 securities brokers 100–3, 107, 117, 127 securities central clearing companies 108 securities companies 100–1, 107, 111, 115, 136–7, 147; comprehensive treatment 124–5; difficulties in development 131; standardization, innovation and development 135–6 Securities Crime Investigation Office 114 “Securities Law” 105–8, 113–14, 123, 128–32, 137 securities market 108, 113–14, 119, 137, 288, 289, 292 Securities Regulatory Commission of the State Council 108, 124 Securities Trading Automatic Quotation System (STAQ) 115–16 securities trading centers 101–2 self-employment 186, 190 senior citizens see retirement senior secondary education 257, 258 SETC 141, 143 severe acute respiratory syndrome (SARS) see SARS Shang Fulin 119 share trading reform 126–7, 147–8, see also capital market shareholders 123–4, 130, 153 Shen, Liantao 277 Singapore 197, 271 smuggling 70–1 SOCBs 24–5, 27, 38, 84; background 84–5; future challenges 95–6; improvements in the external environment 92–4; policy results 94–5; reforming 86–91 social insurance 203, 209–10, 214 social market economy: health system 230; social security 199–200, 206, 210; stateowned enterprises 140–1, 143, 146, 152 social policies 285–6 social security system 19, 37, 50–1, 136, 196; building new system: progress and effects 203–10; future development 210–16; labor market 178, 180, 183, 185–6, 192; management system 215; reforms explored before crisis 196–7; suggestions for promoting reform 212–16; Three Social Security Lines policy 198–203; Two Assurances policy 203 socialist harmonious society 14–15, 226–7 SOEs 85, 139, 228–9; corporate governance 146–8; current problems 150–5, 151; future countermeasures 155–9; labor market 178, 181, 186, 191, 282–3, 284; path and policy orientation after Asian Financial Crisis 141–4; path and policy orientation before 1997 139–41; policy effect and evaluations since 1997 144–50; proactive fiscal policy 23, 27, 37–8; social security 196–206, 201, 204–5, 210, 212 “soft landing” 22–3 sound enterprise financing system 278, 280 sound fiscal policy 22, 30–5, 40, 50 South Korea 8, 131, 268, 270–1, 273–5, 278, 286 Soviet Union (former) 139 Standard & Poor 95, 269 state assets supervision authorities 156–8 State Bureau of Grain Reserve 26 State Economic and Trade Commission (SETC) 141, 143 State Power Grid Corporation 169 state-owned assets 144–50, 155, 160–1n14 state-owned assets management system 143–6, 145, 156–9, 161n18 state-owned assets supervision and administration commissions 156 state-owned commercial banks (SOCBs) see SOCBs state-owned enterprises (SOEs) see SOEs 306 Index state-owned property rights 149, 160n5 stock equity transfer system 115–16 stock exchanges 101–2, 113, 114–18, 121, 129–30, 141 stock market see capital market strategic investors 88–91, 91 structural policy 19 subsidiaries 147 subsidies: rural 166–7, 173; social security 207 subsistence-allowance system 208 Suharto family 275, 278 Taiwan 8, 270–1 taxes 28, 39, 42–4; agricultural and rural see rural taxation; corporate income 36, 74 teachers 169, 247, 248, 252, 255 technology 28–9, 52–3; pirating 295–6; stateowned enterprises 142, 156 Thailand 7–8, 22, 162n26, 266–7, 269–71, 273–5, 286 Three Social Security Lines 198–203, 206 “three-dimensional rural issues” 164, 175 total factor productivity (TFP) 62–4, 64 township and village enterprises (TVEs) 187–8, 282, 285 townships 54, 58n7 trade policy 16, 19, 74, 75, 79–80, see also exports; imports trade protectionism 17, 293–4 trade surplus 13, 15, 17, 19, 71 “traditional” financial risks 287–8 treasury bonds see national bonds “Two Assurances” policy 203 “two basics” 243, 245, 247–8 “two kinds of farmland” system 165 “Two Tendencies” 164 UK see United Kingdom unemployment 23, 31, 282; labor market 178–82, 179, 184–6, 185, 192–3; social security 185, 198–9, 204–5 unemployment insurance 185, 199, 203–6, 214, 214 UNESCO 247 unit security system 198–9 United Kingdom (UK) 20, 154, 227–8, 252, 295 United Nations Educational, Scientific and Cultural Organization (UNESCO) 247 United States (US) 66, 70, 154, 228, 250, 252; Asian financial crisis 22, 271–2, 274, 277–9; economy 8, 17, 20, 290, 292, 295–8, 297, 298 universities 251 urban employment 189–91, 198, 201 urban poverty 181, 198–9, 202, 208 urbanization 11–12, 26 US see United States vocational education 248–9, 250, 253–4, 257, 258, 262n12 wages 65–6, 283, 285 Wang Meiyan 178–95 Wang Yanzhong 196–218 “Washington Consensus” 150 water supplies 173 water-conservation projects 26, 168–9, 173 websites 74 Wen Jiabao (Premier) 33 workers see employment World Bank 197 World Health Organization (WHO) 221 World Trade Organization (WTO), accession 11, 36, 68, 72–7, 75, 113–14, 118–19 Wu Huazhang 219–42 Wu Jinglian (Professor) 152, 159n1, 159–60n5 Xian, T 62 Xiang Huaicheng (Minister of Finance) 24, 46 Yi Gang 59–67 Zhang Delin 139–62 Zhang Li 243–63 Zhang Zhenzhong 219–42 Zhu Rongji (Premier) 141–2 .. .China in the Wake of Asia’s Financial Crisis This book examines China s response to the Asian financial crisis of 1997, both in its immediate aftermath and in the years since The crisis. .. Governance in China – A Way Towards Social Harmony Case studies by China s rising leaders Edited by Wang Mengkui 32 China in the Wake of Asia’s Financial Crisis Edited by Wang Mengkui China in the Wake. .. policy In reaction to the Asian financial crisis, the first step was the expansion of the monetary policy In March 1998, the People’s Bank of China (the central bank of China) lowered the deposit