Sustainable Reform and Development in Post-Olympic China [1 ed.] 9780203840764, 9780415559560

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Sustainable Reform and Development in Post-Olympic China

After 30 years of economic reform, China has reached a crossroads in its development process, and faces many challenges in the use of natural resources, the living environment, and the economic, social and political systems. The sustainability of China’s reform and development is even more salient in the face of the global financial crisis and economic recession. Taking the 2008 Olympic Games in Beijing as an iconic turning-point, the book explores key themes such as economic reform and sustainability, innovation and sustainability, globalization and social development, and analyses the prospects for sustainable reform and development in Post-Olympic China. The book includes topics such as Chinese banking reforms; the issue of regional inequalities; energy and environmental challenges; industry development and corporate social responsibility, and democracy and media bloggers. With analyses written by experts from a wide range of disciplines, the book will appeal to a wide range of readers interested in China’s environment and sustainable development, economic and political reform, and international relations. Shujie Yao is Professor of Economics and Chinese Sustainable Development; Head of the School of Contemporary Chinese Studies; and Coordinator of the China and World Economy Programme at the Leverhulme Centre for Globalization and Economic Policy at the University of Nottingham, UK. He is also Special Chair Professor of Economics at Xi’an Jiaotong University, and his most recent publication with Routledge is Economic Convergence in Greater China: Mainland China, Hong Kong, Macau and Taiwan. Bin Wu is a Senior Research Fellow in the School of Contemporary Chinese Studies at the University of Nottingham, UK. Stephen L. Morgan is Associate Professor and Research Director at the School of Contemporary Chinese Studies, University of Nottingham, UK. Dylan Sutherland is a Lecturer in the School of Contemporary Chinese Studies at the University of Nottingham, UK.

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. 1 The Growth of Market Relations in Post-reform Rural China A micro-analysis of peasants, migrants and peasant entrepreneurs Hiroshi Sato 2 The Chinese Coal Industry An economic history Elspeth Thomson 3 Sustaining China’s Economic Growth in the Twenty-First Century Edited by Shujie Yao and Xiaming Liu 4 China’s Poor Regions Rural–urban migration, poverty, economic reform, and urbanisation Mei Zhang 5 China’s Large Enterprises and the Challenge of Late Industrialization Dylan Sutherland 6 China’s Economic Growth Yanrui Wu

7 The Employment Impact of China’s World Trade Organization Accession A. S. Bhalla and S. Qiu 8 Catch-up and Competitiveness in China The case of large firms in the oil industry Jin Zhang 9 Corporate Governance in China Jian Chen 10 The Theory of the Firm and Chinese Enterprise Reform The case of China International Trust and Investment Corporation Qin Xiao 11 Globalization, 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

13 Economic Growth, Income Distribution and Poverty Reduction in Contemporary China Shujie Yao 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 Globalization, Competition and Growth in China Edited by Jian Chen and Shujie Yao

21 The Chinese Communist Party in Reform Edited by Kjeld Erik Brodsgaard and Zheng Yongnian 22 Poverty and Inequality among Chinese Minorities A. S. Bhalla and Shufang Qiu 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 China Development Research Foundation 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 33 Multinationals, Globalisation and Indigenous Firms in China Chunhang Liu 34 Economic Convergence in Greater China Mainland China, Hong Kong, Macau and Taiwan Chun Kwok Lei and Shujie Yao 35 Financial Sector Reform and the International Integration of China Zhongmin Wu

36 China in the World Economy Zhongmin Wu 37 China’s Three Decades of Economic Reforms Edited by Xiaohui Liu and Wei Zhang 38 China’s Development Challenges Economic vulnerability and public sector reform Richard Schiere 39 China’s Rural Financial System Households’ demand for credit and recent reforms Yuepeng Zhao 40 Sustainable Reform and Development in Post-Olympic China Edited by Shujie Yao, Bin Wu, Stephen Morgan and Dylan Sutherland

Sustainable Reform and Development in Post-Olympic China Edited by Shujie Yao, Bin Wu, Stephen L. Morgan and Dylan Sutherland

The Editors would like to acknowledge financial support from the Chinese Language Council International, Nottingham Confucius Institute and the Leverhulme Centre for Research on Globalisation and Economic Policy.

First published 2011 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon, OX14 4RN Simultaneously published in the USA and Canada by Routledge 270 Madison Avenue, 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, 2011.

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. © 2011 Shujie Yao, Bin Wu, Stephen Morgan and Dylan Sutherland for selection and editorial matter; individual contributors their contribution The right of Shujie Yao, Bin Wu, Stephen Morgan and Dylan Sutherland to be identified as editors of this work has been asserted by them in accordance with sections 77 and 78 of the Copyright, Designs and Patents. 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 Sustainable reform and development in post-Olympic China / edited by Shujie Yao . . . [et al.]. p. cm. — (Routledge studies on the Chinese economy ; 40) Includes bibliographical references and index. 1. China—Economic policy—21st century. 2. Sustainable development— China. 3. Olympic Games (29th : 2008 : Beijing, China)—Economic aspects. I. Yao, Shujie. HC427.95.S868 2011 338.951’07—dc22 2010016442

ISBN 0-203-84076-3 Master e-book ISBN

ISBN 13: 978-0-415-55956-0 (hbk) ISBN 13: 978-0-203-84076-4 (ebk)

Contents

List of illustrations List of contributors List of abbreviations Introduction

ix xii xvi xviii

SHUJIE YAO, BIN WU, STEPHEN L. MORGAN AND DYLAN SUTHERLAND

1 Development of the Chinese private sector over the past 30 years: retrospect and prospect

1

HONGLIANG ZHENG AND YANG YANG

2 Cost–profit efficiency and governance effects of commercial banks in China 1995–2005

13

CHUNXIA JIANG AND SHUJIE YAO

3 Regional inequalities in China: a non-monetary view

38

STEPHEN L. MORGAN AND FANG SU

4 Low-carbon China: the role of international collaboration

60

DAVID TYFIELD AND JAMES WILSDON

5 Effects of policy measures on energy demand and greenhouse gas emissions in China’s road transport sector

77

XIAOYU YAN AND ROY CROOKES

6 Social networks, innovation and the development of industrial clusters in China JINMIN WANG

97

viii

7 Globalization and the seafarers supply in China

108

BIN WU AND SHUJIE YAO

8 China’s diaspora and returnees: the impact on China’s globalization process

124

HUIYAO WANG AND DAVID ZWEIG

9 Corporate social responsibility in China’s largest transnational corporations

145

DYLAN SUTHERLAND AND GLEN WHELAN

10 Nationalism versus democracy: China’s bloggers and the Western media

172

DAVID K. HEROLD

Index

191

Illustrations

Figures 1.1 1.2 1.3 2.1 2.2 3.1 3.2 3.3 3.4 4.1 4.2 4.3 4.4 5.1 5.2 5.3 5.4 5.5

Proportion of above-college education level and CPC members to Chinese private enterprise owners. Proportions of various investment modes to total investment Number of listed private enterprises Mean efficiency level (1995–2005) Mean cost efficiency (a) and profit efficiency (b) by bank type (1995–2005) A provincial life expectancy in 1990 and 2005 National mean height-for-age of Chinese by gender, 1985 and 2005 Per capita Gross Regional Product (log) in relation to longevity, urbanization, illiteracy and years of schooling, 2005 Matrix of the relationship between per capita GRP 2005 and heights of 15-year-old boys and girls in both 2005 and 1985 Greenhouse gas emissions per capita 2005 (t CO2 equivalent/ person) Comparative cumulative GHG emissions per capita (India = 1) GHG/GDP efficiency, 2006 (t CO2 equivalent/US$1M) Comparing possible low-carbon trajectories with and without developing China’s low-carbon innovation capacity (percentage of current GHG emissions over time) GDP per capita and private vehicle ownership in Beijing and Shanghai Past trends of gasoline demand in China’s road transport sector from selected studies and statistics Past trends of diesel demand in China’s road transport sector from selected studies Predictions of total energy demand in China’s road transport sector and the effects of each kind of measure Predictions of petroleum demand in China’s road transport sector and the effects of each kind of measure

6 10 11 28 29 47 49 52 52 62 62 63 68 83 87 88 88 89

x Illustrations 5.6 7.1 7.2 7.3 7.4 7.5 7.6 7.7

Predictions of GHG emissions from China’s road transport sector and the effects of each kind of measure Growth of newly registered free seamen Seafarer supply by region and year Development of seafarer supply bases nationwide since 2000 Growth of seafarer supply prefectures by region Growth of seafarer supply per prefecture by region Distribution of SSBs by scale and region Distribution of major SSBs by GDP per capita (2006)

89 112 114 116 116 117 118 120

Tables 1.1 1.2 2.1 2.2 2.3 2.4 3.1 3.2 3.3 3.4 3.5 5.1 5.2 6.1 6.2 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 8.1

Number of private enterprises and their registered capital to total enterprises in China (2000–2005) Industrial added value of large-scale industries in 2005 Sample mean descriptive statistics (by governance indicators in RMB million at 1995 price level) Corporate governance indicators Estimation of cost and alternative profit frontiers The results of the inefficiency effects model Selected provincial socio-economic indicators, 2005 Provincial human capital indicator, 1990 and 2005 Health institutions, sickbeds and doctors by region, 1990 and 2005 Mean height of 15-year-old Chinese boys and girls by region (cm) Rural–urban differences in mean height for 15-year-olds (cm) Quantification of estimated impact for each kind of measure Reduction due to each kind of measure in 2030 in the Best Case scenario (%) The time period of establishing the sock companies interviewed The size distribution of the sock companies interviewed Valid seafarers entrances by year and repeated status New registered seafarers by rank and year (%) Change of top ten seafarer supply provinces Seafarer supply by rank, region and year (%) Distribution of SSBs by scale (stock from 2005 to 2007) Correlations between seafarers and local eco-social profiles (2006) Comparison of means of selected indicators by seafarer recruitment scale (2006) Distribution of major SSBs against local economic development Comparison of seafarer supply bases in two coastal provinces (2006) Returnees’ advantages to start-up in China

5 5 23 26 27 31 41 44 48 50 51 86 90 102 102 111 112 113 115 117 119 119 120 121 136

Illustrations xi 8.2 9.1 9.2

Conditions for returnees to successfully start a company Summary of CSR policies in China’s largest TNC business groups (based on OFDI stock, 2007) Summary of international initiatives/programmes that China’s TNCs have joined

138 150 163

Contributors

Editors Shujie Yao is Head of the School of Contemporary Chinese Studies, University of Nottingham. He has published widely in many top economics and development journals, including the Journal of Political Economy, Journal of Comparative Economics, Economic Development and Cultural Change, World Economy, China Quarterly, and the Journal of Development Studies, China Economic Review, among others. He is founding editor of Journal of Chinese Economic and Business Studies, chief economics editor of Xi’an Jiaotong University Journal (Social Sciences), editorial member of Journal of Comparative Economics, Food Policy and Journal of Contemporary China. Professor Yao is also Coordinator of the China and the World Economy programme at the Globalization and Economic Policy Centre at Nottingham and special chair Professor of Economics, Xi’an Jiaotong University. He has had a wide range of consultancy experience with major organizations including the UNDP, FAO, World Bank, ADB, DFID, EU and the UNCDF, working in many less-developed and transitional economies in Africa, Asia and Eastern Europe. Bin Wu is Senior Research Fellow in the School of Contemporary Chinese Studies, University of Nottingham. He holds a BSc in Physics, MA in Philosophy and PhD in Human Geography. He has a range of research experience and interests in the areas of sustainable rural development; labour mobility, internal and international migration; globalization, innovation and new professionalism; working conditions, health and safety of migrant workers. His most recent projects are on farmer innovation systems in the Loess Plateau in China (funded by NERC/ ESRC/DFID), and employment and working conditions of Chinese migrants in UK (funded by the International Labour Organization). Stephen L. Morgan is Associate Professor and Research Director at the School of Contemporary Chinese Studies, University of Nottingham. His primary research is on economic and business history of China, but he also researches contemporary economic development and business topics. He is co-editor of the Australian Economic History Review, a journal of Asia-Pacific economic, business and social history. Recent articles and reviews have appeared in Business History,

Contributors xiii China Journal, China Quarterly, Explorations in Economic History and World Development. Dylan Sutherland is Lecturer in the School of Contemporary Chinese Studies at the University of Nottingham. His research interests relate to contemporary Chinese economic and human development such as the emergence of big business groups in China and the impact of China’s rapid economic growth on its people.

Contributors Roy Crookes is Emeritus Professor of Combustion Engineering, at Queen Mary, University of London. For the last three decades he has been involved in research into the ignition characteristics, performance and products of combustion of alternative and sustainable diesel fuels. Of major interest has been the formation mechanism of particulate matter at different operating conditions for which a high-pressure continuous spray burner was developed. He has recently embarked upon a joint research programme with the University of Cambridge to validate reaction mechanisms of surrogate diesel fuels. David K. Herold studied for a double major in Chinese and Social Anthropology at the School of Oriental and African Studies (SOAS), London University, where he also obtained a PhD in Social Anthropology. After teaching and researching in China since 2000, he joined the Hong Kong Polytechnic University in 2007 as Lecturer for Sociology. His research focuses on the Chinese Internet, encounters between Chinese and non-Chinese online, the impact of the Internet on offline society, and online education. Chunxia Jiang is Lecturer in Economics, Middlesex University Business School. She gained her MSc in Money, Banking and Finance in 2003 and PhD in Economics in 2008, both from Middlesex University Business School. She received her undergraduate and postgraduate education in China at the People’s University and the Chinese Academy of Social Sciences, respectively. She was the director of a sub-branch of Harbin Development Zone Branch of the Industrial and Commercial Bank of China (ICBC) during 1997–2002. She published a leading article in Economic Research (a Chinese language economic journal) in August 2004. She has also recently published articles in Applied Economics and China Economic Review. Fang Su is a PhD candidate at the School of Contemporary Chinese Studies, University of Nottingham, UK. Her research topic is regional inequalities in China from a human capital non-monetary view, focusing on the education and health dimensions of human capital development in China over the last three decades. She is also interested in gender inequality, higher education expansion and social justice in the contemporary China. David Tyfield is Lecturer at the Centre for Mobilities Research (CeMoRe) in the Sociology Department at Lancaster University. His research focuses on the

xiv Contributors interaction of political economy, social change and developments in science, technology and innovation, with a particular focus on climate change and the life sciences. He currently is Lead Researcher for an ESRC-AIM Research-funded project, ‘China-UK Innovation Networks towards a Low-Carbon Society’, which runs from 2007 to 2010. Huiyao Wang is the Founding Director General of the Center for China & Globalization (CCG) and Vice Chairman of China Western Returned Scholars Association (WRSA), the largest Chinese overseas returned scholars’ organization in China with over 40,000 members. He also worked as a visiting professor at Ivey Business School of the University of Western Ontario and at Guanghua Management School of the Peking University. Dr Wang has published over 20 books and numerous articles on international business and global talent issues. Jinmin Wang is Lecturer in Strategic Management and International Business, Nottingham Business School, Nottingham Trent University. He is also a Research Fellow at College of Public Administration, Zhejiang University, China. He was a Research Fellow at Asia Research Centre, London School of Economics and Political Science in 2003–2004. His research interests include internationalization of firms in emerging economies, innovation and the development of industrial clusters. James Wilsdon is Director of the Science Policy Centre at the Royal Society, the UK’s national academy of science. Formerly he was Head of Science and Innovation at the think-tank Demos and is co-author (with James Keeley) of China: the next science superpower? Glen Whelan is Lecturer in Business Ethics at the International Centre for Corporate Social Responsibility, Nottingham University Business School. His current research interests include multinational corporations and global governance and Chinese state-owned enterprises and human rights. Xiaoyu Yan is a postdoctoral researcher at Smith School of Enterprise and the Environment at the University of Oxford. He received his PhD in Mechanical Engineering from Queen Mary, University of London. His research interests include: energy demand and supply, environmental impacts and policies related to the road transportation sector; life-cycle assessment of road vehicle fuel/ propulsion options. Yang Yang is a PhD candidate in the School of Business, Renmin University of China. He recieved his MA and BA from the School of Administration and Economics, Southeast University, China, majoring in Organizational Theory, FDI, and International Management. He is co-author of Path Selection and Simultaneous Differentiated Mode of FDI in Chinese Enterprises, recent researches on the pathwise and inverse FDI flow direction. Hongliang Zheng is Professor at the Institute of Economics, Chinese Academy of Social Sciences. He is Vice Editor-in-Chief of Economic Research Journal.

Contributors

xv

Graduated at Department of Economics, Renmin University of China. He has participated in academic exchanges in the US, UK, Austria, the Netherlands and India. He majored in Microeconomics, Transitional Economics, Theory of the Firm, Economics of Property Rights and Financial Economics. He is author and co-author of Business Economics, Township Enterprises and Rural Development in China, The Theory of Corporate Governance and the Reform of Chinese State-owned Enterprises and A Theoretical and Empirical Study on the Impacts of FDI on Indigenous Innovation in China. David Zweig (PhD, University of Michigan) is Chair Professor, Division of Social Science, Hong Kong University of Science and Technology, and Director of the Center on China’s Transnational Relations. He taught for ten years at the Fletcher School of Law of Diplomacy, Tufts University (1986–1996). He is author of four books, including Internationalizing China: domestic interests and global linkages (Cornell University Press 2002), has edited four books, including Globalization and China’s Reforms (Routledge 2009), and two special issues of academic journals which focused on migration of Chinese in the Asia-Pacific region.

Abbreviations

AYOS BOC CBRC CCBC CHNS CPC CSR EITI FDI GHG ICBC IFCCS IPO JSCBs LEAB M&As MNC Mtoe NPL OFDI PBC RCC RMB PRC SASAC SFA SOCB SOE SMEs SSB TNC UNGC VC

Average years of schooling Bank of China China Banking Regulatory Commission China Construction Bank Corporation Chinese Health and Nutrition Survey Communist Party of China Corporate social responsibility Extractive Industries Transparency Initiative Foreign direct investment Greenhouse gas Industrial and Commercial Bank of China International Forum for Contemporary Chinese Studies Initial public offering Joint-stock commercial banks Life expectancy at birth Mergers and acquisitions Multinational corporation Mega tonne of oil equivalent Non-performing loan Outward foreign direct investment People’s Bank of China Rural credit cooperative Renminbi People’s Republic of China State-owned Asset Supervision and Administration Commission Stochastic frontier approach State-owned commercial banks State-owned enterprise Small and medium-sized enterprises Seafarer supply base Transnational corporation United Nations Global Compact Venture capital

Abbreviations xvii WBCSD WTO

World Business Council for Sustainable Development World Trade Organization

Introduction Shujie Yao, Bin Wu, Stephen L. Morgan and Dylan Sutherland

The Beijing Olympic Games in 2008 was more than a sporting event. It was also an opportunity for China to show the international community its achievements over three decades of development, reform and opening to the outside world. Alongside with China’s fast economic growth and rapid re-emergence as a world power, there has been a growing interest in Contemporary Chinese Studies around the world. This is a new research and teaching area, somewhat different from traditional Sinology, which has generally paid more attention to the study of history, culture and traditions. The Beijing Olympics, therefore, symbolizes not only a new era for China’s reform and development but also one in which the study on contemporary China has risen to the fore. It is against the background of a growing interest in today’s China that the International Forum for Contemporary Chinese Studies (IFCCS) was established in 2008 by the School of Contemporary Chinese Studies in the University of Nottingham, one of Britain leading universities. IFCCS held its inaugural conference during 21–23 November 2008 at the University of Nottingham, attracting over 150 delegates from 20 different countries. Over 100 academic papers were presented at the conference. This volume is a collection of selected papers. Despite the variety of disciplinary backgrounds and areas of expertise, some common interests were shared by all conference attendants. These included globalization, innovation and the sustainability of China’s reform and development. After 30 years of economic reform, China has approached a crossroads and it now faces many challenges, including those in natural resources, the living environment, health, education, income distribution and social justice. The sustainability of China’s reform and development, moreover, has become even more salient today in the face of the global financial crisis and economic recession. The world now looks to China to tackle not only its own domestic challenges, but also help the global economy recover from its slump. The papers in this volume address a number of broad areas related to the progress and current challenges that China still faces. This includes discussion of the strategies China has taken to cope with challenges. It also considers the roles globalization and innovation can play in promoting sustainable reform and development. The ten chapters are organized to cover the following themes: uneven process of economic reform; environment, innovation and sustainability; and social perspectives on Chinese globalization.

Introduction xix In Chapter 1, Hongliang Zheng and Yang Yang provide an overview of the uneven development of private sector in China. Bearing in mind the private economy was not allowed in the era of the planned economy only three decades ago, the development and performance of the private sector has been viewed as an important indicator of the progress and success of Chinese economic reforms. The private sector is now officially recognized as ‘an important constituent of the socialist market economy’. In practice, however, it still faces many constraints and difficulties, in part due to the monopoly of state-owned enterprises (SOEs) and the irregular interventions from governmental agencies and corrupt officials. Based on a review of theoretical and policy debates surrounding the development of the Chinese private sector in the last three decades, Zheng and Yan summarize some of the major issues facing the development of this sector, including the nature of the sector, its relation with political power and the question of whether owners of private enterprises can be allowed to join the Communist Party. They suggest that discrimination still hold against the private economy and whether it is necessary for private enterprises to be registered as collective ones. In Chapter 2, Chunxia Jiang and Shujie Yao introduce another important area of economic reform, namely the Chinese banking system. Since entering the World Trade Organization (WTO) in 2001 foreign banks have been allowed to set up their branches and compete in the Chinese banking market. Their entrance was a crucial step for the reform of the Chinese banking system, while has a profound impact on the development of the Chinese economy as a whole. By examining the performance of commercial banks in China from 1995 to 2005, Jiang and Yao show that bank efficiency has improved. The empirical results, they argue, could have important policy implications for future banking reform. While the previous chapters consider the process of economic reform, Chapter 3 turns to the consequences of reforms, considering the problems related to increasing economic and social inequalities. Focusing on human capital development, Stephen Morgan and Fang Su draw attention to the regional disparity of education, life expectancy and attained height-for-age, which have risen during the economic reform period. These non-monetary data measures, although correlated with monetary measures such as per capita income and household consumption data, do have certain advantages in studying the welfare of people in a transitional economy such as China. In particular, the shortcomings in the statistical reporting system raise questions about the adequacy of conventional monetary market-based measures. Looking at non-monetary measures also provides a much-needed focus on aspects of human capital that are central to modern growth theory. Chapters 4 and 5 focus on the environment, innovation and sustainability. In Chapter 4, David Tyfield and James Wilsdon draw our attention to international collaboration on low-carbon innovation. In this regard, China’s role is crucial in the world as it is now the world’s largest greenhouse gas (GHG) emitter. The challenge facing the international community is to move towards joint international setting of low-carbon socio-technical trajectories. This must include measures that support the development of domestic innovation capacity in China.

xx Shujie Yao et al. The purpose of low-carbon innovation is to control and reduce GHG emissions, which can hardly be achieved without effective policies and measures to tackle the rapid growth of energy demand from road vehicles. With a focus on China’s road transport sector in Chapter 5, Xiaoyu Yan and Roy Crookes propose a model to estimate the energy demand and GHG emissions, and analyse future trends to assess the effectiveness of reduction measures. In particular, they present two scenarios to describe the future strategies relating to the development of China’s road transport. Enhancing the innovative capacity of numerous small and medium-sized enterprises (SMEs) is important in China for its sustainable development. Jinmin Wang, in Chapter 6, presents a case study of the innovation experiences in a cluster of SMEs in Yiwu City, Zhejiang province. All the firms were sock makers, sharing similar technologies and production processes, but they pulled their resources together to create better and more efficient technologies. The innovation activities of these firms illustrate a typical model of self-organization, evolution between market expansion, technological innovation and regional economic development. Such a development model may not become a reality without a global value chain upon which the linkage between horizontal cooperation and technological innovation through the local specialized wholesale market and informal social network. As a result, a special institutional arrangement has emerged which can overcome the inadequate innovation incentives of individual SMEs and contribute to the upgrading of industrial clusters. In the era of globalization, China’s rise and sustainability can be seen as a process of increasing exchange and interaction between China and the rest of the world in all aspects. These aspects include ‘hard elements’, such as capital, commodities and technology, as well as ‘soft elements’, which include labour and talents at both low and high skill levels, and management and political systems. The latter is addressed in the final four chapters. Chapter 7 sheds light on the response of Chinese labourers and professionals to the opportunity of employment and career development in international labour markets. Taking the international shipping sector, the first globalized industry in the world as an example, Bin Wu and Shujie Yao present a case study on Chinese seafarers, a new emerging sector for the global labour market. They examine how local government and labour agencies have responded to rising employment opportunities from the international labour market. Based on a national archive for seafarer registration during 2000–2007, they show the importance of government policies for the development of the seafarers market in China over time and across regions. Unlike Chinese seafarers and other contract labour ‘going global’, which are rather low profile, the international flow of Chinese students and high-skilled workers have attracted much more attention from international organizations, national government agencies and academic researches. How the international mobility of Chinese talents has contributed to China’s development in general, and the internationalization of Chinese business in particular, is the theme of Chapter 8. Joining the debate on the ‘brain drain’, Huiyao Wang and David Zweig offer an insight to the process and potential of ‘brain circulation’ among the millions of

Introduction xxi Chinese students and scholars abroad. Based upon a large number of interviews with successful returnee entrepreneurs in China, the authors argue that the mobility experience and return of those Chinese talents contributes enormously to China’s current economic engagement with the world. As the world prepares to deal with a globalizing China, according to them, it must be prepared to deal with a remarkably talented cohort of entrepreneurs, many trained overseas. The process of globalization for Chinese investors and business leaders means learning and adopting new norms of Corporate Social Responsibility (CSR), many of which have widely been adopted by their counterparts worldwide. The way in which CSR reporting has been adopted is the theme of Chapter 9. Dylan Sutherland and Glen Whelan explore the extent to which CSR reporting takes place within China’s largest transnational corporations (TNCs). It shows that an increasing number of Chinese firms have CSR policies and that the influence of central policy-making in shaping Chinese CSR has also been important. Their study, in looking at China’s largest TNCs, also provides insights into how China’s emerging national champions may shape the future of CSR globally as they search for ‘global champion’ status. Three decades of economic reform and opening policy has profoundly influenced the new generations of Chinese people in terms of values, attitudes, perceptions and living styles. This is particularly true as the Internet becomes part of their daily lives. There are now over 300 million Chinese users, the largest group of Internet users in the world. In Chapter 10, David Herold examines the social consequences of the Internet. While these netizens (Internet + citizens) have often been portrayed as a potential force for democracy, this chapter shows that many Chinese netizens began to defend China’s honour against the perceived betrayal and attacks by Western media. With a close look at the reactions of Chinese people to the events of the unrest in Tibet and the run-up to the Beijing Olympics in 2008, the author suggests that Chinese netizens began to see democracy and the protection of Chinese interests as polar opposites, as Western commentary on China damaged democracy’s reputation among the upwardly mobile, emerging middle class active in Chinese cyberspace. To summarize, China’s development experiences and challenges in the past can be approached from different angles: reform, innovation and globalization. By bringing together multidimensional, multidisciplinary and up-to-date research, this book tries to draw an overall picture about trends, routes and scenarios toward sustainable reform and development in China. Not limited to knowledge accumulation and development of our understanding of China’s economic transition and social development, this volume offers an opportunity for readers to think about the priority areas and research methodology for the newly emerging Contemporary Chinese Studies, an important aim for establishing the IFCCS.

1

Development of the Chinese private sector over the past 30 years Retrospect and prospect1 Hongliang Zheng and Yang Yang

Introduction Promoted by the reform and open-door policy, the private sector in China has grown dramatically over the past 30 years, from ‘being constrained or even forbidden to develop’ to its current status of ‘an important constituent of the socialist market economy’. While the course underlying its rapid development has been full of obstacles, the trend has been unstoppable. In the development course, there is no doubt that exploration of bi-directional and interactive models of reforms including ‘from bottom to top’ and ‘from top to bottom’ play a crucial role, alongside bold and intense debates among economists. Through a systematical review of theories and practices, this paper looks back at the arguments about certain critical issues concerned with the development of the Chinese private sector. It furthermore proposes some of the directions for future development.

Private sector economy has emerged since reform According to traditional theories, an individual economy is recognized as an economic pattern of capitalism that produces ‘capitalism’ by the minute. The private sector belongs to capitalism too because private means of production and exploitation through the hiring of labour exist there. Therefore, before China’s reform and open-door policy, the Chinese private sector was treated as ‘the tail of capitalism’ that should be cut off. But in reality, especially in the vast lagging rural areas, the ‘tail of individual economy’ was not ‘cut’ completely, such that private plots, family sideline businesses and bazaar trade still survived, although it was illegal to some extent. When the reform and open-door policy swept through China, productive forces like those mentioned above mushroomed after a long period of oppression. First, the economy of the rural areas was acknowledged. Held in December 1978, the Third Session of the Eleventh National Congress of the Communist Party of China (CPC) clearly stipulated that private plots, family sideline businesses and bazaar trade were essential supplements of the socialist economy, with which nobody was allowed to randomly interfere. Decisions on certain issues relating to accelerating agricultural development (approved at the Fourth Session of the Eleventh National Congress of the CPC in September 1979) also pointed out that

2 Hongliang Zheng and Yang Yang while diversified operations of commune and production teams constitute the socialist economy, private plots, private livestock-rearing, family sideline businesses and rural bazaar trade were supplements to the socialist economy and were therefore not allowed to be criticized as the ‘tail of capitalism’. Second, the individual economy in urban areas was recognized. An economist, Xue Muqiao, as a consultant of the State Planning Commission said in one of his papers that production relations must accord with the nature of production forces. The viewpoint that public ownership should supersede collective ownership under any condition did not belong to Marxism; not only should collective ownership be encouraged today, but individual labour should not be rooted out in the urban areas (Xue 1979). After that, the Constitution of the People’s Republic of China (approved by the Fifth National People’s Congress in December 1982) made definite that the individual economy in cities and the countryside was within the legal restrictions and supplements of the socialist public economy. The role and effect of the individual economy were recognized by law, which promoted the recovery and development of the urban economy. Third, the attitude to the advent of the private sector characterized by hiring labour was to ‘wait and see’, the underlying meaning was to acquiesce and protect its development. When the individual economy in cities and the countryside grows to a certain extent, proprietors have to hire labourers in order to expand in scale. The question thus became: to allow or forbid the hiring of labourers? If so, how many people are permitted to be hired? These had been sensitive and confusing problems. At that time, the State Council prescribed that if necessary, individually owned business could hire helpers and apprentices, the total of which must not be more than seven.2 But actually, this limit was broken within a very short time. In various regions, employers who employed more than ten, or even dozens of employees, emerged. Thereafter, the private sector faced some resistance from traditional schools of thought: Doesn’t it amount to exploitation when the number of employees is more than seven? Can a socialist country adopt a capitalist economy? Many people treated the private economy with suspicion and opposition. In view of this situation, after careful research, the Central Committee of the Political Bureau of the Chinese Communist Party (CPC) clarified that the private sector was not an attack on socialism and that one could wait and see. A pragmatic approach was therefore taken. On 1 February 1983, the Central Committee of the CPC emphasized this notion in its No. 1 Document on Certain Issues of the Current Rural Economic Policy. It stated that it was better not to encourage and publicize the proprietors or private enterprises that employed many labourers, nor was it in a hurry to ban them. The ‘three nos’ policies of the Central Committee acknowledged and protected the emergence and development of the private sector.

A breakthrough in the notion of the private sector as ‘socialist’ or ‘capitalist’ In practice, the private sector greatly expanded due to the implementation of the reform and open-door policy, which at the same time created suspicions in society.

Development of the Chinese private sector 3 In view of this situation, the CPC Central Committee finally explicitly put forward a 4-sentence, 16-character guideline that can be translated as ‘to allow existing, strengthen management, promote what is beneficial, abolish what is harmful, and guide step by step’. In October of the same year, the Thirteenth National Congress of the CPC further clarified issues concerning the private sector: the development of the private sector to some extent is beneficial to the promotion of production, stimulates the market, increases employment and satisfies people’s various living needs. The private sector is an essential and profitable supplement to the publicly owned economy. It is necessary to establish policies and laws concerning the private sector as soon as possible so as to protect its legal rights and benefits and reinforce guidance, supervision and management of the sector. These statements from the Thirteenth National Congress of the CPC greatly contributed to the growth of the private sector and meanwhile gave rise to intense arguments about related issues among economic theorists. But since 1989, the private sector has stagnated. Among political critics, there was a group that advocated restricting the development of the private sector and deemed that the private sector represented an attack on the dominant position of public ownership, and a cause of social inequity. Economists at this time were involved in ongoing debates about whether the nature of private sector was ‘socialist’ or ‘capitalist’. For example, some newspapers held that if the private economy was left to its own devices, it would tend to damage the socialist economy. Some newspaper articles even asked: Do people who advocate liberalization have economic roots? Is there economic power supporting them? Their conclusion was that private enterprises and self-employed people formed the economic root of bourgeois liberalization. Against this background, quite a few entrepreneurs lost their confidence in the prospect of the private sector. They then took measures such as contributing their firms to the collective, turning private property to public property owned by the collective; becoming affiliated to public firms or units, becoming ‘red-cap’ firms; converting to stock cooperatives, changing the nature of the firm; closing businesses and cancelling firms’ registration (Wang and Yang 2007). In 1992, Deng Xiaoping’s speech during his tour of southern China was a turning point. He pointed out that the fundamental reason for misgivings and fear about the reform and open-door policy was that people were afraid to take the capitalist road if too many capitalist elements existed. The crux of the issue lay with whether the nature of the private sector was ‘socialist’ or ‘capitalist’. The criteria for judgment should therefore be whether it was beneficial to develop the production forces of socialist society and to reinforce the national strength of the socialist country and increase people’s living standards (Deng 1993: 372). Deng’s speech overcame the political difficulties in those arguments about the nature of private sector and created a more relaxed environment for academic research and the growth of the private sector. In October in the same year, the Fourteenth National Congress of the CPC announced that the objective of the Chinese economic system reform is to establish a socialist market economy. It proposed that various economic sectors develop side by side in the long term and that different economic sectors are permitted to take diverse forms of joint operation, while emphasizing the acceleration of reform

4 Hongliang Zheng and Yang Yang without being tied down by abstract debates on the nature of the private sector. By September 1997, the Fifteenth National Congress of the CPC explicitly confirmed that the non-public sector was an important constituent of the Chinese socialist market economy, signifying a breakthrough in ownership theory and recognition of the non-public economy. The private sector became an important constituent of the economy, not just a supplement. During this period, whether the nature of private sector was ‘socialist’ or ‘capitalist’ was central to the argument over whether the development of the private economy in China was a good or bad thing. In other words, a ‘capitalist’ private sector was harmful to Chinese economic development while a ‘socialist’ one was beneficial. Before Deng Xiaoping’s speech during his Southern China tour, and around the time of the Fifteenth National Congress of the CPC, theorists had disputed over this issue. One view was that the development of the private sector was one factor that could jeopardize national stability. The proportion of the nonpublic sector in the whole economy may not only incur a fundamental change in the basis of the socialist economy, but also change the socialist superstructure. Many scholars held a negative opinion about this viewpoint. They thought that the main problem was not about which was good or bad (i.e. socialist or capitalist), but whether the private sector should be banned in China at that time. Some other scholars regarded the private sector within the context of system transformation and market growth. They believed that the private sector, having made progress during the economic system reform, had relaxed the economic structure as a first step, and that the new ownership structure whereby previously dominant public ownership coexisted within various economic sectors was a substitute for pure public ownership, therefore promoting market-oriented reform. Development of the Chinese private sector accelerated after the problems about the nature of private sector was overcome. The number of individual-owned businesses increased to 24.639 million in 2005, compared with 0.14 million in 1978, while total capital investment amounted to 580.95 billion RMB, with total employees of 49 million. From the late 1980s, private enterprises in China had grown continuously at an average rate of more than 30 per cent every year since 1992. By the end of 2005, the number of private enterprises was 4.301 million, while the total registered capital was 6,133.11 billion RMB. The number of employees was 58.24 million. Non-public sectors have contributed a third of the GDP and four-fifths of new employment in recent years. The individual and non-public sectors have become an important driver of economic growth and employment (see Table 1.1 and Table 1.2).

Class division: owners of private enterprises Along with the development of the private sector, there were hot debates about the status of owners of private enterprises in Chinese society; about the demarcation of social classes and strata; and whether owners of private enterprises can be admitted into the CPC and seen as model workers. One viewpoint held that owners of private enterprises in China did not constitute a stratum but had become or were

Development of the Chinese private sector 5 Table 1.1 Number of private enterprises and their registered capital to total enterprises in China (2000–2005). Year

State-owned & collective enterprises (thousand)

ForeignPrivate Total invested enterprises Enterprises enterprises (thousand) (thousand) (thousand)

Proportion Proportion of private of registered enterprises capital (%) (%)

2000 5,351

203

1,762

7,316

24.08

10.63

2001 4,833

202

2,029

7,063

28.73

13.05

2002 4,445

208

2,435

7,088

34.35

20.68

2003 4,124

226

3,006

7,356

40.87

18.69

2004 3,798

242

3,651

7,691

47.47

22.56

2005 3,491

260

4,301

8,057

53.38

26.33

Table 1.2 Industrial added value of large-scale industries in 2005. Indicates

Industrial added value in 2005 (billion RMB)

Growth compared with 2004 (%)

Above-scale industries

6,642.5

16.4

State-owned and state-controlled enterprises

2,606.3

10.7

Collective enterprises

258.1

12.4

Joint-stock enterprises

3,217.3

17.8

Foreign and Hong Kong, Macao, Taiwaninvested enterprises

1,897.7

16.6

Private enterprises

1,180.7

25.3

becoming a class of their own (Ge 1991). Many scholars held an opposite opinion in that although owners of private enterprises in China had begun to form a social stratum with a unique economic position, they were not yet a class (Zhang and Liu 1995: 292). There were also arguments about whether the owners of private enterprises could be selected as model workers. Advocates considered that the individual and private sectors had become important constituents of the socialist market economy, leaning on guidelines defined by the Fifth National Congress of the CPC which reassured that China would keep the public sector dominant while allowing diverse economic sectors to develop simultaneously. The guidelines also required that the selection of model workers emancipate the mind, update the concept, and break the frame, in order to choose qualified owners of private enterprises as model workers honourably. But opponents thought that non-labourers, for example capitalists, could not be model workers because it was obvious that they were not workers. This logic is being challenged nowadays.

6 Hongliang Zheng and Yang Yang A more sensitive issue – whether the owners of private enterprises could join the CPC – had also led to lively controversies. Supporters believed that admitting the owners of private enterprises into the Party did not necessarily mean bringing in the whole stratum of owners of private enterprises. Only qualified people were admitted into the CPC. The CPC had never refused applicants who met its criteria even if they belonged to the non-worker strata. Frederick Engels, for example, had run his own private enterprise. Opponents argued that if the hypothesis that owners of private enterprises were permitted to join the Party meant more production forces held true, a ridiculous conclusion was that capitalists and tycoons in the West best met the production force criteria. Arguments about whether owners of private enterprises could join the CPC or be selected as model workers ended after Jiang Zemin’s ‘1 July’ speech in 2001. In the speech, he argued that the CPC ought to absorb first-class people from other social strata who satisfy the requirements of party membership, and definitely affirmed that owners of private enterprises are builders of the cause of socialism with Chinese characteristics (Jiang 2001). In the spirit of the CPC central committee, it was the first time that owners of private enterprises were to be integrated as potential candidates of national model workers in 2005. The proportion of private enterprise owners who were CPC members to the total number of private enterprise owners rose from 12.9 per cent in 1993 to 33.9 per cent in 2004 (see Figure 1.1).

The ‘red-cap’ phenomenon and private property protection During China’s long period of implementing reforms and the open-door policy, discrimination against forms of ownership meant that the private sector could not (%) 60

51.8

50 33.9

30 20

38.4

38.4

40

26.2 17.2

19 20.4

19.9

12.9

10 0 1993

1997

2000

2002

2004

(Year) The proportion of the CPC members

The proportion of above-college education

Figure 1.1 Proportion of above-college education level and CPC members to Chinese private enterprise owners. Source: Chinese National Association of Industry and Commerce, The Sixth Private Enterprise Sampling Investigation launched by the Chinese National Association of Industry and Commerce (2004).

Development of the Chinese private sector 7 operate within the same business and policy conditions as other economic sectors. By contrast, foreign-owned firms enjoyed preferential treatment while public firms benefitted from greater access to bank loans, and lower income and regulatory tax rates. Politically, the owners of private enterprises were afraid to be viewed as exploiters, or to be classified as ‘undesirable’ elements, while worrying about an unstable national policy. As a result, many private enterprises chose to put on a ‘red-cap’ by becoming affiliated to state-owned or collective units, allowing them to register as publicly owned or collective firms. In 1989, in order to carry out research on Chinese township industries commissioned by the World Bank, the Institute of Economics at the Chinese Academy of Social Sciences investigated township enterprises in Jiangsu, Zhejiang, Guangdong and other provinces where township enterprises had developed rather rapidly. The results of this investigation showed that more than a third of enterprises were private enterprises operating under the name of township enterprise. Separately, the Center for Private Economy Studies at the Chinese Academy of Social Sciences collaborated with the Information Center of the National Association of Industry and Commerce to carry out a questionnaire survey. In 1993, surveyed owners of private enterprises thought 50–80 per cent of collective enterprises were ‘red-cap’ enterprises. And in 1994, in a survey of 360 private enterprises, 50 per cent of owners estimated the proportion was around 30–50 per cent. In 1994, another survey by the State Administration for Industry and Commerce found that 83 per cent of collective enterprises were actually private enterprises. In the same year, statistics from Dongyang of Zhejiang province indicated that more than 70 per cent of collective enterprises were in practice private enterprises (Dai 2005). This unusual phenomenon led to intense arguments among theorists. Guo Zhenying et al. (1992) gave the following reasons for private enterprises putting on ‘red-caps’ to imitate collective ones. First, enterprises could benefit from preferential clauses such as tax relief. Second, private enterprises could expand the scale of their businesses beyond state restrictions on the individual and private economy. Third, having the collective enterprise tag allows private enterprises to seek political protection, get to their credit access, ease transactions, and promote their products. Fourth, awarding the ‘red-cap’ label to private enterprises let town governments and collective enterprises earn management fees that enable them to afford extra staff while at the same time increasing collective output and local political achievements. Dong Fureng (2001) thought that ‘red-cap’ enterprises were a unique historical phenomenon. After the country’s transformation to a market economy, ‘red-caps’ did not make sense any more, and was a potential cause of problems and property disputes. Some enlightened local governments took the initiative to resolve these problems, while other governments did not want to eliminate the ‘red-cap’ arrangement voluntarily because of the impact on their benefits, staff arrangement, and the like. In fact, at the present stage of reform, even the state-owned enterprises (SOEs) are supposed to be detached from the government, not to mention the ‘red-caps’. In summary, we can see that after private enterprises were permitted to register in 1988, especially after Deng Xiaoping’s Southern China tour in 1992, some

8 Hongliang Zheng and Yang Yang ‘red-cap’ enterprises attempted to vary their original registration in order to remove their ‘red-caps’. But there were still many debates and disputes. In 1997, the Fifth National Congress of the CPC pointed out that individual and private sectors were important constituents of the socialist market economy. Then the policy environment was relaxed further, which accelerated the speed of taking off ‘red-caps’. In 2002, the Sixteenth National Congress of the CPC proposed ‘two unwavers’, that is, to ‘unwaveringly’ reinforce and develop the public economy, and to ‘unwaveringly’ encourage, support and promote the growth of the non-public economy. Amendments to the Constitution approved at the Second Session of the Tenth National People’s Congress explicitly provided for State protection of the legitimate rights and interests of non-public sectors including the individual and private sectors; citizens’ legitimate private property; and private property and inheritance rights in accordance with laws. These clauses, centred on private property protection, finally relieved private enterprise owners of their fears of political, economic and legal troubles, removing the initial rationale for the phenomenon of ‘red-caps’.

Market access and fair competition Research carried out by the State Development Planning Commission showed that till 2004, there were restrictions on market access in nearly 30 industries within the non-public sector. In some coastal provinces, state-owned firms could enter more than 80 industries, foreign-held firms more than 60 industries, whereas private capital could only access about 40 industries. The local government had refused more 56 per cent of loan applications by small and medium-sized enterprises (SMEs), while more than 70 per cent of bank loans were made to state-owned enterprises. However, the private sector which had less than 30 per cent of funding support had accounted for 50 per cent of the country’s GDP and 70 per cent of the job opportunities (Ma 2006: 309). As the above indicated, problems of market access and fair competition faced by the Chinese non-public sector had to be resolved urgently. Against this background, on 24 February 2005, the State Council issued several suggestions to encourage, support, and carry out the development of the individual, private and other non-public sectors. These recommendations included the following seven sections: to relax restrictions in the non-public sector on market access; to strengthen the fiscal, tax and financial support to non-public sector; to improve social services to the non-public sector; to protect the legitimate rights and interests of non-public enterprises and their employees; to direct the improvement of non-public enterprises; to improve government supervision of non-public enterprises; to reinforce the guidance and policy coordination of the non-public sector’s development. In the seven sections, there were 36 provisions in total, therefore, the document was referred to as ‘Non-public Sector 36’. Amidst the publication of this document, there were heated discussions among economists. Kong Fanhe and Ma Qian (2006) analysed the ‘Virgin’ phenomenon brought about by restrictions on market access and other factors. They thought that such restrictions were artificial thresholds that significantly raised the market entry costs for private enterprises. They had also artificially created many non-market,

Development of the Chinese private sector 9 unfair obstructions to fair competition between private enterprises, state-owned and foreign-invested enterprises, which had consequently hindered the development of private small and medium-sized firms. In order not to be marginalized, many resourceful private enterprises converted to foreign-invested enterprises by registering overseas before coming back to compete with state-owned and real foreign-invested enterprises in their home market. This marked the attractive ‘Virgin’ phenomenon in recent years. Li Yining (2007) described the private enterprises’ situation in terms of market access and equal competition in recent years as a ‘glass door’. He considered that though the industrial door had opened theoretically after the announcement of ‘Nonpublic Sector 36’, there still existed a ‘glass door’ holding entrants back. Some monopolistic industries sought to thwart the entry of non-public capital by pleading their peculiarities. Li thought there were four main reasons for the ‘glass door’ existence. The first reason was industry monopoly: firms in some industries had been enjoying market dominance and earning monopolistic profits for a long period of time and therefore did not want to lose their privileged positions. The second reason was local obstruction, whereby some local governments feared that local enterprises would be affected and thus hurt local GDP growth or they were worried about the dominance of an external non-public sector, which might consequently affect local fiscal revenue and employment. Third, home and private enterprises in some vital industries were small in scale, lacked capital and standard management practices. Their entry and collaboration with large state-owned enterprises, compared with large foreign corporations called ‘strategic investors’, were not considered helpful. Fourth, some people still had misgivings about private enterprises entering certain important industries that concerned the lifeblood of the national economy and called for strict conditions concerning confidentiality. Meanwhile, private enterprises were lacking in technology and quality assurance competencies, resulting in arguments in favour of restricting market access. Officials of the National Development and Reform Commission had said that promoting non-public sector growth did not mean that private enterprises were to be encouraged, supported, and developed independently, but that they should be taken into consideration within the context of improving the socialist market economic system. For instance, allowing nonpublic capital to enter monopolistic industries required the improvement of related criteria and conditions on the one hand, while a systemic reform was necessary on the other hand to ensure progress. Furthermore, the revision of laws and regulatory documents regarding market access for non-public capital and development of the non-public sector’s development cuts across numerous industries and requires feedback and other complicated procedures. Therefore, promoting the development of the non-public sector is a long-term and arduous task.

Several trends in the development of the Chinese private sector The first trend is that the rate of growth will continue to be higher than the national GDP growth, and its proportion of GDP will rise further. This can be deduced from

10 Hongliang Zheng and Yang Yang data provided by the National Bureau of Statistics. In 2000, the Chinese private sector accounted for about 42.8 per cent of GDP, compared with about 12.6 per cent contributed by the foreign-owned and Hong Kong, Macau, Taiwan-invested sector. The total share of these sectors was nearly 55 per cent. In 2005, the proportion of private sector was 49.7 per cent, the foreign and Hong Kong, Macau, Taiwan-invested sector around 15–16 per cent, totalling about 65 per cent. In 2000, the proportion of private investment to total fixed asset investment was 41.9 per cent, with the figure rising year by year. In 2002, the proportion of private investment surpassed that of state-owned investment for the first time, ahead of all other forms of investment, accounting for 48.7 per cent. It then rose to 52.2 per cent in 2003, 54.6 per cent in 2004, and increased to 60 per cent in 2005 (see Figure 1.2). The proportion of private investment increased by a total of 18.1 per cent in the five years. The second trend is the expansion of enterprises, as the number of corporations and listed companies increase (see Figure 1.3). Along with the enlargement of private enterprises’ assets, the structure of private enterprises’ have also diversified from mainly individual or family-based enterprises to equity-based corporate entities. According to a survey of Chinese private enterprises carried out by the National Association of Industry and Commerce in 2004, in the ten-year period from 1992 to 2003, the proportion of individual-owned enterprises out of the total of private enterprises declined from 63.8 per cent to 22.5 per cent, while the share of limited liability companies went up from 16.5 per cent to 62.9 per cent. The third trend is that governance structures are becoming more standardized and sound, with constant improvements in the personnel structure and quality. Among private enterprises, the family-oriented management style has been further integrated into an expert-based management style. The overall governance structure has advanced to take on a more normative, reasonable and modern form. A large number of professional and technical workers have entered private enterprises, enhancing the quality of managers and ordinary employees (see Figure 1.2). The fourth trend is an optimization of the industrial structure of the private sector, along with its expansion into heavy, chemical industries and infrastructure fields. Their level of technology is increasing, while their product quality is improving. Private enterprises still play a dominant role in the textile trade and other labourForeign-invested sector, 9.4%

State-owned sector, 30.6%

Private sector, 60.0% Figure 1.2 Proportions of various investment modes to total investment.

(Quantity)

Development of the Chinese private sector 11 400 350

336

345

2004

2005

297

300 250

196

200

147

150 100

171

103 69

50 0 1998

1999

2000

2001

2002

2003

(Year)

Figure 1.3 Number of listed private enterprises. Source: Chinese corporate governance report (2005) by Shanghai Stock Exchange and Data from WIND.

intensive industries. As restrictions on market access are relaxed, their market share in the heavy, chemical and infrastructure industries will increase. Meanwhile, the innovation ability of enterprises is constantly improving, which is expected to result in technologies and products with proprietary intellectual property rights. The fifth trend is private enterprises taking on more social responsibilities and playing a more active role in contributing to social and public welfare, and helping to build a ‘harmonious society’. Under the direction of the State, awareness is increasing among private enterprises of their social responsibilities, which is being translated into concrete action. All of these trends will drive private enterprises to become an important undertaker of social responsibilities and make them an important driving force in the building of a ‘harmonious society’.

Notes 1 This paper was presented by the authors at the IFCCS. Inaugural Conference at the University of Nottingham, UK, 19–21 November 2008. For more information, please contact the corresponding author: [email protected] 2 At that time, some economists found an equation in Karl Marx’s Das Kapital as an example and concluded that an individual who employs less than seven labourers and makes money for his/her own consumption belongs to the self-employed. Someone who hires more than eight employees, when residual value and exploitation come about, belongs to the capitalist category. Thus employing seven or eight workers became the criterion for distinguishing the self-employed from the private entrepreneur.

12 Hongliang Zheng and Yang Yang

Bibliography Dai, Y. (2005) ‘A roundabout development road of private economy-“red-cap” enterprises’, South China Journal of Economics, no. 7. Deng, X. (1993) Selected works of Deng Xiaoping, Vol. 3. Beijing: People Press. Dong, F. (2001) ‘The fate of “red-cap” enterprises attracts social concerns’, China Economic Times, 30 October 2001. Ge, D. (1991) ‘Whether Chinese enterprises’ owners can form a capitalist class’, Pursuit of Truth, no. 4. Guo, Z., Lu, J., Song, N. and Zhang, T. (1992) ‘Several problems in our country’s property structure’, Economic Research Journal, no. 2. Jiang, Z. (2001) ‘In the 80th anniversary of the establishment of the Chinese Communist Party Congress speech’, People’s Daily, 2 July 2001. Kong, F. and Ma, Q. (2006) ‘The market access dilemma of Chinese private enterprises: “Virgin” phenomenon perspective’, Special Zone Economy, no. 8. Li, Y. (2007) On the Private Economy. Beijing: Peking University Press. Ma, L. (2006) Big Breakthrough: New China’s economic situation recorded in the private sector. Beijing: China Industry and Commerce Associated Press. Wang, H. and Yang, H. (2007) ‘Deng Xiaoping’s southern speech and the development of Chinese private sector’, Theory Journal, no. 2. Xue, M. (1979) ‘Increasing job opportunities needs change of labor management system’, People’s Daily, 20 July 1979. Zhang, H. and Liu, Y. (1995) China’s Private Sector and Private Enterprises’ Owners. Beijing: Knowledge Press.

2

Cost–profit efficiency and governance effects of commercial banks in China 1995–2005 Chunxia Jiang and Shujie Yao

Introduction China achieved an annual GDP growth of over 9 per cent during the past 30 years, becoming the third largest economy in the world next to the USA and Japan. Along with economic reforms, China’s banking system has undoubtedly contributed to this miracle. In order to better serve economic development and maintain social stability, the banking system has been subject to piecemeal but well-planned reforms. By ‘touching stones to cross the river’, banking reform has achieved important results. As China becomes more integrated with the world, its banking system has become more influential in the world financial markets, underpinned by China’s fast economic growth. By 2008, three Chinese banks, namely Industrial and Commercial Bank of China (ICBC), China Construction Bank Corporation (CCBC), and Bank of China (BOC), were rated among the world’s five largest banks in terms of market capitalization. With the five-year grace period under WTO agreement elapsing, Chinese banks have become real players in an open financial market. It is therefore of great interest to examine whether they are efficient enough to compete with foreign rivals. It is also of great importance to investigate the impacts of reform strategies on bank performance, thereby providing policy makers valuable information for further banking reform. Despite voluminous bank efficiency literature, there are only a handful of studies that have investigated bank efficiency in China. None of them simultaneously examines the static, selection and dynamic governance effects on bank efficiency. This paper attempts to bridge the gap and contribute to existing bank efficiency literature in the context of developing countries and bank privatization. This paper employs a stochastic frontier approach (SFA) to estimate cost efficiency and profit efficiency for 35 commercial banks between 1995 and 2005. The SFA is criticized for its pre-specified functional form and distributional assumptions for random errors and inefficiencies. However, because of the separation between random errors and inefficiencies, the SFA is more appropriate over the non-parametric method in efficiency studies in transition and developing countries where problems of measurement errors and uncertain economic environments are

14 Chunxia Jiang and Shujie Yao more likely to prevail (Fries and Taci 2005). Moreover, this paper uses a one-step SFA model that overcomes serious statistical problems suffered by the commonly adopted two-step estimation procedure. Following Berger et al. (2005) method, this study investigates the static, selection and dynamic governance effects of foreign acquisition and initial public offerings (IPOs) strategies on bank efficiency. Governance refers to different types of banks with different ownership and management structure. The static effect examines the performance of banks that maintain certain types of governance structure over a long time; the selection effect investigates whether outperforming banks are selected for governance changes; and the dynamic effect shows differences in performance before and after governance changes. The regression results show that both cost efficiency and profit efficiency have improved and both averaged at 75 per cent. The results from the inefficiency effect model shed important light for future banking reform in China. Joint-stock ownership is found to outperform state ownership (static effects), providing evidence for bank privatization. Banks selected for foreign acquisition are more cost efficient, implying foreign investors had picked better banks for their investments. Those banks undergoing IPOs appear less profitable, meaning that the government picked less efficient banks for IPOs as a means of reform (selection effects). In the long term, foreign acquisition is found to have a positive impact on cost efficiency but a negative impact on profit efficiency. IPOs are found to improve bank profitability (dynamic effects). The overall results suggest that the real impact of reform strategies are less clear and remain to be seen. This study also enhances literature from the perspective of research methodology. It is one of a few studies1 addressing the issues of exogeneity and endogeneity of input prices in cost and profit efficiency estimation. Most efficiency studies use endogenously determined bank specific input prices by dividing total factor expenses by the total units of factors employed. This is in contradiction with the assumption of the cost and profit functions that firms face exogenous input prices in competitive markets. This paper uses both market average input prices and bank specific input prices and the results are in favour of the former. The rest of this chapter covers the following: a literature review on bank efficiency in developing and transition countries; a brief history of the Chinese banking system; an outline of research methodologies, including model specification, variables definition and data description; an interpretation of the results obtained; and, finally, the chapter concludes with policy implications.

Bank efficiency in developing and transition countries Although a voluminous literature on bank efficiency has been documented, the majority of studies have been undertaken on the US and European countries. In the last two decades, bank efficiency study in developing and transition economies has received much attention and there has been a rapid development of empirical research as market-oriented banking reform took place in most of these countries. Banking systems in transition economies and developing countries share

Cost–profit efficiency and governance effects 15 many commonalities. In a centrally planned economy, banks acted as accounting agencies to keep records of financial transactions and they were functionally segmented by economic sectors. They lacked management skills and credit analysis systems. The banking systems were commonly associated with state ownership, poor asset quality, poor oversight institutions, and weak legal frameworks. Earlier market-oriented reforms focused on creating a two-tier system and subsequent reform strategies followed different paths, namely rehabilitation and new entry (Claessens 1998). Countries in Central Europe mostly followed the former by transforming and revitalizing the old state banking system, while most countries in the former Soviet Union took the second approach by creating a new banking system. Banking reform has been highlighted on the policy agenda in order to transform banking systems into market-based ones in line with economic development in most transition economies and developing countries. The reform is also provoked by the recognition that a well-functioning banking system is important for economic growth and development. The primary purpose is to improve the efficiency of resource allocation and to strengthen the financial foundation of the economy as a whole. Despite varying reform strategies across countries, reform measures generally include lowering the entry threshold for both private domestic and foreign banks, privatizing state-owned banks, enhancing the supervisory framework, liberalizing interest rates, removing credit controls and reducing government intervention. Consequently, efficiency studies have focused on the effect of deregulation, financial liberalization, foreign bank entry, ownership characteristics, and privatization. Among others, ownership is an important factor in constructing good governance. The relationship between ownership and performance has been well modelled under the principal-agent framework. Primary concerns are optimal ownership and management structure that better reconciles management interests to that of owners (Spong et al. 1995). When the management of an entity is separated from its owners, the agent (management) may not act in the best interests of the principal (the owner) and therefore may result in inefficiencies. Good governance structure helps tackle the agent-principal problems and improve performance. There are three broad ownership types: state, private and foreign ownership. State ownership in banks has been prevalent in transition and developing countries. The argument for state ownership is that governments are able to channel funds to sectors and projects with low financial but high social returns since private capital is distrustful in doing so. The arguments against state ownership in banks are mainly built on its poor performance. State ownership theoretically means all citizens are co-owners who in practice have no power and no incentive to influence and monitor the management of state banks and in turn create a free-rider problem. This free-rider problem leaves governments the only effective representative agent (Huibers 2005). Governments, however, have multiple (often conflicting) goals other than pure profit maximization. State ownership facilitates governments to pressurize state banks to assist in achieving these goals. Furthermore, the poor performance of state banks stems from the lack of the market discipline on inefficient banks and the inadequate means of punishing wrong-doing by bank managers.

16 Chunxia Jiang and Shujie Yao Most state banks are ‘too big to fail’, leading to moral hazard problems. Conversely, private ownership is expected to improve performance by better tackling the agentprincipal problems and encouraging shareholders to exercise due diligence on monitoring bank management. Banks with private ownership are also subject to less government intervention so that their business decisions are made on pure commercial basis. The management is under pressure to improve bank efficiency as inefficient management would be replaced and banks may be bankrupt when facing financial distress. There is extensive literature on the relationship between industrial ownership and performance, especially for countries where state-owned banks dominate the banking system. Empirical research generally shows a negative association between bank efficiency and state ownership. In transition economies, state-owned banks are found to be significantly less efficient then their private counterparties (Bonin et al. 2005a; Fries and Taci 2005; and Yao et al. 2007). A few exceptional studies include Spong et al. (1995) that argue no single organizational structure appears to guarantee efficiency and Chen (2005) that found state banks outperform other types of banks. As to foreign ownership, a home field advantage hypothesis argues that domestic institutions are generally more efficient than foreign-owned institutions due to organizational diseconomies to operate and monitor from a distance and limited access to soft qualitative information. In contrast, a global advantage hypothesis argues that foreign institutions can be more efficient because of superior managerial skills and high quality human capital inherited from foreign owners (Berger et al. 2000). Claessens et al. (2001) carried out a comprehensive study on the effect of foreign bank entry and they found a tendency that the home field advantage hypothesis holds in developed countries while the global advantage hypothesis holds in developing countries. In developed countries, evidence supporting the home field advantage hypothesis can be found in Berger et al. (2000), De Yong and Nolle (1996), Sathye’s (2001), Chang et al. (1998), Peek et al. (1999) and Mahajan et al. (1996). In developing and transition economies, the empirical results are less conclusive. A limited form of global advantage hypothesis is supported by Bonin et al. (2005b) and Kraft et al. (2006). On the other hand, Rao (2005) and Yao et al. (2007) find the home field advantage hypothesis holds in United Arab Emirates and China, respectively. Other studies find mixed results regarding different type of banks and efficiency concepts used. Given the poor performance of state ownership, the privatization of state banks has been popular, especially in developing and transition countries. Empirical studies have shown clear performance improvements after privatization in developing countries and transition economies (Boubakri et al. 2005; Berger et al. 2005; Williams and Nguyen 2005). Two commonly used privatization strategies are foreign acquisition (foreign investors acquiring stake in domestic banks) and an IPO, both trying to construct good corporate governance. Foreign acquisition is welcomed as foreign investors are expected to bring in advanced technology, modern banking techniques and superior managerial skills. Empirical literature has generally found improved performance after foreign acquisition (Fries and

Cost–profit efficiency and governance effects 17 Taci 2005, and Bonin et al. 2005b). An IPO strategy is adopted to incorporate the disciplining role of the capital markets on banks. The literature suggests that listed banks are more efficient than unlisted ones (Berger and Mester 1997). Only in recent years has the study of bank efficiency in China attracted attention (Yao et al. 2007; Fu and Heffernan 2007; Chen et al. 2005; Yao et al. 2008; Berger et al. 2009). Existing studies consistently find bank efficiency has improved after two decades of reform. Yao et al. (2007) and Fu and Heffernan (2007) suggest jointstock commercial banks (JSCBs) are more efficient than state-owned commercial banks (SOCBs) while Chen et al. (2005) report SOCBs outperform JSCBs. This paper distinguishes itself from existing studies by being the first study using market average input prices to estimate cost and profit efficiency for commercial banks in China. It also jointly examines static, selection and dynamic governance effects on bank efficiency. Efficiency concepts used in this study are cost efficiency and profit efficiency that are based on economic foundations accounting for not only the use of technology in the production process but also the production optimization for the given market prices and competition conditions (Berger and Mester 1997). The assumptions of cost minimization and profit maximization are considered to be appropriate during the sample period 1995–2005 because banks have been legally defined as commercial banks under the Law of the People’s Republic of China on Commercial Banks since 1995.

Brief history of the Chinese banking system and its reform The banking system in the People’s Republic of China has gone through two distinctive evolutionary periods: a mono-banking period (1949–78) and a reforming period (1979–now). The mono-banking system was a centrally planned unitary banking system, dominated by the only bank in the country – the People’s Bank of China (PBC). The PBC was in charge of nearly all financial functions: the conduct of monetary policy, exchange policy, foreign reserve management, deposit taking, commercial lending and investment. Its operation was subject to strict cash and credit plans set in accordance with the production plans projected by the State Planning Commission. Although a few banks, such as People’s Construction Bank of China and Agricultural Bank of China, were established during this period, the structure of the banking system was unchanged and the dominant status of PBC was unchallenged. Under central planning, banks passively collected household savings and channelled funds in accordance with national production plans. They were merely accounting agencies, keeping track of the financial transactions on planned allocations. Banks’ operations were driven by government needs rather than profitability. Since the late 1970s, the Chinese banking system has entered the reform period. The goal of the reform is to transform the banking sector from a state-owned, monopolistic and policy-driven system to a multi-ownership, competitive and profit-oriented one. The reform period can be sub-divided into four stages: initial institutional restructuring during 1979–84, advanced institutional restructuring in 1984–94, bank commercialization in 1994–2003, and bank modernization from

18 Chunxia Jiang and Shujie Yao 2003 onwards (Tang 2005). Throughout the reforming period, the following major reforms are marked as milestones in shaping the banking system in China. The banking reform was kicked off by replacing the mono-banking system with a two-tier banking system in 1979. Commercial operations were separated from central bank functions and the PBC became the central bank with the main objectives of maintaining price stability, supervising financial institutions, conducting clearance, and issuing bank notes. The PBC headquarters were also in charge of issuing and implementing monetary policy, and formulating a credit plan in accordance with the national economic plan. Four specialized state-owned banks took on the commercial operations of the PBC. The Agricultural Bank of China took over the PBC’s rural banking businesses and responsibilities for supervising a network of rural credit cooperatives (RCCs). The People’s Construction Bank of China was specialized in dealing with fixed assets investment of the government and addressed urban large construction projects in the 1980s. The BOC mainly dealt with foreign currency transactions and the ICBC was established in 1984, undertaking commercial banking activities in urban areas. Each bank had its own designated economic sector to serve and there was no competition among them. The banking reform then focused on the deregulation of the banking market to create a competitive banking system. Since the early 1980s, foreign banks and domestic joint-stock banks were allowed to enter the market, tapping new sources opened to competition. The majority of nationwide or regional JSCBs were launched in the 1980s and 1990s. These banks had shareholding ownership structures, which was an institutional breakthrough in the Chinese banking industry. Moreover, operational restrictions on the four specialized state banks were removed. The four state-owned specialized banks were allowed to enlarge their business scope and to compete with one another as well as with the JSCBs. Although competition in the banking market was increased, the increase was insufficient to create a market-based banking atmosphere. The banks were expected to be profit-driven institutions, but this expectation was overwhelmingly diminished by their strong role of promoting economic growth and maintaining stability. State-owned banks still acted as government arms to help implement production plans projected by the State and Regional Planning Commissions. Commercial banking practices and skills were hardly developed. These problems stood in the way of successfully transforming the banking system to a market-oriented system. The year 1995 marked the beginning of the banks’ commercialization. In 1995, the Law of the People’s Republic of China on Commercial Banks was enacted and the four state-owned specialized banks were legally defined as wholly state-owned commercial banks. They were expected to operate in accordant with the principles of profitability, safety and liquidity, and were responsible for their own profits and losses. Also, these banks were supposed to be operationally independent and have the freedom to choose their clientele on a purely commercial basis. Their policylending functions were taken away by the three newly established policy banks, namely the China Development Bank, the Import-Export Bank of China and the Agricultural Development Bank of China. The intention is to move the state-owned specialized banks away from being driven by policy towards being driven by profit

Cost–profit efficiency and governance effects 19 and competition. However, the three policy banks lacked branch networks and capital as well as serving and lending capacity, and they were unable to meet the needs of policy lending previously fulfilled by the four state-owned specialized banks. The central and local governments frequently intervened in the operations of the SOCBs resulting in huge non-performing loans (NPLs) in the 1990s. These NPLs and losses were regarded as the costs of institutional transition of the economy and the state was expected to clean them up. Thus state banks were implicitly guaranteed by the government and enjoyed a soft budget constraint. By the end of the twentieth century, the SOCBs became financially insolvent because of stubbornly high levels of accumulated NPLs and the resultant low capitalization. Moreover, the Chinese economy experienced overheating and the transitional reform of SOEs was deepened in the 1990s. NPLs in SOCBs grew even faster accompanied by steadily declining capital adequacy ratios. By 1999, the total amount of NPLs in SOCBs was estimated at RMB 3.3 trillion under a four-category loan classification system, accounting for 41 per cent of the GDP for the year. Capital adequacy ratios were unavailable to the public until 2004 but they were estimated to be much less than the international standard of 8 per cent in the 1990s. The banking system became rather weak and vulnerable. Perhaps awakened by the Asia Financial Crisis in 1997, the central government launched the first rounds of SOCBs bailouts to treat the ailing banking system in 1998–9. Fresh capital of RMB 270 billion was injected into SOCBs in 1998 through bonds issues. Meanwhile, NPLs of RMB 1.4 trillion were transferred to four newly created asset management companies in 1999. These measures cleaned up SOCBs’ balance sheets, but the banking reform only addressed surface problems, not the deep-rooted causes of these problems. When China joined the WTO in 2001, the Chinese government committed to fully opening up the banking sector by the end of 2006. In response to the challenges, the central government initiated radical banking reforms, beginning with the financial restructuring of SOCBs. Using the state’s massive foreign exchange reserves, the central government injected US$22.5 billion into BOC and CCBC respectively in 2003 and US$15 billion into ICBC in 2005. Meanwhile, NPLs were stripped off them, amounting to RMB 475 billion in 2004 and RMB 705 billion in 2005. After financial restructuring, these SOCBs were partially privatized by attracting foreign strategic investors and undergoing IPOs. Foreign investors reacted positively starting with prudent trial investments in 2001, followed by a surge in 2004 and a peak in 2005. Bank of America acquired a 9 per cent stake in CCBC and Goldman Sachs, Allianz and American Express acquired a 10 per cent stake in ICBC. The Royal Bank of Scotland together with Merrill Lynch and Hong Kong tycoon Li Ka-shing bought a 10 per cent stake in BOC. Subsequently, these SOCBs successfully made their IPOs on the Shanghai and Hong Kong Stock Exchanges. The market reaction was highly positive from the second half of 2006 and their share prices rocketed by up to 100 per cent. By July 2007, ICBC had become the largest bank in the world measured by market capitalization. Successful IPOs and their subsequent extraordinary performance on the stock markets provided a sound cornerstone for the overall success of China’s further bank reform. Recent reform measures have

20 Chunxia Jiang and Shujie Yao not only attempted to tackle the surface problems of low capitalization and high NPLs, but also addressed the deep-rooted problems such as the corporate governance issue and the modern banking risk management issue. Along with legal, environmental, institutional, and financial restructuring, a series of comprehensive and concrete reforms were implemented to liberalize the financial market and strengthen a prudent regulatory and supervisory framework. Actions included the removal of credit quotas in 1998, the introduction of capital adequacy requirements, the adoption of an internationally accepted five-category loan classification system, strict requirements on reducing existing NPLs and controlling new NPLs, the liberalization of lending interest rates with a 20 per cent floating range and so forth. More important, the China Banking Regulatory Commission (CBRC) was established in April 2003 as a regulatory and supervisory body to introduce modern banking managerial practices. CBRC takes over the responsibilities and functions from the central bank of regulating and supervising all banking institutions while the PBC remains responsible for the monetary policy and liquidity of the financial sector. This reflected the government’s resolution to ensure safe, sound and efficient operation of the banking industry through strengthened supervision and enhanced risk control capacity. Banking reform has achieved in stages progress in improving the soundness and stability of the banking system. According to CBRC, the NPL ratio of Chinese commercial banks fell to its lowest-ever level of 6.2 per cent and the average capital adequacy ratio of Chinese banks surpassed 8 per cent for the first time in 2007. By 2007, a multi-layered banking system has taken shape, comprising of a central bank – the PBC, a regulatory and supervisory body – the CBRC, 4 SOCBs, 13 JSCBs, 112 city commercial banks (CCBs), foreign banks (FBs), along with a vast number of rural and urban credit cooperatives.

Research methodology: model specification and variable definition The preferred estimation technique is SFA, developed by Aigner, Lovell and Schmidt (1977). SFA pre-specifies a functional form and decomposes error terms into a random error (vi) and inefficiency (ui). It assumes that inefficiencies follow an asymmetrical half-normal distribution and random errors follow a symmetric standard normal distribution. A two-step procedure is commonly employed to estimate a cost and/or profit frontier to derive inefficiencies in the first step and to regress the estimated inefficiencies against a set of possible determinants of inefficiencies in the second step. This two-step procedure suffers from serious econometric problems. Inefficiencies are assumed to be identically distributed in the first step but they are assumed to have a functional relationship with a set of variables in the second stage (Kumbhakar and Lovell 2000). The alternative one-step estimation procedure overcomes these problems. This paper particularly adopts a one-step stochastic model proposed by Battese and Coelli (1995). It is assumed that non-negative cost inefficiencies are a function of firm-specific variables and they are independently distributed as truncations of normal distributions with constant variance but with means that are a linear function of observable variables.

Cost–profit efficiency and governance effects 21 A generalized Battese and Coelli (1995) cost model is shown by three equations. Equation 1 shows the cost frontier: yit = β0 + βt t + βxit + 1n vit + 1n uit, i = 1, …, N; t = 1, …, T,

(1)

where i and t denote firm and time; ln yit is the logarithm of the cost of production of the i-th firm; xit is a k × 1 vector of the logarithm of input prices and output of the i-th firm; Vit a random variable assumed to be iid. N (0,σ 2v) and independent of Uit; Uit are non-negative cost inefficiency, which are assumed to be independently distributed as truncations at zero of the N (mit,σ 2u) distribution; β is a vector of unknown parameters to be estimated. Equation 2 shows the inefficiency effects model: mit = δ0 + δt t + δzit + Wit

(2)

where zit is a vector of explanatory variables associated with cost inefficiency of production over time; Wit is a random variable defined by the truncation of the normal distribution with zero mean and variance σ2; δ is a vector of unknown coefficients to be estimated. Equation 3 defines cost efficiency for the i-th bank at the t-th time: CEit = exp(Uit) = exp(zitδ + Wit)

(3)

The empirical specification of the cost frontier in Fourier flexible functional form is shown in Equation 4: 3

1n(TC/w2 z2) = α + ∑β i 1n(Yi /z2) + ∑ ψk 1n(Wk /w2) = ∑φr 1n(Zr /z2) = τ1T k =1

i=1

r =1

+

1 3 3 1 β ij 1n(Yi /z2) 1n(Yj /z2) ∑ ∑ ψkm1n(Wk /w2) 1n(Wm /w2) ∑ ∑ 2 i=1 j =1 2 k =1 m=1

+

1 1 φrs 1n(Zr /z2) 1n(Zs /z2) + τ11T2 ∑ ∑ 2 2 r =1 s=1 3

3

+ ∑ ∑ϖik 1n(Yi /z2) 1n(Wk /w2) + ∑ ∑ κ ir 1n(Yi /z2) 1n(Zr /z2) i =1 k =1

i =1 r =1 3

+ ∑ ∑ σkr 1n(Wk /w2) 1n(Zr /z2) + ∑ηi 1n(Yi /z2) T k =1 r =1

i=1

+ ∑ηk 1n(Wk /w2)T + ∑ηr 1n(Zr /z2) T k =1

r =1

22 Chunxia Jiang and Shujie Yao 3

3

3

+ ∑ ∑ ∑ anpq cos(xn + xp + xq) + bnpq sin(xn + xp + xq) n =1 p =1 q =1 3

3

+ ∑ ∑ anp cos(xn + xp) + bnp sin(xn + xp) n =1 p =1 3

+ ∑ an cos(xn) + bn sin(xn) + 1nvit + 1nuit

(4)

n=1

where TC is the total costs of a bank in a given year; Yi are outputs; Wk are input prices; Zr is fixed netputs; T is a time trend; vit are identical and independently distributed random errors, which are independent of uit; uit are non-negative inefficiencies; xn are adjusted values of logged outputs so that they fall within the interval [0.1 × 2π, 0.9 × 2π],2 and α, β, ψ, φ, τ, ϖ, κ, σ, η, a and b are parameters to be estimated. The standard restriction of linear homogeneity in input prices is imposed by normalizing the costs and input prices by one arbitrarily chosen input price – the price of fund. Fourier terms are applied for outputs only, leaving the effects of input prices to be determined by the translog terms alone. Total costs, profits, output variables and net puts are normalized by total assets to control for scale biases and heteroskedasticity. To derive profit efficiency, an alternative profit frontier is estimated by assuming that banks can exercise a degree of market power in setting output prices (Berger and Mester 1997). The specification of alternative profit frontier is identical to the cost frontier except the dependant variable of total costs is replaced with profit and the inefficiency term becomes. The empirical inefficiency effects model is shown in Equation 5. 10

14

a=1

b=11

uit = δ0 + ∑ δaCGit + ∑ δbRiskit + δ15GDP + δ16t + εit

(5)

where t is a time trend; CGit is a vector of governance effect indicators; Riskit is a vector of risk taking indicators; GDP is a proxy of macroeconomic environment. Employing a modified version of the intermediation approach (Sealey and Lindley 1977), this paper defines three outputs – total loans, other earning assets and deposits; two inputs – cost of fund and cost of labour; and one netput-equity. Table 2.1 provides the summary statistics. Data are mainly from BankScope complemented by the Almanac of China’s Finance and Banking (1986–2005) and the China Statistical Yearbook (1995–2005). This paper focuses on commercial banks only and classifies banks into four types: SOCBs, JSCBs, city commercial banks (CCBs),3 and foreign banks (FBs). The sample of 310 observations covers major commercial banks in China and accounts for more than 80 per cent of total banking assets. Following Koetter (2005), this paper defines labour and physical capital markets by bank types and assumes that banks compete for funds on a single national fund

CCB no

0.02

0.03

0.02

0.03

Price of labour and physical capital (w1)

Price of fund (w2)

Market price of labour and physical capital (w1)

Market price of funds(w2)

38,851

Total assets (z2)

30,427

Total deposits (y3)

1,776

17,352

Other earning assets (y2)

Equity (z1)

19,106

461

1,479

Total loans (y1)

Profit (π)

Total costs (C)

0.02

0.02

0.02

0.02

29,702

1,339

22,732

12,685

14,770

348

1,185

Outputs and inputs and other financial figures

CCB all

0.03

0.12

0.04

0.12

3,361

562

2,109

1,500

1,752

164

253

FB all

0.04

0.02

0.03

0.02

199,740

7,472

147,254

77,283

114,949

1,863

6,911

JSCB all

0.04

0.02

0.03

0.01

200,000

6,600

148,634

72,679

112,553

1,711

6,863

JSCB no

0.04

0.02

0.05

0.02

2,885,792

126,041

2,230,996

1,007,263

1,675,942

16,972

151,156

SOCB all

0.04

0.02

0.03

0.02

2,335,387

90,083

1,795,032

656,118

1,500,546

6,575

96,086

SOCB no

Table 2.1 Sample mean descriptive statistics (by governance indicators in RMB million at 1995 price level).

6,166

45,728

For_sel

38,650

0.04

0.02

0.03

0.02

0.03

0.02

0.03

0.02

555,494 873,774

23,772

437,873 672,955

208,258 324,532

322,294 493,743

5,049

20,806

Listed

(continued)

0.04

0.02

0.03

0.02

1,336,357

59,015

1,030,032

494,679

756,860

9,443

70,150

List_sel

CCB no

1.29

87.94

70.32

Loan loss reserve /Loans

Interbank fund/Deposits

Loans/Deposits

72.22

83.89

1.20

4.91

194.35

440.46

2.36

28.80

FB all

79.74

38.76

2.24

4.65

JSCB all

76.96

37.88

1.24

3.79

JSCB no

81.42

52.57

1.53

4.35

SOCB all

97.20

40.00

0.91

4.08

SOCB no

80.61

27.12

2.31

4.66

Listed

76.79

57.51

1.99

4.78

For_sel

77.97

39.11

2.06

4.57

List_sel

Notes: 1. CCB: city commercial bank, FB: foreign bank, JSCB: joint-stock commercial bank, SOCB: state-owned commercial bank, For_sel: selection with foreign acquisition, List_sel: selection with listed banks, all: all banks, no: no governance changes. 2. Ratios are in percentage.

Source: BankScope and authors’ calculation.

4.90

Equity/ total asset

Risk Taking Indicators in inefficiency effect model

CCB all

Cost–profit efficiency and governance effects 25 market. Market average prices of labour and physical capital are the un-weighted average of the prices the other banks belonging to the same bank type excluding the banks’ own price. The assumption of one single national fund market is appropriate in China since the interest rate structure is set by the central bank and commercial banks have been strictly restricted in setting interest rates on deposits and borrowings. The market average price of fund is computed as the un-weighted average of the prices the other banks excluding the banks’ own price. Theoretically, the price of labour and the price of physical capital should be measured separately. Due to the lack of separate data on labour, the price of labour and physical capital is defined as the ratio of non-interest expenses to total assets as in Hasan and Marton (2003). The price of funds is defined as the ratio of total interest expenses to total interest-bearing funds. Risk-taking characteristics in the inefficiency effects model are represented by a set of financial ratios. The equity to total asset (E/A) ratio is the proxy for capital risk and the higher the E/A ratio, the lower the capital risk. Loan loss reserve to total loans ratio reflects credit risk. The ratio of interbank borrowing to total deposit accounts for market risk and total loans to total deposits ratio indicates liquidity risk. The inefficiency effect model includes 11 governance effect indicators defined in Table 2.2. The first four static governance indicators – CCB – no governance change, JSCB – no governance change, SOCB – no governance change, FB – no governance change – examine the effect of maintaining each type of governance structure without changes over a long time. For all periods, these dummy variables equal one for such a bank and zero for all other banks. Only 12 of 29 domestic banks in the sample experienced no change in governance. About 60 per cent of domestic banks controlling 80 per cent of the total assets in the sample have experienced governance changes, highlighting the importance to examine these effects on performance. The last static indicator – Listed banks is used to explore the relationship between the listing status of banks and performance. The dummy equals one for listed banks and zero for unlisted banks. Only 7 of 29 domestic banks have been listed on stock exchanges, possessing 27 per cent of the total assets of the banks in the sample. Two selection effect indicators – Selected for foreign acquisition and Selected for IPO – are designed to see whether better performing banks are selected for governance changes. Dummies equal one for such a bank for all periods and zero otherwise. Fourteen banks have been selected for foreign acquisitions and nine for IPOs.4 Dynamic governance indicators are defined to examine the effects of governance changes by comparing bank performance before governance changes with their subsequent performance after changes. Two short-term dynamic indicators – Underwent foreign acquisition ST and Underwent IPO ST – measure the timing following governance changes. The dummies equal zero prior to governance change and one after the changes. Two long-term dynamic indicators – Underwent foreign acquisition LT and Underwent IPO LT – measure the number of years following a governance changes. The dummies equal zero prior to governance change for all banks and one starting from the change.

Table 2.2 Corporate governance indicators. Governance

Definition of dummy variables

Bank No.

TA

%

%

Static governance indicators CCB – no governance change

Equals 1 for CCBs without governance change and 0 otherwise.

9 (14) 64

34

JSCB – no governance change

Equals 1 for JSCBs without governance change and 0 otherwise.

2 (11) 18

18

SOCB – no governance change

Equals 1 for SOCBs without governance change and 0 otherwise.

1 (4) 25

20

FB – no governance change

Equals 1 for FBs without governance change and 0 otherwise.

6 (6)

Listed banks

Equals 1 for listed banks and 0 otherwise.

7 (29) 20

27

Selection governance indicators Selected for foreign acquisition

Equals 1 for banks that underwent foreign acquisition and 0 otherwise.

14 (29) 48

77

Selected for IPO

Equals 1 for banks that underwent IPO and 0 otherwise.

9 (29) 31

75

Dynamic governance indicators Underwent foreign acquisition ST (short term)

Equals 1 after foreign acquisition, 0 before acquisition and all other banks.

Underwent IPO ST (short term)

Equals 1 after IPO, 0 before IPO and all other banks.

Underwent foreign acquisition LT (long term)

Number of years since foreign acquisition, 0 before acquisition and all other banks.

Underwent IPO LT (long term)

Number of years since IPO, 0 before IPO and all other banks.

Notes: a. Figures in parentheses are the number of each type of banks or total domestic banks. b. TA: total assets.

Cost–profit efficiency and governance effects 27

Empirical results The results of the cost and profit frontiers Estimation results of the cost and alternative profit functions are reported in Panel A and Panel B of Table 2.3. Estimated γ is 0.99 and 0.86 in the cost and profit frontiers respectively, indicating a large part of the total composite error term attributable to inefficiencies. LR test are 210 and 140, confirming the existence of a onesided error within the composite error term. Cost function and alternative profit functions have been estimated using both bank-specific input prices and market average input prices. The results show that the exogeneity/endogeneity of input prices matters and the use of market average input prices is preferred. Different input price measurement is found to influence the estimated inefficiency levels. The use of market prices drives down profit inefficiency by 14 per cent while bidding up cost inefficiency by 19 per cent compared with efficiency estimates using bank specific prices. Moreover, cost efficiency tends to be more sensitive to different input price measurement than alternative profit efficiency, consistent with Koetter (2005). In the cost efficiency estimation, the use of market average input prices increases the proportion of the inefficiency in composite error term and has a downside effect on cost efficiency. In profit efficiency estimation, the use of market average input prices has shown opposite impacts that decrease γ and profit inefficiency. Furthermore, very different values of γ and σ2 suggest that a different Table 2.3 Estimation of cost and alternative profit frontiers. Bank-specific prices Market average prices Panel A: Cost frontier Gamma (γ)

0.77***

0.99***

Sigma-squared (σ2)

0.004***

0.21***

Log likelihood function

574

80

LR test of one-sided error

215

210

Mean cost efficiency

0.94

0.75

Gamma (γ = σ 2u /σ 2v + σ 2u )

0.99***

0.86***

Sigma-squared (σ 2 = σ 2v + σ 2u )

0.69***

0.56***

Panel B: Alternative profit frontier

Log likelihood function LR test of one-sided error Mean profit efficiency Note: *** signifies significance at 1% levels.

91

152

231

140

0.61

0.75

28 Chunxia Jiang and Shujie Yao input price measurement also influences the distribution of inefficiencies, similar to the findings of Bos and Kool (2006). Both the mean cost efficiency and profit efficiency are 75 per cent. The results suggest that banks spend 25 per cent more than the minimum possible cost while earning 25 per cent less profit than the maximum possible profit of a best practiced bank using the same bundle of inputs under the same conditions. Figure 2.1 plots cost efficiency and profit efficiency by year. Cost efficiency rose by 10 per cent from 70 per cent in 1995 to 80 per cent in 1998. While SOCBs had made efforts to reduce costs by closing branches and dismissing labour, the main reason for the improvement was considered to be the significant cut in interest rates. For example, the interest rate on one-year deposits dropped by two-thirds from 10.98 per cent in 1995 to 3.78 per cent in 1998, significantly reducing interest costs on deposits. The cost efficiency level remained stable thereafter until a sudden drop in 2002, which is attributed to the tightened regulatory requirements and prudent accounting practices. For example, since 2001 the loan loss provision was required to reflect the quality of assets and it could be made up to 100 per cent compared with only 1 per cent of loan balance under previous requirements. Most banks increased the loan loss provision, resulting in a substantial increase in total costs. After that, cost efficiency rose steadily and peaked at 83 per cent in 2005. Profit efficiency kept declining during the first half of the sample period and bottomed at 63 per cent in 1999. The main reason for this decline was the deterioration of banking assets quality. The Chinese government alleged the SOCBs’ NPL ratio was less than 25 per cent, while international estimates ranged from 35% to 50%. One might argue that the cause could be the cut in interest rates, but the spread between the interest rates charged on loans and paid on deposits was stable or slightly increased. Since 1999 profit efficiency entered a steady growth period and reached a peak of 84 per cent in 2005. The turnaround in 1999 was a direct

1.00

0.80

0.60

0.40

0.20

0.00 1995

1996

1997

1998

1999

2000

Average cost efficiency

Figure 2.1 Mean efficiency level (1995–2005).

2001

2002

2003

Average profit efficiency

2004

2005

Cost–profit efficiency and governance effects 29 (a) Cost 1.0 0.8 0.6 0.4 0.2 0.0 1995

1996

1997

1998 CCBs

1999

2000

FBs

2001 JSCBs

2002

2003

2004

2005

2004

2005

SOCBs

(b) Profit 1.0 0.8 0.6 0.4 0.2 0.0 1995

1996

1997

1998 CCBs

1999 FBs

2000

2001 JSCBs

2002

2003 SOCBs

Figure 2.2 Mean cost efficiency (a) and profit efficiency (b) by bank type (1995–2005). Notes: CCB = city commercial bank, FB = foreign bank, JSCB = joint-stock commercial bank, SOCB = state-owned commercial bank.

consequence of the off-load of NPLs from SOCBs. Subsequent improvement was attributable to improved bank management and operational skills as well as further off-loading of NPLs in 2003 and 2005. In Figure 2.1 cost efficiency and profit efficiency appear to move oppositely over most of the sample period. It seems puzzling that banks were less profit efficient when they were more cost efficient. The reason for this phenomenon was the huge amount of NPLs. NPLs are included in total loans as output and inflate cost efficiency. However, there was no such effect on profit efficiency because no profits could be earned from NPLs. Therefore, we argue that profit efficiency was a more precise performance measure than cost efficiency for a banking industry where NPLs were high. Our results support the view that profit efficiency was superior to other efficiency concepts (Berger and Mester 1997).

30 Chunxia Jiang and Shujie Yao Figure 2.2(a) and 2.2(b) plot mean cost efficiency and profit efficiency by bank type5 regardless of whether banks experience governance changes or not. Although both SOCBs and JSCBs have the highest cost efficiency scores of 82 per cent, JSCBs are considered as the most efficient banks since SOCBs hold the majority of NPLs that have an inflationary effect on cost efficiency. In contrast to the high level of cost efficiency, SOCBs are the least profitable banks at a mean of 46 per cent, substantially below the industrial average by about 30 per cent. The results further justify the inflationary effect of NPLs on cost efficiency. CCBs are the least cost efficient banks, averaging 68 per cent, but they are the most profitable domestic banks. In terms of cost efficiency, although FBs outperform CCBs by 7 per cent, they underperform major domestic banks – SOCBs and JSCBs – by 7 per cent, providing weak evidence for the home field advantage hypothesis. In terms of profit efficiency, FBs are the most efficient banks, supporting the global advantage hypothesis. The results of the inefficiency effect model Results from the inefficiency effects model (reported in Table 2.4) are of particular interests as they offer insights into the ongoing banking reform. The inefficiency effect model focuses on the static, selection and dynamic governance effects on bank performance as well as the relationship between banks’ risk-taking characteristics and performance. Static governance indicators examine the performance of banks with different ownership experiencing no governance changes over the sample period. The first static governance indicator, CCB – no governance change, is excluded from the estimation for comparison purposes. Coefficients on FB – no governance change (δ1) suggest that sole or majority foreign ownership is associated with higher profit efficiency than joint-stock ownership and state-ownership over a long term. However, foreign ownership appears to be cost disadvantageous. FBs are the least cost efficient banks, along with the control group and SOCBs without governance changes. Coefficients on JSCB – no governance change (δ2) is negative and statistically significant in cost model, indicating joint-stock ownership resulted in the highest cost efficiency. In terms of profit efficiency, joint-stock ownership outperforms state ownership but underperform foreign ownership and CCBs. Coefficients on SOCB – no governance change (δ3) show that state ownership in banks has led to the lowest cost efficiency and profit efficiency over the long term. On balance, joint-stock ownership in banks has resulted in better performance over state ownership measured by both cost efficiency and profit efficiency, which is consistent with the literature. The results provide support for the ongoing banking reform of the joint-stock restructuring and privatization of SOCBs. The last static governance indicator – Listed banks (δ4) suggests listed banks are more cost and profit efficient than non-listed banks, consistent with literature that publicly traded banks are generally more efficient. Selection effect indicators are used to examine the performance of banks subsequently being selected for governance changes. Coefficients on Selected for foreign

Cost–profit efficiency and governance effects 31 Table 2.4 The results of the inefficiency effects model. Cost efficiency

Profit efficiency

FB – no governance change (δ1)

–0.06 (–1.27)

1.42 (1.96)**

JSCB – no governance change (δ2)

–0.11 (–2.06)**

1.44 (3.54)***

SOCB – no governance change (δ3)

–0.05 (–1.06)

3.10 (5.02)***

Listed bank (δ4)

–0.09 (–1.87)**

–1.34 (–2.88)**

Selected for foreign acquisition (δ5)

–0.22 (–4.02)***

0.85 (2.91)**

Selected for IPO (δ6)

–0.06 (–1. 15)

1.75 (3.95)***

–0.003 (–0.06)

–1.45 (–2.61)**

Static governance indicators

Selection governance indicators

Dynamic governance indicators Underwent foreign acquisition ST (δ7) Underwent IPO ST (δ8)

0.03 (0.64)

0.11 (0.14)

Underwent foreign acquisition LT (δ9)

–2.16 (–5.52)***

Underwent IPO LT (δ10)

–0.01 (–0.06)

–0.74 (–5.33)***

Equity/Total asset (δ11)

–0.96 (–2.86)**

–1.22 (–3.60)***

LLR/Total loans (δ12)

–0.72 (–3.27)**

0.15 (1.10)

Interbank fund/Deposits (δ13)

–0.14 (–1.35)*

0.19 (1.50)*

0.46 (4.66)***

Risk-taking and environmental indicators

Total loans/Deposits (δ14)

0.01 (0.04)

–0.35 (–0.86)

t (δ15)

–0.06 (–1.25)

–0.07 (–1.46)*

GDP (δ16)

–0.62 (–3.66)***

–0.51 (–3.94)***

Notes: a. FB = foreign bank, JSCB = joint-stock commercial bank, SOCB = state-owned commercial bank, IPO = initial public offering, LLR = loan loss reserve. b. *, ** and *** signify significance level at 10 per cent, 5 per cent and 1 per cent respectively. c. Negative sign of the estimated coefficient indicates that the particular variable has a positive effect on cost or profit efficiency and vice versa.

acquisition (δ5) indicate that foreign investors have selected more cost efficient banks for acquisition. Selection decisions appear to be rational since foreign banks are found to be less cost efficient but more profit efficient than domestic banks in China. Foreign investors intend to incorporate their comparative advantages of profitability with domestic banks’ strengths of cost advantage. In fact, foreign acquisition becomes a win-win strategy as both acquirer and acquiree could potentially benefit from it. Estimated coefficients on Selected for IPO (δ6) shows that banks being selected for IPOs are significantly less profitable. The results are

32 Chunxia Jiang and Shujie Yao contrary to general expectation that more profitable banks would be chosen for listing on stock exchanges since they are more attractive to investors. However, our results reflect the fact that IPOs are used by Chinese government as a partial privatization strategy to reform less profitable SOCBs. These banks are expected to perform better after being listed on stock exchanges by being subject to more public scrutiny and transparency. Estimated coefficients on dynamic effect indicators shed important light on the effectiveness of ongoing banking reform by comparing bank performance before and after governance changes. Foreign acquisition was found to have a positive impact on banks’ subsequent performance in the short term as the coefficients on Underwent foreign acquisition ST (δ7) are negative. The impact is significant on profit efficiency at the 5 per cent significance level while insignificant on cost efficiency. Coefficients on Underwent foreign acquisition LT (δ9) is used to quantify the impact of foreign acquisition on bank performance in the long term. Foreign acquisition strategy is supported by the cost efficiency analysis but not by the profit efficiency analysis. Foreign acquisition has resulted in significant gains in cost efficiency in the long term. Nevertheless, its significant short-term gains in profit efficiency have faded and turned into significant losses in the long term. In fact, the short-term gains in profit efficiency are largely attributable to the effect of the one-off reform measures rather than advantages of having foreign owners. In order to attract foreign investors, government has divested NPLs from banks immediate before foreign acquisition, which have a direct positive impact on bank profitability. Over a longer term, these gains are unsustainable without fundamental changes in banks’ management and operations. It might be too early to expect a significant improvement in profit efficiency as it takes time to change bank management and improve operational skills. Moreover, with a maximum foreign minority interest of 25 per cent, it is doubtful whether foreign owners have sufficient power to influence management and operations to apply their profitable practices. Compared with foreign acquisition strategy, undergoing an IPO appears to be a more successful and promising privatization strategy. Coefficients on Underwent IPO ST (δ8) suggest that going public has no immediate positive impact on bank performance in terms of both cost efficiency and profit efficiency. However, coefficients on Underwent IPO LT (δ10) show that in the long term, the IPO strategy has improved profit efficiency significantly. Although its impact on cost efficiency is still insignificant, the sign of the coefficient has changed from positive in the short term to negative in the long term, signalling a possible turnaround to a positive impact over a longer time. Now, we turn to how bank performance is interrelated with particular risk-taking behaviours and general macroeconomic conditions. This paper attempts to provide information for bankers on the relationship between bank performance and risk-taking characteristics. Banks with higher Equity/Total Assets ratio (δ11) and therefore a lower capital risk are found to be more cost efficient and profit efficient, consistent with Berger and Mester (1997). Coefficients on LLR/total loans (δ12) suggest credit risk is positively related to cost efficiency but not closely related to

Cost–profit efficiency and governance effects 33 profit efficiency, indicating banks facing less credit risk are more cost efficient. The Market risk indicator, Interbank fund/deposits (δ13), shows banks purchasing more funds from the wholesale market are more cost efficient but less profit efficient, again consistent with findings in Berger and Mester (1997). Liquidity risk – Total loans/deposits (δ14) – is not closely related to either cost efficiency or profit efficiency. As time passes (δ15), profit efficiency has improved at a constant rate of 7 per cent while cost efficiency has tended to be stable. Coefficients on GDP (δ16) suggest a favourable macroeconomic condition has a positive impact on both cost efficiency and profit efficiency.

Conclusions and policy implications This paper has examined cost efficiency and profit efficiency of 35 commercial banks in China for the period 1995–2005. Different input price measurement was found to influence efficiency level and the distribution of inefficiencies. Estimation results were in favour of the use of market average input prices. Average cost efficiency and profit efficiency were 75 per cent, indicating Chinese banks on average cost 25 per cent more but generating 25 per cent less profit compared with best practice cost and profit frontiers. Regardless of whether banks have experienced governance changes, foreign banks were the most profit efficient banks but they were less cost efficient than major domestic banks. JSCBs were the most cost and profit efficient domestic banks and SOCBs were the least profitable banks. Since cost efficiency could be inflated by the presence of a large amount of NPLs in total loans as output, we argue that a focus on profit efficiency is superior to cost efficiency when examining bank efficiency in countries where NPLs are relatively high. However, cost efficiency is necessarily complementary to measuring the cost-side performance of bank operations. Employing Berger et al.’s (2005) method, this paper has further differentiated static, selection, and dynamic governance effects on cost and profit efficiency. Banks with joint-stock ownership have been found to outperform banks with state ownership for a long time without governance changes. Foreign investors have selected more cost efficient domestic banks for acquisition attempting to overcome their cost disadvantage. Banks selected for IPOs were less profitable, in line with the fact that IPO has been used by the government as a major means to reform the least profitable SOCBs. Foreign acquisition strategy was found to have improved cost efficiency in the long term. However, it resulted in losses in profit efficiency in the long term after initial short-term gains. Short-term gains are largely attributable to one-off reform steps in order to attract foreign investors rather than expected good and functioning governance. The IPO strategy was found to have no significant impact on bank performance in the short term but it had a positive impact in the long term. Our results have shed important light on policy implications. First, Chinese banking reform is on track in the right direction. This paper provides support for the joint-stock restructuring and privatization of SOCBs for building good and functioning governance. In order to supervise and monitor the management and

34 Chunxia Jiang and Shujie Yao performance of banks, authorities have set out ten requirements for good governance and seven performance indicators. However, although a modern corporate governance structure has been put in place, it is not yet fully functioning. There is a need for fundamental changes in management and operational decision-making processes, from being policy oriented to profit oriented. There is also a need for effective and enforceable steps to ensure the long-term functioning of a well-structured governance structure in the long term and to prevent SOCBs from stepping back to their previous managerial and operational behaviours. Second, IPO and foreign acquisitions have been successful privatization methods. At least, they are successful steps toward advancing the modernization of the Chinese banking system. The IPO strategy has been found to improve bank profitability in the long term. It has also turned short-term losses in cost efficiency into long-term gains although insignificant. The impact of the foreign acquisition strategy appears less fruitful. Foreign acquisition has shown a positive impact on cost efficiency in the long term. Nevertheless, its short-term positive impact on profit efficiency has vanished and turned into a negative impact in the long term. Fundamental changes in bank management and operations involve a complex process. It might take time to realize the advantages of international best practice and technological benefits brought about by foreign investors. On the other hand, the upper limit of the foreign ownership in domestic banks is 25 per cent and that for a single foreign investor is 20 per cent while the central government holds a controlling stake. It is doubtful whether foreign investors have sufficient power and ability to influence decision making processes in order to apply their superior operational and managerial skills. The Chinese government has encouraged foreign ownership participation in domestic banks and helped the IPOs of the three restructured SOCBs. However, although our results provide some supporting evidence, these reform strategies on their own do not necessarily improve performance. They are only the first step to improve performance. Future studies are needed to follow up whether the reform turns out as expected. Third, partial privatization and government intervention could hinder and postpone the success of banking reform. The Chinese government has partially privatized SOCBs and retained a controlling stake. A controlling stake in banks facilitates government intervention in SOCBs’ operations, especially in lending decisions. Existing information and evidence suggest that government intervention still persists and whether it could be reversed in the near future is uncertain. The eleventh Five-Year Plan has projected to balance the urban and rural development through urbanization and SOCBs are more likely to be pressurized to support the achievement of these goals (Dobson and Kashyap 2006). The key to banking reform success is fundamental shifts in banks’ management and operations away from a policy orientation. This is unlikely to happen as long as the government has an incentive and power to intervene in SOCBs’ operations in favour of fulfilling governmental and political goals. Therefore, the ultimate success of the banking reform largely depends on whether those partially privatized SOCBs could really escape from government intervention. We suggest a gradual repeal of government ownership from SOCBs.

Cost–profit efficiency and governance effects 35 There is no doubt that banking reform in China has achieved phased progress toward a modern banking system. However, it is still too early to draw any definite conclusions on whether the banking reform is or will be successful. Without fundamental changes in management, from the previous bureaucratic style toward modern banking practices, without improvements in operational skills, and without a real release from government intervention, any improvement in performance will be unsustainable in the long term. Failure would be an inevitability. Therefore, we conclude that banking reform in China still has some way to go and ultimate success is still an uncertainty. More effective reform steps are needed to consolidate current achievements and to advance the modernization of the Chinese banking system.

Notes 1 Patti and Hardy (2005), Berger and Mester (2003), DeYoung and Hasan (1998), Bos and Kool (2006) and Koetter (2005). 2 In(Yi /z2) are rescaled so that each xn term falls into the interval [0,2π]. Following Berger and Mester (1997), each end of the interval [0,2π] are cut off by 10 per cent so that xn to span the interval of [0.1 × 2π, 0.9 × 2π] for reducing approximation problems near the endpoints. According to Berger and Mester (1997), the rescaling formula is 0.2 – μi × ai + μi × 1n(Yi /z2) where [a,b] is the range of 1n(Yi /z2) over the entire 11-year time interval, and μi = (0.9 × 2π – 0.1 × 2π)/(bi – ai). 3 CCBs have been constructed as joint-stock commercial banks, but they are restricted to operate within their municipalities’ localities and subject to certain local government intervention. Their management is also very different from that of JSCBs. Therefore, CCBs are separated from JSCB to gauge the effect of different governance structure on bank performance. 4 Selection effect has taken account of the effect of significant foreign acquisitions and IPOs up to 2006. 5 The actual average performance of CCBs would be lower than our estimates. This is because the sample includes only 14 CCBs out of 112 for those whose data are available for at least five years. It is argued that banks with better management and performance are more likely to make data publicly available.

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3

Regional inequalities in China A non-monetary view Stephen L. Morgan and Fang Su

Introduction Economic reform has improved the standard of living of the Chinese over the past three decades and lifted tens of millions out of poverty, but it has come at the cost of large increases in inequality. At the start of economic reform in the late 1970s China was one of the most equal societies in Asia, despite differences between rural and urban populations and across regions. In general though, those differences in income and welfare were relatively compressed. Studies of household consumption and income over the past decade show that China has become one of the ‘most unequal’ in Asia (Khan and Riskin 1998; Riskin et al. 2002; UNDP 2005; Brandt and Rawski 2008). Differences between urban and rural populations, within cities and villages, and between and within regions are among the inequalities that pose huge economic, political and social challenges for the Chinese State, which were recognized in the policy pronouncement of the 2007 Chinese Communist Party Congress (Yao and Morgan 2008). In this chapter we use human capital and welfare indicators such as education, life expectancy and physical height. These are useful alternatives to conventional economic measures. They reflect broadly the socio-economic and environmental circumstances of the population. This is especially so when examining welfare in a transitional economy such as China. Conventional welfare measures are often limited in their usefulness because of differences in the way prices are determined, in the quality and availability of goods, and in the reliability of official data. At the start of the reform period markets were nearly non-existent and subsidies were widespread while complicated estimates of true income and the statistical system was designed for a planned rather than a market economy. As Simon Kuznets (1955) noted long ago, conventional income measures fail to capture many important elements of human welfare and the standard of living. Human capital such as education and health are central to the new growth models explaining economic development (Becker 1975; Romer 1986; Lucas 1988). It refers to the stock of skills, knowledge and capacity of people; those with better education and health will be more productive, enjoy life and contribute to economic production than those with less. On the eve of economic reform, China was well ahead in terms of common measures of human capital such as average life expectancy, infant mortality, and literacy

Regional inequalities in China 39 compared with many developing economies of a similar level of income (World Bank 2007), though average nutrition levels were recognized as barely adequate (Lardy 1983; Piazza 1984). China has since made huge advances. For instance, education attainment and literacy, life expectancy at birth, nutrition (attained heightfor-age of children) and income levels have improved greatly. However, those improvements have been uneven. Some Chinese are better off than others. Regional disparities are particularly marked. Increases in the stock of human capital raise the productivity of individuals and reduce inequalities (Fontanna and Srivastava 2009). Its influence on growth and inequality reduction is discernable over the long run rather than within a shortterm frame. Based on human capital theory, our research argues that human capital development is a key factor in explaining the regional inequality in China. Over the past 30 years of economic reform, rapid structural changes as well as shortcoming in the statistical reporting system raise questions about the adequacy of conventional monetary market-based measures. Selected non-monetary educational and health measures are used to help us focus on human capital perspectives that are central to the transitional economic growth in China, such as the average years of schooling and life expectancy. Reasons for the selections are given in the following sections. More importantly, inequalities in human welfare and well-being are put forward as a significant factor in China’s economic development towards a more stable and sustainable future. All the relevant data are from the People’s Republic of China Census of 1990; the China Statistical Yearbook of 1991, 1993 and 2006, published by China’s Statistics Bureau and the Human Development Report 2008; and the height data are from the report on the physical fitness and health surveillance of China’s school students for 1985 and 2005. After combining the data, some systematic and relationship analyses are illustrated in the following sections accordingly. We find evidence that the gap is widening, despite the positive gains for the Chinese in general. The rest of this chapter covers the following: a literature review on bank efficiency in developing and transition countries; a brief history of the Chinese banking system; an outline of research methodologies, including model specification, variables definition and data description; an interpretation of the results obtained; and, finally, the paper concludes with policy implications.

Background At the end of the 1970s China abandoned its autarkic development model and began to decollectivize agriculture and open the economy to foreign investment and trade. Rapid economic growth followed (Naughton 2007; Brandt and Rawski 2008). Incomes rose rapidly in the countryside during the early agricultural stages of reform, which narrowed the gap between rural and urban household consumption. From the mid 1980s, the rural–urban gap again widened from a ratio of 2.2 in 1983–5 to highs greater than 3.5 for most years after 1995 (NSB various years). In the early 1980s, the Gini Coefficient1 measure of inequality was 0.16 for urban households and 0.21 for rural households, with an overall urban–rural coefficient

40 Stephen L. Morgan and Fang Su of 0.28; by the mid-to-late 1990s, the coefficients had increased to 0.35 to 0.4 or higher (Khan and Riskin 1998; World Bank 1997; UNDP 2005). Recent locallevel studies have reported Gini ratios greater than 0.5 (Zhou et al. 2008), though the rural–urban household consumption ratio has trended downwards since 2004 (NSB 2007). Many analyses have shown that East China is more open, has developed more quickly, and has become richer than the Central and Western regions in terms of per capita GDP income since 1970 (e.g. Yao 2005). Although growing disparities are a worry for the Chinese government, different endowments in natural resources, labour, capital and market development mean that no two regions possess equal capacity for growth. Increased inequalities were to be expected with market reforms. Numerous studies of rural China reveal that education not only promotes productivity on the farm, but also improves people’s abilities to exploit new opportunities in both rural and urban sectors (Yang 2004; Heckman 2005). We have seen an increase in returns on education and capital, which in general means higher incomes for those in urban areas or, in the countryside for those with better education or capital resources, such as local-level party officials and their relatives (Zhou et al. 2008). Across China there are huge discrepancies in income, education and literacy, life expectancy and mortality, and nutrition as measured by attained human stature. Based on the division of China into three economic regions,2 namely the Eastern, Central and Western regions, Table 3.1 summarizes some of these inequalities at the provincial level. China is the world in microcosm. For example, the differences in life expectancy range from a level similar to those in low-income economies, of around 65 years such as in Guizhou and Yunnan provinces, to a level on par with high-income economies, around 78 years or more, such as in Beijing and Shanghai (World Bank 2007). The three provincial-level municipal cities of Beijing, Tianjin and Shanghai in the Eastern region are exceptional in all measures. They are the smallest in terms of population; the most urbanized, the richest in terms of per capita income, and have the greatest longevity (Table 3.1). They also have the most highly educated population and with the smallest household size. The contrast with Tibet, Guizhou and Yunnan in the Western region is huge, where urbanization is about one-third of those eastern cities, income is one-third to one-quarter, and life expectancy is lower by ten years or more. Regional-level averages for life expectancy (Table 3.1) and schooling (Table 3.2) show that in the Eastern region the population attained 74.7 years of life expectancy and 8.2 years of schooling, compared with 72.7 years life expectancy and 7.9 years of schooling in the Central region, while in the Western region the attained life expectancy was 70.4 years, and the number of years of schooling was 7.2 years, which was between 40 and 60 per cent less than in the East. Analysis of regional inequalities is influenced by the preferred method to aggregate provinces, the common geographic unit for regional analysis. From the mid 1980s, Chinese planners have used a three-zone model comprising East, Central and West China (Linge and Forbes 1990; Fan and Sun 2008). This approach captures

Table 3.1 Selected provincial socio-economic indicators, 2005. 2005

Population Urbanization Per level capita income2 million

%

506.1

53.3

9,023

Beijing

15.4

83.6

Tianjin

10.4

Shanghai

Urban– Per rural capita ratio3 GRP 4 yuan

years

2.9

23,412

74.7

15,962

2.5

45,444

76.9

75.1

10,882

2.6

35,783

76.0

17.8

89.1

17,511

2.1

51,474

79.1

Hebei

68.5

37.7

5,602

3.2

14,782

72.6

Liaoning

42.2

58.7

6,870

2.7

18,983

74.4

Jiangsu

74.8

50.1

8,805

2.4

24,560

75.6

Zhejiang

49.0

56.0

12,058

2.6

27,703

75.1

Fujian

35.4

47.3

8,174

2.8

18,646

74.3

Shandong

92.5

45.0

6,997

3.1

20,096

74.0

Guangdong

91.9

60.7

10,806

3.5

24,435

75.0

8.3

45.2

5,318

2.8

10,871

75.8

417.4

39.1

5,234

3.2

11,135

72.7

Anhui

61.2

35.5

4,710

3.3

8,675

73.0

Shanxi

33.6

42.1

5,427

3.3

12,495

72.2

Jilin

27.2

52.5

6,114

3.1

13,348

73.3

Heilongjiang

38.2

53.1

5,903

2.9

14,434

74.3

Jiangxi

43.1

37.0

5,160

2.8

9,440

70.2

Henan

93.8

30.7

4,647

3.4

11,346

73.0

Hubei

57.1

43.2

5,555

3.2

11,431

72.7

Hunan

63.3

37.0

5,488

3.0

10,426

72.6

West

359.8

34.6

4,594

3.7

9,324

70.4

Inn Mongolia

23.9

47.2

5,891

2.9

16,331

70.7

Guangxi

46.6

33.6

4,778

3.0

8,788

73.6

Chongqing

28.0

45.2

6,169

3.5

10,982

72.0

Sichuan

82.1

33.0

4,645

3.1

9,060

71.9

Guizhou

37.3

26.9

3,563

4.8

5,052

66.6

East1

Hainan Central

yuan

Longevity

(continued)

42 Stephen L. Morgan and Fang Su 2005

Yunnan

Population Urbanization Per level capita income2

Urban– Per rural capita ratio3 GRP 4

Longevity

44.5

29.5

4,173

4.3

7,835

66.4

2.8

26.7

4,049

5.9

9,114

65.8

Shaanxi

37.2

37.2

4,368

4.1

9,899

71.1

Gansu

25.9

30.0

3,813

4.1

7,477

68.8

Qinghai

5.4

39.3

4,469

3.6

10,045

68.8

Ningxia

6.0

42.3

4,874

3.4

10,239

72.0

Xinjiang

20.1

37.2

4,528

3.9

13,108

72.3

Tibet

Source: NSB, 2006 and UNDP, 2008. Notes: 1. Inner Mongolia and Guangxi were reclassified into the Western region in 2001. The summary data shown for each region is the populated-weighted mean of the variable. http://www.stats.gov.cn/tjsj/ ndsj/2006/indexch.htm 2. Per capita income is the rural–urban populated-weight mean of the per capita urban income and the per capita net rural income for 2005 from NBS (2006) Tables 10.15 and 10.22. 3. Urban–rural household consumption ratio (rural = 1) from NBS (2006) Table 3.18. 4. Per capita gross regional product (GRO) 2005 from NBS (2006) Table 3.9.

well the effects of China’s opening up, in which foreign direct investment (FDI) and trade development has fanned out from coastal China to the inland provinces. The East-Coastal region is the most open and technologically advanced zone, attracts the lion’s share of FDI, and contains China’s leading cities. But this model masks large North–South differences and does not reflect the economic geography that underpins agriculture and the spatial organization of China. This is evident in the anomaly of including Guangxi in the Eastern region – and Inner Mongolia in the Central region – when both had a GDP per capita equivalent to the average level of the Western region provinces. In 2001, the Ninth People’s Congress programme for the development of the Western region reclassified Inner Mongolia and Guangxi into the Western region in order to offer them the preferential policies on economic growth (Xinhuanet 2005). Chinese planners have recently adopted a modified fourregion model, which hives off the three northeast provinces as a separate region (Fan and Sun 2008).3 Another issue in any regional classification is the classification of the municipallevel provinces of Beijing, Tianjin, Shanghai and Chongqing that were carved out of the adjoining provinces. Beijing – and to a lesser extent Tianjin and Shanghai – had a privileged position under the planned economy. They are now predominantly urban as their rural hinterland counties over the past three decades have become dormitory suburbs, the fields turned into new towns or industrial districts. Although not ideal, for comparative purposes we retain these municipalities as part of the East region in the East-Central-West model, which is common practice in most discussion of regional differences in China, except where we otherwise indicate that we have moved them into a separate metropolitan group.4

Regional inequalities in China 43

Education and literacy Education and literacy levels, which are central to the human capital literature, are closely associated with economic development. Human capital plays a significant role in facilitating economic growth, and also in international technology diffusion (Barro 1991; Barro and Lee 1993; Chow 2005; Yao and Wei 2006). From the 1960s scholars began to include education into accounts of modern economic growth (Becker 1964). Better education among the population creates more opportunities to earn higher income in the labour market, increases their productivity, and enhances national or regional economic capacity (Schultz 1971; Becker 1975; Moock and Addou 1994; Asteriou and Agiomirgianakis 2001; Tsang 2002; Yao, Zhang and Feng 2005). When analysing the impact of education on total factor productivity in China’s regions, Fleisher and Chen (1997) found that the low level of education in inland areas had thwarted the investment. Higher levels of human capital in East China have been attractive for foreign investors since the 1980s. Other things being equal, as a consequence investment between regions in China has been unbalanced, which has had a negative impact on the return to physical capital, the absorption of advanced technology that might bring productivity gains, and the overall level of regional economic development. High income countries or regions have high levels of literacy compared with those of lower income. They typically invest more in schooling, which enhances education-based human capital and creates larger stocks of human capital. The most commonly used specification of the stock of human capital is the average years of attained schooling (AYOS) (Ludger 2003). In this paper, AYOS involves four levels of education: primary, junior and senior secondary schooling, and higher education. Past studies have found different levels of schooling differentiate educational status, which will influence an individual’s opportunities in the labour market. Each additional year of schooling – ignoring issues of quality for the moment – does not equally increase the stock of human capital (Mulligan and Sala-i-Martin 2000). Therefore, the years of schooling that have been accumulated should be weighted differently according to the variety of education levels (Ludger 2003). The weighted values of AYOS in this paper are estimated for the population aged 6 years and above who have completed various educational levels from primary school to higher education using the formula: YAYOS =

∑ (6 * POP

Stu.pri.

+ 9 * POPStu.jun. + 12 * POPStuu.sen. + 16 * POPStu.he. ) POPstu.tot.

The weighted AYOS is the sum of the years of those who have completed primary (6 years: POPstu.pri.), junior secondary school (9 years: POPstu.jun), senior secondary school (12 years: POPstu.sen) and higher education (16 years: POPstu.he) divided by the population of the sum of the four groups (POPstu.tot). Drawing on literacy and schooling data from the official Chinese statistics and the World Bank, we examine regional inequalities with an overview of human capital in each province in 1990 and 2005 in Table 3.2. It displays the provincial illiteracy

Table 3.2 Provincial human capital indicator, 1990 and 2005. Illiteracy rate (%)

Year of schooling (years)

1990

2005

Change

1990

2005

Change

Beijing

10.9

3.9

–7.0

8.0

10.7

2.7

Shanghai

13.5

5.2

–8.3

7.7

10.0

2.3

Tianjin

11.6

4.8

–6.8

7.3

9.5

2.2

Liaoning

11.5

4.8

–6.7

7.1

8.7

1.6

Jilin

14.3

5.9

–8.5

6.8

8.5

1.7

Heilongjiang

14.9

6.2

–8.7

6.8

8.5

1.7

Shanxi

15.8

5.6

–10.2

6.7

8.4

1.7

Guangdong

15.1

6.0

–9.1

6.5

8.4

1.9

Hebei

21.6

7.2

–14.4

6.1

8.2

2.1

Inner Mongolia

21.7

11.3

–10.5

6.2

8.2

2.0

Xinjiang

19.5

8.3

–11.2

6.2

8.2

2.0

Jiangsu

22.7

10.0

–12.7

6.2

8.1

1.9

Hainan

21.2

9.8

–11.4

6.2

8.1

1.9

Shaanxi

25.1

10.3

–14.8

6.1

8.1

2.0

Henan

23.1

9.8

–13.3

6.1

8.0

1.9

Hunan

17.0

8.6

–8.4

6.3

8.0

1.7

Hubei

22.3

12.1

–10.2

6.2

7.8

1.6

Shandong

23.0

12.4

–10.6

6.0

7.7

1.7

Guangxi

16.3

8.6

–7.7

6.1

7.7

1.6

Zhejiang

23.0

12.0

–11.1

5.9

7.6

1.7

Fujian

23.2

12.9

–10.3

5.7

7.5

1.8

Jiangxi

24.1

10.5

–13.6

5.7

7.5

1.8

Chongqing

21.3

11.7

–9.7

5.8

7.4

1.6

Ningxia

33.5

18.7

–14.8

5.3

7.4

2.1

Anhui

34.4

19.2

–15.2

5.1

7.0

1.9

Gansu

39.2

20.8

–18.4

5.0

6.9

1.9

Sichuan

21.3

16.6

–4.7

5.8

6.8

1.0

Qinghai

40.0

24.1

–15.9

4.7

6.8

2.1

Regional inequalities in China 45 Illiteracy rate (%)

Year of schooling (years)

1990

2005

Change

1990

2005

Change

Guizhou

36.7

21.4

–15.3

4.6

6.4

1.8

Yunnan

37.5

20.1

–17.4

4.4

6.4

2.0

Sources: NBS, 1993 and NBS, 2006. Notes: 1. Tibet is excluded (in official statistics it is part of the Western region). 2. The table is rank ordered in terms of the total years of schooling in 2005.

rate and years of schooling in these two years according to the descending years of schooling in 2005. A nationwide positive improvement is clear. The literacy rate indicates the general breadth of education and AYOS. Illiteracy rates have declined markedly over the 15 years, though the size of the change and the absolute level of illiteracy varies greatly between provinces. The improvement has been largest for provinces with the highest illiteracy, such as Gansu where the illiteracy rate was reduced 18.4 percentage points, though the absolute level of illiteracy in 2005 was 20.8 per cent, which is more than five times Beijing’s level of 3.9 per cent. The East region – especially Beijing, Shanghai and Tianjin – has far lower illiteracy levels than the poorer West where development of education has been slower. Similar to the illiteracy rate, the average years of schooling shows strong improvement of about two years for most provinces between the two periods, though once again the absolute difference is large. The relative gap in the years of attained schooling has widened. For instance, people in Beijing had an average of 3.6 years more schooling in 1990 than those in Yunnan, yet the gap had increased to 4.3 years in 2005, with 10.7 years in Beijing compared with 6.4 years in Yunnan. Despite policies aimed at improving social and economic opportunities in the inland regions, access to education across provinces has seemingly become relatively worse over time. Central and local government investment in education affects the breadth and depth of education and the distribution of educational resources. In 1990, Chinese government spending on education was 2.49 per cent of GDP (Rong and Shi 2001), which had slightly increased to 2.82 per cent of GDP by 2005 (Xinhuanet 2006). Despite more favourable recent policies, the investment in education has lagged behind. Richer provinces tend to produce more educated people than do poorer provinces (Zhao 2009); investment in education is inequitably and inefficiently distributed across regions and between rural and urban areas within the region; and different resource constraints between provinces and region affect the level of schooling attainment, especially in rural and remote areas (Heckman 2005). In general, the uneven distribution of school resources among the three regions explains the disparities in education. Regional disparities have worsened (Cai, Wang and Du 2005). In part, this can be attributed to the decentralization of the education budget (Lin and Zhang 2006). Provinces in the less developed regions have fewer school resources compared with those in developed regions. The lack

46 Stephen L. Morgan and Fang Su of financial resources has been reported to increase the dropout rate, which further exacerbates inequalities (Rosen 2004). Students from the poorer rural areas also face intensive competition for places at the post-primary educational level within and across regions (Thogerson 2000; Gu 2000; Zhang 2002; Heckman 2005; Cai, Wang and Qu 2009). Competitive pressures to win places and excel at school are also reported to have had psychological and health consequences on many young people from rural areas, with long-term implications for their productivity as adults (Zhang 2002).

Life expectancy Health status is a crucial indicator for the potential development of developing countries (Bhargava et al. 2001). It is the foundation of a population’s potential productivity. Strauss and Thomas (1998) argued that health status can explain variation in wages and income at least as much as education. Healthier workers are more productive because of greater vigour, strength, attentiveness, stamina, creativity and endurance. Healthier workers are also better able to produce private, corporate and state gains from their increased productivity, thus health is a dimension of human capital that positively affects long-run economic growth (Howitt 2005). Life expectancy at birth (LEAB) is one of the most intuitive and simple measures of human well-being and relative health status.5 Differences in life expectancy over time and across regions are powerful indicators of the differences in the quality of life and a measure of the inequality in the distribution of resources that contribute to longevity. Improved longevity is the result of many factors, such as better living and working conditions, maternal and preventative medical care, education and learning opportunities, and increasing income. For these reasons a higher life expectancy is positively correlated with economic growth (Kalemli-Ozcan 2002; Sala-i-Martin et al. 2004; Michael et al. 2004; Moav 2005; Cervellati and Sunde 2005; Socares 2005; Tamura 2006). According to the World Bank (2007), the average LEAB was 79 years in high-income countries but only 65 years in low-income countries. Over the past century, LEAB has made great advances around the world. Improved longevity is associated with investment in health, reduction in poverty and greater social wealth. Disparities in life expectancy reflect disparities in the accumulation of and investment in human capital. In a study involving 92 countries, Amparo and Rafael (2006) found a higher life expectancy had a significantly positive influence on human capital accumulation, while countries with higher levels of human capital inequality have a lower life expectancy. In 1990, the average life expectancy for Chinese people was ten years longer than the LEAB in other developing counties and was high relative to China’s then average per capita income. Figure 3.1 shows the provincial life expectancy in 1990 (NBS 1993) and 2005 (UNDP 2008). Most obvious is the huge absolute difference in LEAB among China’s provinces, which underscores the considerable inequalities in human welfare, health and income within China and variations in poverty levels (UNDP 2005; Shi, Yang and Jiang 2006). In 2005, Shanghai had an average LEAB of 79 years (Table 3.1), which was the average for the World Bank group

Regional inequalities in China 47 1990

2005

Life expectancy – years

80 78 76 74 72 70 68 66 64 62 60

Be

ijin Ti g an jin He In ne Sh bei r M an on xi g Lia olia on ing He ilo Jil ng in j Sh iang an g Jia hai n Zh gsu eji an g An h Fu ui ji Ji an Sh ang an xi do n He g na Hu n be Gu Hun i a n an gd Gu ong an g H xi Ch ain on an gq Si ing ch Gu uan izh Yu ou nn an Ti Sh bet aa n Ga xi Qi nsu ng h Ni ai ng Xi xia nji an g

58

Figure 3.1 A provincial life expectancy in 1990 and 2005. Sources: NBS, 1993 and UNDP, 2008. Note: The 1990 LEAB data are from the fourth national census. The 2005 data are estimates derived from data reported for 2005 in the China Human Development Report (2008), which differ slightly from 2000 LEAB in the fifth national census.

of high-income countries, whereas Yunnan at 66 years was at about the same level as the low-income group of countries (World Bank 2007). LEAB in the inland provinces is lower than in the coastal provinces; compared with the more developed and richer coastal provinces, the gap is frequently also larger. Nevertheless, these data for LEAB point to improvement in health status between 1990 and 2005 that have paralleled the increase in per capita income, improved education and better public health such as medical facilities (Li and Zhu, 2008), despite the huge variation between provinces. Improvements in health provision – such as health institutions and hospital sickbeds – between 1990 and 2005 should be noted. Table 3.3 shows that the number of health institutions has increased in all of the three regions. While the number of sickbeds and doctors per 10,000 people remained the same in the Central region, there was a slight decline in both the Eastern and Western regions. The significance of these shifts for welfare is difficult to interpret in the absence of information about the organization of the delivery of medical services, which have changed markedly over the period.6

Height and nutrition Height is a well-established measure of human welfare or the biological standard of living. At an individual level, the height of an adult (or a child at the time of measurement) is a product of the complex interaction between their genetic endowment and the living environment (Eveleth and Tanner 1990). While genes are

48 Stephen L. Morgan and Fang Su Table 3.3 Health institutions, sickbeds and doctors by region, 1990 and 2005. Per 10,000 persons

1990

2005

East

1.96

2.66

Central

1.57

2.07

West

2.10

3.08

East

2.7

2.9

Central

2.5

2.5

West

3.3

2.4

East

1.7

1.6

Central

1.4

1.4

West

1.7

1.4

Health institutions

Sickbeds

Doctors

Sources: NBS, 1991 and NBS, 2006.

important for differences between individuals, the average height of a population is determined primarily by the economic, disease and social environment (Steckel 1995, 2009). Height measures the net nutrition available for human growth at the time of measurement for a child or until adulthood, which can be thought of as an output measure of human growth conditioned on inputs, such as access to quality nutrition and a healthy environment. Over the past decade economists have increasingly turned to height data to measure a variety of economic growth and inequality issues (Steckel 2009). Height data have been fruitfully used to analyse both contemporary and past Chinese economic growth (Morgan, 2000, 2004 and 2009). The average height of a population is closely correlated with income (Steckel 1995). Further, differences in height between social groups, gender or across regions are an indicator of unequal distribution of resources available for human growth and well-being. Our height data are drawn from the 1985 and 2005 Chinese Children and Adolescent Health Survey (CCAHS 1988 and 2007), part of a series of largescale surveys of children and adolescent health conducted since 1979. The surveys measured ethnic Han Chinese children aged 7 to 22 years old, of both genders from both rural and urban backgrounds in every Chinese province.7 Although the Chinese Health and Nutrition Survey (CHNS) data are richer in detail, the provincial coverage and sample size per age group is far smaller (CHNS).8 As shown in Figure 3.2, the height-for-age of ethnic Han Chinese children had increased in the period between the 1985 and 2005 surveys. The average increase is quite large among younger age groups, in the order of 2 cm per decade between 1985 and

Regional inequalities in China 49 175 170 165

Height (cm)

160 155 150 145 140 135 130 125 120 115 7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

Ag e 2005-males

1985-males

2005-females

1985-females

Figure 3.2 National mean height-for-age of Chinese by gender, 1985 and 2005. Sources: CCAHS, 1988 and 2007.

2005, though the final adult group’s (20–22 years old group) attained height has increased a little more than 1 cm per decade. However, there are large provincial and regional differences in the attained mean height-for-age. Northern Chinese have long been taller and heavier than southern Chinese for reasons that are not entirely clear, though differences in income and diet explain some of the variance. Over the twentieth century the gap between the north and south in attained height has halved (Morgan 2009). For the regional analysis in this chapter we have used the 15-year-old group to examine inter-region variations in attained height in 1985 and 2005 as shown in Table 3.4. Large rural–urban and regional differences in mean height-for-age can be observed. Urban children are usually several centimetres taller than rural children. Secular change between the two periods is striking. The mean height of urban 15-year-old boys increased between 4.4 cm and 5.0 cm from 1985 to 2005, while their rural counterparts increased 5.5–6.7 cm. Among both urban and rural 15-year-old girls, the gain in average attained height was less, from 2.0 cm to 3.0 cm. Regional differences in 2005 were greater for boys than girls. The gap between the East and West regions was 3.1 cm for urban boys and 3.6 cm for rural boys, but for urban and rural girls the East–West gap was 2.5 cm and 2.6 cm respectively. While large rural–urban differences in mean height-for-age persist in 2005, the gap between urban and rural for boys has narrowed 1.5 cm over the two decades, from an average difference of 5.0 cm in 1985 to 3.4 cm in 2005 (Table 3.5). The gap in mean attained height for girls narrowed less than boys, by about half, with one exception. For girls in the West, the gap between rural girls and their urban sisters widened slightly, by just 0.1 cm, which in the context of economic growth over the past two decades point to substantive disadvantages being inflicted on girls (and women) in China’s poorer Western provinces. We can see a marked height

50 Stephen L. Morgan and Fang Su Table 3.4 Mean height of 15-year-old Chinese boys and girls by region (cm). Chinese boys 1985

2005

Change 1985–2005

Gap with East, 2005

East

166.6

171.0

4.4

Central

164.3

169.3

5.0

–1.6

West

163.4

167.8

4.5

–3.1

East

161.2

167.9

6.7

Central

159.4

165.8

6.4

–2.1

West

158.7

164.3

5.5

–3.6

Gap with East, 2005

Urban

Rural

Chinese girls 1985

2005

Change 1985–2005

East

158.0

160.4

2.4

Central

156.4

159.0

2.6

–1.4

West

155.9

157.9

2.0

–2.5

East

154.9

158.1

3.2

Central

153.9

157.2

3.4

–0.9

West

153.5

155.4

2.0

–2.6

Urban

Rural

Source: See Figure 3.2. Note: The regional means are population-weighted mean heights. The rounding to one decimal place explains any minor discrepancies in the change and gap estimates compared with the reported mean heights.

gradient from East to West in China, with the tallest children in the East and the shortest in the West. These differences point again to large welfare inequalities that we have already observed in the data for life expectancy.

Combined measures and discussion New economic growth theories emphasize human capital over physical capital and labour inputs. Human capital is a driving force of economic growth in a long term (Lucas 1988). In this paper, our measures of human capital include education (years of schooling and literacy) as well as health (proxied by longevity and

Regional inequalities in China 51 Table 3.5 Rural–urban differences in mean height for 15-year-olds (cm). Chinese boys 1985

2005

Change 1985–2005

East

–5.3

–3.1

2.2

Central

– 4.9

–3.5

1.4

West

– 4.7

–3.6

1.1

Average

–5.0

–3.4

1.6

Chinese girls 1985

2005

Change 1985–2005

East

–3.1

–2.3

0.8

Central

–2.5

–1.8

0.7

West

–2.4

–2.5

–0.1

Average

–2.7

–2.2

0.5

Source: See Figure 3.2. Note: The negative sign indicates the amount by which rural children were shorter than their urban counterparts. The positive sign for the change column indicates the extent of the narrowing of the difference between 1985 and 2005.

attained average height). Historically, economic growth and income have varied greatly among China’s provinces. In the past, this could be attributed to soil productivity when agriculture was the base of the economy. Regional disparities in per capita income in China today arise largely from the differences in the return to human capital accumulation between provinces and rank differences which parallel the per capita GDP differences between regions (Cai and Wang 2003; Luo and Zhu 2008). In this section we will examine briefly the interrelationship between our non-monetary measures of inequality, which are primary measures of human capital, and the level of income. Our preferred measure for income in this section is per capita gross regional product (GRP) rather than per capita household income.9 We first test the relationship between per capita GRP 2005 and our human capital variables.10 The relationship is log-linear as expected since each increment in income is associated with a diminishing increase in human capital. The same holds for per capita household income. In general, an increase in income at low levels is associated with a greater rise in years at school, LEAB and attained height than at higher incomes. The cross variable relationships are not necessarily linear (e.g. illiteracy and urbanization). Next we conduct a simple two-way regression of the log of per capita GRP against our variables of interest and plotted the fit for each. As can be seen from Figures 3.3 and 3.4, there is a high degree of fit, some more so than others. For the four panels in Figure 3.3, the R2 of the fitted line is respectively 0.8504 for urbanization (F = 159.6), 0.6765 for life expectancy at birth (F = 58.6), 0.6729

Legend for panels 95% Cl Fitted values East Central West Metro

8

8.5

9

9

9.5

10

10 10.5 11

11

52 Stephen L. Morgan and Fang Su

65

70

75

80

20

40

60

80

1 00

Urbanization 2005

8.5

8.5

9

9

9.5

9.5

10 10.5 11

10 10.5 11

Life expectancy at birth 2005

5

10

15

20

25

6

7

8

Literacy 2005

9

10

11

Years of schooling

10.5 11

11

10 9 8.5

9

160

162 Height of boys 1985

164

166

164

168 166 Height of boys 2005

170

172

Fitted values East Central West Metro

8.5

8.5

9

9

9.5

9.5

10

10.5

Fitted values East Central West Metro

10 10.5

162

11

11

158

Log per capita GRP 2005

Fitted values East Central West Metro

9.5

9.5

10 10.5

Fitted values East Central West Metro

8.5

Log per capita GRP 2005

Figure 3.3 Per capita Gross Regional Product (log) in relation to longevity, urbanization, illiteracy and years of schooling, 2005.

152

154 156 Height of girls 1985

158

154

156

158 Height of girls 2005

160

162

Figure 3.4 Matrix of the relationship between per capita GRP 2005 and heights of 15-year-old boys and girls in both 2005 and 1985.

for years of schooling (F = 57.6) and 0.44124 for illiteracy (F = 19.7). In other words, our variables account for 85 per cent to 44 per cent of the change in GRP. The degree of illiteracy as reported is a less strong indicator than school years or life expectancy. Average attained height is a strong indicator of the nutritional or health experience of a child (Steckel 1995, 2009). Figure 3.4 shows the clear gradient in average attained heights for 15-year-olds from the metropolitan city provinces,

Regional inequalities in China 53 whose children are exceptionally tall on average, to the shortest originating from the Western region provinces. The correlation with the log of per capita GRP is quite strong. The R2 for the 1985 heights (0.5875 for boys, F = 39.9, and 0.4548 for girls, F = 23.4) were only slightly less robust than those for 2005 heights (0.6286 for boys, F = 47.4 and 0.5493 for girls, F = 34.1). Once we add in dummy variables for the regions, the R2 increases to more than 0.8 for both 1985 and 2005 height variables. Although our selected human capital variables are strongly correlated with GRP, they do not lend themselves well to inclusion in a simple OLS growth regression, which is beyond the scope of the paper and for that reason we have not done so in this paper.11 Our study of non-monetary indicators of inequality – education, life expectancy and attained height – identifies huge gaps in these measures of human welfare, which persist despite the huge strides in economic development over the past three decades and the positive gains to many poorer Chinese in higher income and a better quality of life. As many authors have noted, the Eastern region has enjoyed advantages that stem from economic policies that favoured the development of coastal area over the inland areas and advantages that reflect geographic and historical developments over the long run (Brandt and Rawski 2008; Cai, Wang and Du 2005; Cai, Wang and Qu 2009; Luo and Zhu 2008). The problem is not that the inland Central and Western regions have performed poorly, but that growth in the coastal provinces has been exceptional. As Luo and Zhu (2008) observed, per capita rural income in coastal areas has increased three-fold between 1989 and 2004 compared with two-fold for inland rural areas. Much of that growth difference can be attributed to the higher return to education in the Eastern region than in the inland. It is this difference in the return to human capital that has driven the increase in disparities between regions in the most recent decade (Luo and Zhu 2008). The increase in the gap between the regions might well be an inevitable and positive consequence of early economic growth – the so-called Kuznet inverted-U where inequality increases before it begin to decline at a higher levels of development. Nevertheless, the size of the gap and the perception of growing inequalities is a major policy issue for the Communist Party (Yao and Morgan 2008). Reforms to the labour market would help, such as further unwinding the archaic household registration (hukou) system that constrains migration, which would promote redistribution via wage convergence. Additional school fees imposed on rural migrant families in coastal cities (Li 2002; Heckman 2005), for example, is in effect a regressive tax on the mobile poor. Removing distortions arising from the hukou would also have a positive effect on attracting and retaining professionals in interior provinces were general salary levels to rise. This in turn would be beneficial to improving human capital and the quality of life through the provision of health and education services in these provinces. Certainly the huge gap in the quality of life as measured by LEAB and attained height are unlikely to be narrowed quickly without improvements in services that might foster better welfare in the Central and Western regions. These differences in health and education are the result of long-standing regional imbalances that economic growth alone has not addressed, despite the real benefits and improvements in the standard of living of the Chinese over the past three decades

54 Stephen L. Morgan and Fang Su (Anand and Ravallion 1993; Psacharopoulos 1994; Hojman 1996; and Bidani and Ravallion 1997, Gupta et al. 2002; Baldacci et al. 2004). Improving the level of education in poorer regions would increase an individual’s productivity, with social and private returns (Topel 1999; Du and Wang 2004), as indeed would also raising the level of nutrition and health in China’s poor regions (Zhang 2001).

Conclusion In this chapter we explored the change in selected non-monetary measures of human welfare: education, life expectancy and nutritional status (attained height). Our motivation was that conventional measures of inequality such as per capita income only capture part of the change in human welfare. Over the past three decades the Chinese have become much richer. They also are better educated, live longer and on average much taller, reflecting improved nutrition and health. But those living in the Eastern provinces have seen more rapid improvements in their standard of living and well-being than those in the less developed Central and Western provinces. Regional disparities have generally widened, especially since the late 1980s, by whichever measure we use, whether per capita income or components of human capital. A substantive reason for increased disparities is that the Eastern region has developed faster than the Central and Western regions. Part of this reflects historical advantages – the Eastern region was more developed before economic reforms began – and deliberate policies to promote development in the coastal areas before the inland regions. This process is nothing more than a ‘trickle-down’ development policy seen in other parts of the world, but it sits uneasily with Chinese state ideologies that profess a concern for balance and equality, most recently couched in terms of building a ‘harmonious’ society (Yao and Morgan 2008). Policies to promote economic growth in Central and Western regions have not closed the gap with the coastal areas. In the long run, economic development may eventually lead to redistribution as markets become more integrated and institutional constraints are removed. In the short term, though, China faces huge inequalities that are as great within China as between the rich and the poor countries of the world. Life expectancy is one such example we have highlighted. Improvements in such health and welfare measures, in which China successfully made huge advances during the first three decades of the PRC, should once again be a focus of development policy if the country is to achieve a more balanced and sustainable future that maximizes the welfare of all its citizens.

Notes 1 The Gini Coefficient ranges from zero (absolute equality) to one (absolute inequality). Sometimes the coefficient is multiplied by 100 to convert it to a 1–100 scale (e.g. World Bank 1997). 2 The Eastern region includes Beijing, Shanghai, Liaoning, Tianjin, Shandong, Hebei, Jiangsu, Zhejiang, Fujian and Guangdong; the Central region includes Heilongjiang, Jilin, Shanxi, Henan, Anhui, Hubei, Hunan and Jiangxi; and the Western region includes Xinjiang, Inner Mongolia, Ningxia, Shaanxi, Qinghai, Gansu, Tibet, Sichuan, Chongqing, Yunnan, Guizhou and Guangxi. This classification places Guangxi in the West, though

Regional inequalities in China 55

3

4 5 6

7 8

9

10 11

from the mid 1980s until the early 2000s the official three-region schema included Guangxi in the East, despite its low level of development and lack of ocean ports. An alternative that accounts for China geographic variation is a seven-zone model, which is derived from the Skinner physiographic macro-region division of China (Skinner 1964), and which can be compressed into three broad zones of North, Central-East and South China. This division better reflects the climatic-geographical constraints that have long influenced agriculture, the foundation of past economic growth, and the spatial distribution of cities. Tibet, which is part of the Western region, is excluded from our analysis because its low level of development and ethnic minority status makes it an outlier compared with other provinces. LEAB is defined as the number of years a newborn infant would live if prevailing patterns of mortality at the time of birth were to remain the same throughout its life. Shifts in surgical practices, for example, could reduce the need for hospital beds while increasing the access to surgery. In many countries procedures that once required an overnight stay are now routinely performed as day surgery, leaving beds only for the acutely ill. The sampling procedure, age- and province-group sample sizes, and questions of urban– rural biases are discussed in Morgan (2000). The Chinese Health and Nutrition Survey (CHNS), which is conducted by the North Caroline Population Centre in collaboration with the Chinese Center for Disease Control and Prevention, is similar to the Chinese household consumption surveys and includes details on health, income, education and more of all family members. It therefore enables sophisticated multivariable analysis of health and nutrition, as well as the tracking of subjects between surveys, but the data coverage is limited. The total population sampled per CHNS is less than the sample for a single province from the Chinese Children and Adolescent Health Survey and coverage is limited to nine provinces of China. See their website for more detail (CHNS). Per capita personal income reported in Table 3.1 is a populated weighted estimate of the per capital household income derived from the separate rural and urban per capita household consumption, as noted in the table. The per capita GRP is the gross regional product divided by population, that is, provincial-level GDP, which is the more commonly used indicator for income in discussion of regional income disparities. Both are linearly related to each other. The correlations matrix is available on request from the authors. A common problem with many forms of growth regressions is that the variables are frequently endogenously determined in both an economic and technical sense. For example, variables such as income and longevity or income and height are strong correlated but are likely to be jointly determined by another variable, such that even a robust statistical result is not all that informative about the determinants of growth (and inequality) that we are interested in exploring. See Durlauf, Johnson and Temple (2005).

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4

Low-carbon China The role of international collaboration David Tyfield and James Wilsdon

Introduction Climate change from global warming is amongst the gravest challenges confronting the world. As a huge country undergoing unprecedented economic growth, China’s contribution is crucial to global efforts to tackle climate change. A major part of this contribution will be developments in ‘low-carbon innovation’, which reduces the greenhouse gas (GHG) emissions of socio-economic activity. Climate change is not merely ecological, but also a social problem, hence requiring a complex systems perspective (Rial et al. 2004). The socio-political challenge of climate change and of low-carbon innovation is to move from high-carbon to sustainable, low-carbon socio-economic systems – that can continue to offer attractive ways of life beyond the low-carbon shift – on a global scale and within the stringent time constraints. Undoubtedly, China has enormous environmental challenges, but it is making important strides in low-carbon innovation (Climate Group 2008). This progress, however, is both patchy and highly uncertain, making a single definitive statement on current prospects for low-carbon innovation in China extremely difficult. The political nature of this process is immediately apparent for one pre-eminent (and highly uncertain) factor conditioning the development of low-carbon innovation in China is the strained geopolitical negotiations regarding a global agreement on climate change to follow the Kyoto Protocol. On the one hand, the commitment of China’s central government to tackle climate change is compromised by its (understandable) demand that the global North makes significant strides first, seeing as the aggregated concentrations of GHGs remains overwhelmingly their responsibility. Conversely, governments in the global North respond that, since China now has the highest overall GHG emissions, which are set to continue to grow rapidly (International Energy Authority [IEA] 2007), they cannot commit to a global deal without China. These positions spell deadlock, while time is too short to delay action further. Against this positioning, we note that the goal of this global, political problem is a sociotechnical low-carbon transition that no country has yet made – a point that is too often simply overlooked – and one that will take many decades to achieve. Accordingly we argue that a low-carbon shift depends upon a global politics in which there is mutual benefit at the level of individual nation-states, their societies

Low-carbon China

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and economies. The challenge of international collaboration in low-carbon innovation is thus best understood as the joint global setting of the sociotechnical trajectory that effects a low-carbon systems transition in a way that is sensitive to individual countries’ socio-economic needs and capabilities. The way forward is thus neither continuation of the status quo ante, with a dominant global North trying to go it alone (hence ‘joint global’), nor a one-off jamboree of ‘technology transfer’ handouts from the North to developing countries like China, as if this is all that is needed to achieve a global solution (hence, ‘setting’ versus following an already established path). In this context, international collaboration in research and innovation has begun to receive attention and is often seen as crucial to the global effort against climate change. The rhetoric of ‘international collaboration’ has become even more marked in the wake of the current global economic crisis. Such collaboration is important to enable and expedite the improvement of Chinese domestic capacity for lowcarbon innovation. ‘International collaboration’, however, is a vague term with numerous interpretations. To formulate policies to support international collaboration that would contribute to a global low-carbon transition we need to understand the differences between various forms of collaboration and between the ensuing diverse and many-levelled effects. While the goal must be to reduce China’s (and the world’s) GHG emissions as quickly and enduringly as possible, international collaboration policy needs to take account of the socio-political dimensions (over several decades) of a low-carbon shift if it is to be successful. This chapter focuses on the complexity of these issues and highlights an issue of particular importance for international collaboration with China, namely incubation of domestic innovation capacity.

China and climate change Climate change is now the urgent global problem. The latest report of the Intergovernmental Panel on Climate Change concluded that average temperatures are likely to rise by 4 ˚C this century as the direct result of human action. The impact will produce food and water shortages, extreme weather events, the displacement of hundreds of millions of people and the loss of numerous species (IPCC 2007). In the past five years, China’s contribution to global warming has come under increasing scrutiny. China’s rapid economic development is the primary cause of its environmental impact. While this growth has lifted more than 200 million people out of poverty, the environmental cost has been large. The head of China’s (then) State Environmental Protection Agency (SEPA), Pan Yue, stated in 2005 that ‘the economic miracle will end soon because the environment can no longer keep up’.1 China is also now the world’s largest absolute emitter of GHGs. Its cumulative emissions since 1960 are approaching those of a small but highly industrialized economy like Australia, though its per capita emissions remain relatively low (Figures 4.1 and 4.2) (Wang and Watson 2007). The IEA (2007) reports that China is an ‘emerging giant’ of the international energy market but that unfettered growth

62 David Tyfield and James Wilsdon

Figure 4.1 Greenhouse gas emissions per capita 2005 (t CO2 equivalent/person). Sources: Authors’ calculation based on UNFCCC (2006) and UN (2006).

Figure 4.2 Comparative cumulative GHG emissions per capita (India = 1). Sources: Authors’ calculation based on Wang (2007) and UN (2006).

of its energy demand is ‘alarming’. Indeed, if the EU meets its current reduction targets and China continues to grow at its present rates, even Chinese per capita GHG emissions will be twice those of Europe as early as 2020 (Climate Group 2008).

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Numerous factors have contributed to China’s increased GHG emissions. In energy, the primary source of emissions is industry, as economic growth has taken the route of heavy industrialization. Admittedly this includes much manufacturing expressly for export, which is effectively an offshored form of the energy consumption of the global North (NEF 2007). This fact must also be borne in mind when comparing the energy inefficiency of China’s industry to that of other countries in terms of GHG emissions per unit of GDP: a more reasonable basis of comparison would be GHG emissions per unit of industrial GDP. Yet even on this revised calculation, China’s energy consumption is comparatively inefficient (see Figure 4.3). In transport, a process of urbanization without precedent in human history and a massive increase in car use are singular problems facing China (Gallagher 2006; Zhao 2006). Indeed, on one calculation, if China were to have the same density of cars as that of the US today, it would mean 50 per cent more vehicles than the entire worldwide car fleet in 2003 (Girardet 2004). Climate change, however, is not just a question of fossil fuel emissions. In agriculture and land use China also faces some severe problems, including land shortages from urbanization, over-fertilization, over-grazing, burning of straw and land degradation, all of which threaten biodiversity and increase the carbon footprint of agriculture (Pearce 2007). China is also vulnerable to climate change: in brief, to drought in the North and flood in the South (Zhang et al. 2006). The country has already experience 21 consecutive warm winters from 1986–2006 (GEI 2009). Furthermore, with over 60 per cent of the population still resident in rural areas, these environmental changes will hit hardest a huge and politically explosive section of Chinese society. A forewarning of the political repercussions of such developments is already apparent, with

Figure 4.3 GHG/GDP efficiency, 2006 (t CO2 equivalent/US$1M). Sources: Authors’ calculation based on UNFCCC (2006), USDA (2007) and Photius (2006).

64 David Tyfield and James Wilsdon environmental problems contributing significantly to the extraordinary growth of protests (Pan 2005). The cruel irony, however, is that these environmental problems are being created by the very process of development that has proven so successful economically over the past 30 years and the continuation of which the Chinese government considers to be equally crucial to political stability. In short, China cannot and must not be forced to choose between socio-economic development and the environment. Taken together, all these issues put China at the heart of the inseparable issues of climate change, development and the global economic order and make it something of a crucible for the profound social and political changes these issues entail. It is encouraging that China’s government is increasingly taking environmental issues seriously. This can be seen in: new legislation regarding climate change, energy efficiency, renewable energy and fuel efficiency in cars; the upgrading of SEPA to Ministry level; as well as in the slogans which set the agenda for government, of ‘sustainable economy’, ‘harmonious society’ and ‘scientific development’. In June 2007, the State Council announced China’s national climate change programme and set up a ‘National Leading Group’ on climate change, energy conservation and pollution control, headed by Wen Jiabao. A climate change White Paper was also published in October 2008, though this includes a number of re-packaged measures on pressing domestic problems such as national fuel security and air pollution (GEI 2009). Major problems of implementation remain, in particular of central government policy at the local level where demands of economic growth continue to trump environmental concerns and where there is little legal redress against those caught violating the law. China’s leadership, however, increasingly recognizes that it is in China’s national self-interest to embark as a matter of urgency upon the transition from a high to low-carbon society. This, however, will require new and sustained forms of low-carbon innovation.

Defining low-carbon innovation and the importance of China Carbon use is embedded into everyday life. If China (like all countries) is to reduce its carbon emissions drastically, greater value must be placed on carbon, and rewards given to those who reduce its use. Different ways of building, travelling and shopping must be developed, and innovators must emerge who can develop successful alternative products, services and business models.2 Much will depend on the broader health and dynamism of China’s innovation system. The central policy platform for innovation in China is the 2006 15-year Medium- to Long-term Plan for the Development of Science and Technology, which sets out the explicit goal of making China a global leader in science and innovation by 2020. While China has long been established as a location for low-cost manufacturing, it is now making a concerted effort to move ‘up the innovation value chain’ and to develop ‘indigenous innovation’ (zizhu chuangxin, 自主创新). Since 1999, its spending on research and development (R&D) has increased by more than 20 per cent each year and the ambitious 15-year plan aims to boost investment to

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2.5 per cent of GDP by 2020. As such, while the development of China’s science, technology and innovation (STI) capacities started from very humble beginnings in the late 1970s, the high levels of investment are yielding significant results, as reflected in recent scientific publications and citations, patents and flows of multinational R&D, the rising profile of Chinese research universities and institutes and a staggering outflow of graduates in science, engineering and maths.3 A recent survey by the OECD (2007) concludes that ‘there can be no doubt that China is now a major R&D player’. Significant problems and constraints remain and at many levels, however, including in low-carbon innovation. First, while many of the statistics are indeed impressive in absolute terms, the sheer size of China renders such figures something of a ‘hall of mirrors’, with per capita concentrations still modest (Leadbeater and Wilsdon 2007). Second, numerous weaknesses remain, including an educational culture of rote-learning that discourages independent exploration and critical thought, access to venture capital finance, and poor connections both between academia and business and amongst academic institutions, which are often still jealously guarded fiefdoms suspicious of others.4 Most important, though, are the historical weakness of business’s interest in innovation and a lack of policies to incentivize low-carbon innovation by making high-carbon options economically unattractive (see below). In this context, it may seem that the prospects for tackling climate change are not bright. But China does have great potential for breakthroughs in low-carbon innovation, as it has already shown in the growth of the past three decades. China has a huge domestic market, which easily provides the critical mass needed to roll out new products and services, including low-carbon innovations. The forecasts of economic growth in China also present a singular opportunity to shape what form that growth takes. Third, China remains relatively unencumbered by some infrastructures and socio-economic structures, such as the car system (Dennis and Urry 2009) (though this lessens by the day). This potentially spares China from the paralysis of sociotechnical ‘lock-in’, where a particular technology is so embedded in a society that it is difficult to overcome, and conversely opens up the possibility of ‘leapfrogging’ to more sustainable economic model, bypassing altogether familiar and ecologically destructive stages of socio-economic development (Gallagher 2006). The question thus becomes whether and how China can lead the necessary global shift through low-carbon innovation. Taking a social systems perspective, though, ‘low-carbon innovation’ is not limited to improved efficiency of GHG emissions. Rather, it refers to any socioeconomic change that contributes to building a social system with low (or even zero) net consumption of carboniferous resources. Such a systems perspective also resonates with the literature on innovation, which recognizes that innovation is not just about technology but a matter of the development of socio-technical systems and hence the setting of socio-technical trajectories (Smith et al. 2005). Innovation, on this definition, thus includes not only hi-tech innovation (whether radical or incremental) but also wider forms of innovation, such as low-technology and social interventions (Willis et al. 2007).

66 David Tyfield and James Wilsdon Limiting low-carbon innovation only to hi-tech ‘solutions’ not only unnecessarily excludes other important contributions to the low-carbon shift. As such hi-tech projects are usually premised on existing social systems, it also excludes the specific forms of ‘disruptive’ innovation that have the potential cumulatively to produce the broader social systemic changes that are needed (Willis et al. 2007). Furthermore, in placing all hopes for low-carbon society on technology alone, this approach ignores the complexity of the social response to, and effects of, introducing technologies, with potentially unwelcome unintended consequences. Finally, given that innovation concerns numerous possible trajectories of sociotechnical change, this raises not merely quantitative but also qualitative questions of ‘which direction?’, ‘says who?’ and ‘why?’ When set aside a number of facts, this effects a dramatic change in perspective to those currently motivating global climate change negotiations. First, no country – in the global South or the global North – has yet achieved a low-carbon society yet all depend upon such a global shift. As such, the issue is one of setting or establishing a low-carbon trajectory, not following an existing precedent. Second, the patent unsustainability of the current socio-technical trajectory of global economic growth makes it clear that the issue is not whether a new trajectory is going to emerge – a fact that is even starker given the current global economic crisis, e.g. in the car industry especially – but what this is and the proportions of humanity it enables and penalizes. Assuming only the pragmatic need for domestic political support for global measures – let alone the normative issue of optimizing the fair global distribution of costs and benefits – the issue becomes one of the joint global setting of socio-technical trajectories towards a low-carbon systems transition responsive to the circumstances of all parties involved and with distribution of benefits amongst them all. As nearly one-fifth of the global population and given its exceptional challenges and opportunities for low-carbon innovation, China must play a key role in this joint global process.

The role of international collaboration in low-carbon innovation We have argued that the goal of low-carbon innovation is best viewed as the joint international setting of socio-technical trajectories. This suggests that international collaboration will be crucial. Indeed, lacking sufficient innovation capacity itself, China’s contribution will necessarily depend to a great extent on international collaboration (see below). International collaboration, however, is not coextensive with the joint setting of innovation trajectories. For instance, if each individual nation-state were to take significant steps at mitigation, regardless of the actions of others, the overall effect would be greatly positive and would produce a de facto global dispersal of low-carbon efforts. The problem is that these national efforts are unlikely alone to be sufficient so that a greater degree of explicit and multi-level coordination is needed. This is not just because of the ‘prisoner’s dilemma’ geopolitical game regarding fears of free-riding by other states on their expensive mitigation initiatives. The very global nature of

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the problem itself also will require both considerable coordination of innovation efforts and the full weight of global innovation resources, including the extraordinary productivity of globalized innovation and scientific networks (e.g. Bhidé 2008; Wagner and Leydesdorff 2005). Yet international collaboration need not always be the most effective means to prosecute low-carbon innovation. Whether such international collaborative efforts occur depends largely upon national exigencies, since the nation-state remains a key site of political economic decision-making and domestic political priorities will always trump the more diffuse imperatives of ‘global’ problems such as climate change. Amongst the most obvious trade-offs for a policy on international collaboration is that between supporting the deepening of international connections and direct investment in domestic factors (Katz and Martin 1997). As such, international collaboration on climate change needs to reinforce national policy and development objectives as well as tackling climate change in order to be successful. Just as the low-carbon transition is irreducibly social and political, so too is international collaboration in low-carbon innovation. The most obvious element of the social context of efforts to create low-carbon capacity is that it is one of nation-state economies at different stages of development competing in conditions of globalizing neoliberal capitalism. The latter introduces particular risks associated with analysis of international collaboration, in that it could easily be reduced to an instrument of the prematurely universalistic ‘global’ logic of hegemonic neoliberal politics. The dangers and difficulties of such a definition are even more apparent given the particularly challenging current conditions of turbulence and transition: turbulence regarding the unfolding of the full effects of the current financial crisis and transition regarding the shifting centre of the global political economy from the US to Asia (Tyfield et al. 2008 and references therein). Conversely, the joint global setting of low-carbon transition demands collaborations that offer mutual benefit to competing national economies. The development of innovation capacity is the key factor in such competitiveness. A crucial issue regarding international collaboration in the current social context is thus how to distinguish between international collaboration that supports a global systems transition, including through development of national innovation capacity in developing countries such as China, and that which only merits support insofar as international collaboration is considered from a presumptively ‘global’ perspective. Acknowledging the importance of domestic innovation capacity also accords with current scholarship on how it can be maximized overall – the crucial issue for a low-carbon shift. Analysis of the role of international connectedness in current innovation capacity and competitiveness shows that the regions and firms that flourish are those that (can) pay due attention to both internal capacity development and external connectivity. Innovation capacity appears to need both development of local concentrations and international linkages (Barthelt et al. 2004), with these two as complementary rather than exclusive strategies for the development of ‘absorptive capacity’ (Scott 2003; Cohen and Levinthal 1990). Likewise Altenburg et al. (2008) note that ‘all industries in our sample show a combination of successfully tapping into international pools of knowledge on the one hand, and strong investments in

68 David Tyfield and James Wilsdon national skills development and innovation capabilities on the other’ (emphasis in original). The goal, therefore, is for policies that balance ‘the development of the national innovation system and strategic integration in global value chains and international research communities’ such that they ‘create a virtuous circle of technological catch-up’ (Altenburg et al. 2008) Aiming just to expedite GHG emission reduction may thus be to take as given the global capacity for low-carbon innovation rather than seeking to expand this; and hence, in the medium term, to effect a more dramatic low-carbon shift (as illustrated in Figure 4.4). Given that so much of the future growth of GHG emissions is likely to come from China, this issue becomes even more pressing. Finally, the importance of considering all these factors is particularly stark in the case of international collaborations with China. While China is highly developed, economically and scientifically, in its huge Eastern cities, it remains a developing country with a peasantry of 700 million people. In these circumstances, it is entirely understandable, and legitimate, that Chinese innovators are acutely aware of the need to serve the economic development of the nation and not just generate pockets of international excellence (e.g. Xue 2008). This is even more so given China’s turbulent modern history and the even deeper roots of national pride of Chinese culture. National industrial policy for the growth of domestic innovation capacity – legitimate concerns about the political centralization and potential corruption of the state notwithstanding – thus remains a crucial issue for China and thus for international collaborations involving Chinese partners (Tyfield and Urry 2009). We have focused so far on issues of political economy, particularly the development of domestic innovation capacity, and their importance for evaluation of

Figure 4.4 Comparing possible low-carbon trajectories with and without developing China’s low-carbon innovation capacity (percentage of current GHG emissions over time). Note: The particularly important issue here is the area below the line, representing total aggregated GHG emissions over the whole period, seeing as GHGs (particularly CO2) remain in the atmosphere over as long as a century.

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international collaborations in low-carbon innovation. This is not, however, to say these issues are the only ones that matter. One other issue, in particular, deserves explicit discussion, namely various cultural changes that may be facilitated through international collaboration. Cultural issues are particularly important regarding the issue of climate change because of its global nature, and hence its dependence on global political negotiations. The emergence of a cosmopolitan ethic, which simultaneously expresses a global ethic of concern and a sensitivity to local differences, is crucial for the global campaign because such an aspirational vision (Beck 2006) is an absolute necessity to create material circumstances that simply do not yet exist. It follows that the contribution of international collaborations in low-carbon innovation to the development of such a broader ‘cosmopolitan innovation’ regime is of singular importance (Wilsdon and Keeley 2007; Tyfield and Urry 2009). Yet, as with the political economic issues, the question regarding international collaboration here is how it can contribute simultaneously to global and national priorities, both climate change and the specific needs of particular countries.

Sectoral analysis: the example of energy Let us consider the particular issues regarding international collaboration with China in a crucial sector regarding climate change, namely energy. Energy and low-carbon innovation in China merits much fuller analysis – including of emissions data and policy – than we can offer here. Instead, we focus on developments in China’s innovation capacity in this sector regarding the potential role for international collaboration. The most striking aspect of Chinese low-carbon efforts is their focus on energy efficiency, i.e. energy consumption. This could indeed have a major impact of global consumption of fossil fuels, given the sheer size and rapid growth of China’s energy needs (e.g. IEA 2007). There is widespread consensus as to the obvious gains from improving the country’s energy efficiency, both industrial and household, which remains behind that of developed countries. For instance, energy consumption per unit GDP decreased 60 per cent from 1980–2005 (Climate Group 2008) and the government aims to reduce it by a further 20 per cent from 2005 to 2010, which would be equivalent to savings of 1.5 billion tons of CO2 (GEI 2009). This national efficiency drive includes the Ten Key Energy Conservation Projects that include issues of lighting, combined heat and power, and fuel-efficient motor engines (GEI 2009). China has also developed ‘one of the most comprehensive mandatory energy efficiency standards’ (Climate Group 2008). Improved energy efficiency is a perfect example of China’s significant domestic efforts, for which it should be applauded, but it also illustrates how national efforts alone are insufficient. First, energy efficiency remains significantly lower than in the US (Climate Group 2008), while current progress towards the 20 per cent improvement target is behind schedule, suggesting that meeting this target will be difficult (GEI 2009). Second, the emission savings are measured only against a ‘business as usual’ scenario, thus representing only a slowing in the growth of total emissions not the absolute reductions that are needed (CEIP 2009).

70 David Tyfield and James Wilsdon Regarding energy production, China is also improving significantly. First, it has capitalized upon the Clean Development Mechanism, representing nearly 70 per cent of the market.5 Second, there are notable successes in renewable energy technologies, particularly wind and solar (both photovoltaic [PV] and water heaters). China’s wind industry is growing so strongly that the government has set the target of 100 gigawatts (GW) of wind power by 2020, compared to a current global capacity of around 55 GW. This represents a continuation of the already impressive rate of growth, from 2.3 GW installed wind capacity in 2005 to 10 GW by the end of 2008, two years ahead of government targets (Schwartz 2009). A further 100 GW of wind power is expected from six mega-projects alone by 2020 (Schwartz 2009). Most of this growth in capacity will also be using Chinese products, as domestic manufacturing of wind turbines is increasing too, so that by 2007 over 50 per cent of installed capacity came from Chinese-made turbines (Schwartz 2009). Similarly, in the solar PV sector, China’s manufacturing capacity is second only to Japan and is on course to expand annual production capacity to 4 GW by 2010 – ‘more than the entire global production in 2007’ (Climate Group 2008: 10). The most high profile success is Suntech, which has gone from establishment in 2001 to a successful listing on NASDAQ in 2005, but there are three other companies also with market capitalizations of over US$2 billion (LDK Solar, JA Solar and Yingli Solar), while a further three also had annual production capacity of over 100 MW in 2007 (Solarfun, China Sunergy and Ningbo Solar) (Climate Group 2008). Any large Chinese city also bears witness to the ubiquity of solar water tanks, now on 10 per cent of Chinese houses, representing sales of US$2.6 billion in 2006, or 60 per cent of the global market (Climate Group 2008). China is also making significant efforts in other non-fossil fuel energy sources. For instance, China already has the largest global capacity for hydropower, at over 400 tera(1012)watt-hours (TWh) by 2006, and plans to double capacity by 2020 (Climate Group 2008). Indeed, hydropower has a much greater impact on reducing China’s carbon footprint than either wind or solar, and will continue to do so in the medium term. There are also nuclear power targets of 40 GW (or 4 per cent of national production) by 2020 and important plans regarding biogas digesters, with 26.5 million domestic ones already fitted by the end of 2007 (GEI 2009). These developments, however, are not without problems. The wind and solar industries are growing largely through cost reduction and mass production, rather than breakthrough innovation. In wind, while there are now strong and growing domestic manufacturers, many key components still have to be imported, especially those dependent on precision engineering (Schwartz 2009). The opposite is almost the case for solar PV: the leading companies are increasingly internationally competitive but most Chinese photovoltaic cells are exported, so that the sector has an ambivalent effect on China’s own GHG emissions. Indeed, solar power is projected to contribute just 0.1 per cent of total electricity generation in 2020 (Climate Group 2008). Both hydropower and nuclear power are also often highly controversial, especially regarding their broader socio-economic impacts. The most important energy source and by far the country’s most abundant fossil fuel, however, is coal. Given the projections of China’s growing demand for

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energy and its energy security concerns, China is committed to coal for the foreseeable future. Yet it is already suffering grievously from the effects of mass coal combustion (Mao et al. 2008). There is thus a focus on efforts to develop ‘clean coal’ technologies, replacing inefficient plants with some of the most advanced technology for coal combustion (such as ultra-supercritical coal combustion) or enhanced coal-bed methane combustion. This ‘clean coal’ terminology, however, means only improved combustion efficiency and reduction of NOx /SOx emissions and soot. While this does have some effect on emissions, even perfectly clean and complete combustion must release CO2. The effect is thus, again, a slowing of the growth in emissions, not their absolute reduction, for which the capture and storage of CO2 (CCS) would be needed. CCS, however, is a very low priority for China, albeit understandably so: it remains a technology that is unproven and expensive (in terms of both investment and energy loss) and one, moreover, the developed world itself has yet to demonstrate (e.g. Economist 2009). Overall, then, China is making significant efforts regarding the emissions from the energy sector, but there are few signs that China’s absolute emissions will decline given current trajectories. Innovation is thus essential, but China’s domestic innovation capacity, particularly in hi-tech and breakthrough innovations, remains comparatively weak, leading to the continuing dependence upon foreign technology noted by the central government that is the main motivation behind the ‘indigenous innovation’ policy (Jakobson 2007). This is certainly not due to a total lack of research expertise or of business acumen. There is some excellent science, for instance at the Chinese Academy of Science, National or Key State Laboratories, while the meteoric rise of the Chinese economy in the last 30 years is testament to the extraordinary entrepreneurialism. What is lacking, however, is the connection of these two, the historical legacy of a system that separated R&D and business for over 30 years. The researchers often have what one senior manager of a major TNC called ‘Rembrandts in the attic’, but lack development experience. Conversely, entrepreneurs rarely have access to these ideas or the means, or even the motivation, to invest in development. Furthermore, and arguably of more importance given that much hi-tech innovation does not directly involve research at scientific establishments, is the socio-economic context, which does not encourage innovation as a core business activity. Several factors are important in this regard. Large domestic firms, that tend to have stronger innovation capacity, remain largely state-owned and so shielded from market competition, while the space this market dominance arguably creates for innovation (e.g. Schumpeter 1976) has not been matched by government pressure to develop low-carbon improvements. Conversely, private (often smaller) companies have been able to maintain strong profitability simply by taking advantage of low labour costs. China also largely lacks a culture of ‘venturesome consumption’ (Bhidé, 2008) that embeds a broader business culture of innovation. Thus, while enterprises already accounted for 69 per cent of China’s R&D expenditure in 2005 – a level equivalent with countries in the Global North – ‘the overwhelming majority of Chinese companies who are remarkable success stories are not high-tech driven’ (Jakobson 2007: 13). In short, ‘it is unlikely that many Chinese enterprises will

72 David Tyfield and James Wilsdon develop R&D capabilities in support of novel, science-based technologies in the near future’ (Suttmeier et al. 2006). In fact, in solar PV and some breakthroughs in coal combustion, the energy sector is arguably one of the most advanced regarding hi-tech innovation in China. Nevertheless, there is still a lack of innovation capacity regarding low-carbon energy, reflecting a number of important policy barriers, whether economic or regulatory, that undermine the domestic incentives to innovate. Four issues, in particular, need to be considered. First, Chinese energy prices are often subsidized and do not reflect true economic cost, let alone include the ‘externality’ of its contribution to climate change. Second, the energy sector in particular is dominated by large SOEs with relatively weak innovation capacity. Furthermore, innovation capacity of these large SOEs is also notably weaker than comparative companies in Japan or South Korea at similar points in their development, partly for reasons of industrial policy (Nolan 2004). Third, such incentives for low-carbon innovation as there are from environmental regulation have been undermined by partial enforcement, as described above. Finally, the continuing lack of a strict and binding international treaty, following the disappointing modesty of what was achieved at the Copenhagen conference in December 2009 (for which, on some accounts, the Chinese delegation had considerable responsibility), significantly diminishes the pressures and support for many forms of low-carbon innovation, just as it does in the US and EU. Given these institutional disincentives to innovate, it may appear that the development of low-carbon innovation capacity in China is an issue that resides very much in the hands of domestic government policy, except for the global negotiations, and so is not primarily an issue for international collaboration. For instance, even as regards the need to ‘catch-up’ with existing overseas competition, China, with its massive market and its huge accumulation of capital, has considerable bargaining power (Altenburg et al. 2008), while the ‘organizational decomposition of the innovation process’ (Schmitz and Strambach 2007) may allow the purchase of capabilities that were previously dependent on slow processes of maturation. We may also ask whether China even needs to develop strong capacity for hi-tech innovation in order to make its mark on global markets or contribute to global efforts on climate change. We must not overlook the potentially key role of the Chinese economy to develop low-cost, low-tech innovations, particularly renewable energy technologies. If this is their comparative advantage, the argument may run, why demand that China does what it cannot do as well as the developed economies? Certainly, the cheapening and mass production of solar panels and wind turbines could make a significant impact on the global market for renewable energy, and China does excel at disruptive cost innovation (Zeng and Williamson 2007). However, basing policy regarding international collaboration on this functionalist international division of labour would most likely fail on two counts. First, from China’s perspective, it would seem to condemn China to permanent second-tier status in the global economy. Second, regarding climate change, it would deprive the global effort (in the medium term) of the full exploitation of China’s potential for innovation, both as a country of 1.3 billion people with a relatively high level

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of education and as a site of unique opportunity for socio-economic transformation as the country continues to develop (i.e. to take route ‘Without’ over route ‘With’, as seen in Figure 4.4). The lack of low-carbon innovation capacity in China thus does appear to be a particularly important problem. While removing the disincentives to low-carbon innovation in China is of enormous importance, several roles for international collaboration, offering benefits at both the global and national level, seem apparent. First, it has an important role to play in expediting the improvement of Chinese hi-tech innovation capacity, which will certainly be crucial, even if it is not the only form of innovation that is relevant. Second, international collaboration could play a crucial role in bridging the gap between businesses and R&D described above, accelerating this learning process. Third, there are clear opportunities for demonstration of new technologies, such as CCS, given the rate of growth of new coal power stations in China compared to the global North. Finally, insofar as international collaboration contributes to the generation of cross-cultural trust and a broad grassroots global movement, it will also have some impact on the (ongoing) global politics of climate change upon which low-carbon innovation policies depend so heavily. To be sure, this impact may be slight, but the complexity of the social systems involved suggests that tipping-points from positive feedback loops (where developments that are self-reinforcing reach a level that affects a switch in the broader context) are unpredictable and potentially sudden. Deepening cross-cultural understanding and collaborative projects can only assist in this regard. In all these ways, therefore, international collaboration could contribute to global efforts in low-carbon innovation in energy, while also simultaneously contributing to Chinese socio-economic development. These possibilities are not necessarily in conflict with, or alternatives to, domestic policy reforms to develop domestic low-carbon innovation capacity. Indeed, increasing the imperatives for domestic innovation in China could unlock a positive feedback loop in which the increased domestic innovation capacity attracts more and better international collaborations, thereby greatly expediting the further improvement of the former.

Conclusions We have explored the growth of low-carbon innovation capacity in China and the role of international collaborations in contributing to this process. We argued that the goal of policy should be the creation of mechanisms for the joint global setting of the sociotechnical trajectory of a systems transition to low-carbon societies. Acknowledging the need to maximize China’s contribution to this global social transformation demands that we also recognize its need to concentrate on development of domestic innovation capacity – a policy orientation that is, crucially, compatible with the particular challenges climate change poses China as a developing country and its existing innovation policy of indigenous innovation. This does not, however, licence a closed, protectionist techno-nationalism, not just because this would cripple efforts to tackle ‘global heating’ but also because it

74 David Tyfield and James Wilsdon would be self-defeating for China itself. Nor is it necessarily at the expense of the global North. As Altenburg et al. (2008) have argued ‘the development of (China’s) national innovation system and strategic integration in global value chains and international research communities may well create a virtuous circle of technological catch-up’ from which all parties gain. This reframing of the global challenge of climate change may also, therefore, have significantly positive effects on the fractious negotiations for a global post-Kyoto deal, transforming zero- or negative-sum questions of ‘who pays?’ to positive-sum ones of ‘how can all parties best work together’.

Notes 1 2 3 4 5

Quoted in Economy (2007). See, for example, the Carbon Trust (2006). Wilsdon and Keeley (2007), OECD (2007), Tyfield, Zhu and Cao (2009). See also Xue and Forbes (2006), Schwaag-Serger and Breidne (2007), Segal (2003). The Clean Development Mechanism (CDM) is a programme under the Kyoto Protocol that allows countries with emission reduction commitments to count towards these reductions investment in projects in the Global South that evidence reduced carbon use.

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International Energy Authority (IEA) (2007) World Energy Outlook 2007: China and India insights. Paris: IEA. International Panel on Climate Change (IPCC) (2007) Climate Change 2007: Synthesis report. Geneva: IPCC. Jakobson, L. (ed.) (2007) Innovation with Chinese Characteristics. Basingstoke: Palgrave Macmillan. Katz, J. S. and Martin, B. R. (1997) ‘What is research collaboration?’ Research Policy, 26:1–18. Leadbeater, C. and Wilsdon, J. (2007) The Atlas of Ideas. London: Demos. Mao, Y., Sheng, H. and Yang, F. (2008) The True Cost of Coal. Beijing: Greenpeace. New Economics Foundation (2007) Chinadependence: The Second UK Interdependence report. London: NEF. Nolan, P. (2004) China at the Crossroads. Cambridge: Polity Press. Organization for Economic Co-operation and Development (OECD) (2007) OECD Reviews of Innovation Policy, China: Synthesis report (1st Draft). Paris: OECD. Pan, E. (2005) China’s Angry Peasants, Council for Foreign Relations Backgrounder Paper. New York: Council for Foreign Relations. Pearce, F. (2007) The Last Generation. London: Transworld Publishers. Photius (2006) Industrial GDP percentages, using CIA 2006 Yearbook Data. Online. Available HTTP: (accessed 9 June 2008). Rial, J. et al. (2004) ‘Nonlinearities, feedbacks and critical thresholds within the Earth’s climate system’, Climatic Change, 65: 11–38. Schmitz, H. and Strambach, S. (2007) The Organizational Decomposition of the Innovation Process: Implications for the global distribution of innovation activities. Mimeo: Institute of Development Studies, Sussex and University of Marburg. Schumpeter, J. A. (1976) Capitalism, Socialism and Democracy, 5th edn. London: Allen & Unwin. Schwaag-Serger, S. and Breidne, M. (2007) ‘China’s fifteen-year plan for science and technology: an assessment’, Asia Policy, 4: 135–64. Schwartz, L. (2009) ‘China’s new generation: driving domestic development’, Renewable Energy World Magazine, 12(1). Online. Available HTTP: (accessed 20 November 2009). Scott, J. (2003) ‘Absorptive capacity and the efficiency of research partnerships’, Technology Analysis and Strategic Management, 15: 247–54. Segal, A. (2003) Digital Dragon: High-technology enterprises in China. Ithaca: Cornell University Press. Smith, A., Stirling, A. and Berkhout, F. (2005) ‘The governance of sustainable socio-technical transitions’, Research Policy, 34: 1491–510. Suttmeier, R. P., Cao, C. and Simon, D. (2006) ‘China’s innovation challenge and the remaking of the CAS’, Innovations, summer: 78–97. The Economist (2009) ‘Trouble in store’, The Economist, 390: 72–5. Tyfield, D. and Urry, J. (2009) ‘Cosmopolitan China? Lessons from international collaboration in low-carbon innovation’, British Journal of Sociology, 60: 793–812. Tyfield, D., Urry, J., Wilsdon, J. and Wynne, B. (2008) ‘China-EU innovation networks towards a low-carbon society’, Working Paper, Lancaster University. Tyfield, D., Zhu, Y. G. and Cao, J. H. (2009) ‘The importance of the “international collaboration dividend”: the case of China’, Science and Public Policy, 36: 723–35.

76 David Tyfield and James Wilsdon UNFCCC (2006) GHG Data (2006). Online. Available HTTP: . United Nations (UN) (2006) World population prospects (2006). Online. Available HTTP: (accessed 9 June 2008). United States Department of Agriculture (USDA) (2006) GDP data sets. Online. Available HTTP: (accessed 9 June 2008). Wagner, C. S. and Leydesdorff, L. (2005) ‘Network structure, self-organization, and the growth of international collaboration in science’, Research Policy, 34: 1608–18. Wang, T. and Watson, J. (2007) Energy and Climate Scenarios for China: Some considerations, Briefing Paper for Tyndall Centre Workshop, Beijing (12 September 2007). Wang, T. (2007) China’s Cumulative Carbon Emission and Pathways over the 21st Century, Presentation to Tyndall Centre workshop: ‘Future Pathways for China’s Carbon Emissions’, Guohong Mansion, Beijing (12 September 2007). Willis, R., Wilsdon, J. and Webb, M. (2007) The Disrupters: Lessons for low-carbon innovation from the new wave of environmental pioneers. London: NESTA. Wilsdon, J. and Keeley, J. (2007) China: The next science superpower. London: Demos. Xue, L. and Forbes, N. (2006) ‘Will China become a science and technology superpower by 2020? An assessment based on a national innovation system framework’, Innovations, Fall: 111–26. Xue, L. (2008) ‘The prizes and pitfalls of progress’, Nature, 454: 398–401. Zeng, M. and Williamson, P. J. (2007) Dragons at your Door: How Chinese cost innovation is disrupting global competition. Cambridge, MA: Harvard Business School Press. Zhang, Y., Xu, Y., Dong, W., Cao, L. and Sparrow, M. (2006) ‘A future climate scenario of regional changes in extreme climate events over China using the PRECIS climate model’, Geophysical Research Letter, 33, L24702. Zhao, J. (2006) ‘Whither the car? China’s automobile industry and cleaner vehicle technology’, Development and Change, 37: 121–44.

5

Effects of policy measures on energy demand and greenhouse gas emissions in China’s road transport sector Xiaoyu Yan and Roy Crookes

Introduction Transport has become a crucial component of modern life in China. The transport sector, a major oil consumer and GHG emitter worldwide, is China’s most rapidly growing sector in terms of energy and particularly oil demand and GHG emissions. Transport petroleum consumption reached 98 million tonnes of oil equivalent (Mtoe) in 2005, 21 times that in 1980 (APEC 2007). The rapid growth of road vehicles, private vehicles in particular, is responsible for the growth in China’s oil demand and imports, which had affected future oil availability and prices, and a contributor to China’s GHG emission increase (Yan and Crookes 2007a). The Chinese government is trying to curb petroleum demand and GHG emissions in the road transport sector through alternative fuels and regulating the vehicle fuel economy. China has promoted E10 (10 per cent bioethanol and 90 per cent gasoline blend by volume) as an alternative transport fuel in some of the major grain producing regions since 2002 and is currently the third biggest producer of fuel ethanol after Brazil and the US. As at end of 2005, annual E10 consumption in China reached 10 million tonnes (Mt), about 20 per cent of the total gasoline consumption (Liu 2006). China has also promoted gas vehicles in a few demonstration regions and cities since 1999. There were more than 300,000 gas vehicles in China at the end of 2005. More cities are joining the programme (CATRC and CAAM 2006). China recently implemented mandatory regulations for its first fuel economy standard for the passenger vehicle fleet (AQSIQ and SAC 2004). Another standard targeting light-duty commercial vehicles was implemented in 2007 (Wagner et al., forthcoming). Other policy measures such as fuel tax are also being considered. Policy-making is constrained if the implemented measures are not evaluated. Of critical importance is the need to analyse future energy demand and GHG emissions in China’s road transport sector, and to assess the effectiveness of possible reduction measures. Several earlier studies have estimated the historical and future trends of energy demand and the associated GHG emissions in China’s road transport sector under different policy scenarios (He et al. 2005; Wang et al. 2007; Yan and Crookes 2007b; Zhang 2004). However, these studies failed to provide reliable

78 Xiaoyu Yan and Roy Crookes historical trends and took little account of policy measures. The present study will develop a model that can provide a reliable historical trend of energy demand and GHG emissions in China’s road transport sector. This model can be used to assess possible energy savings and GHG emission reductions up to 2030 for a wider range of policy measures, which include those already implemented in China and those that might be adopted because of successful implementation elsewhere.

Methodology and data A model has been developed to estimate energy demand and GHG emissions in China’s road transport sector, in which all the important driving factors and recent efforts in alternative fuel promotion are incorporated. Energy demand and GHG emissions in China’s road transport sector between 2000 and 2005 were estimated. Results are compared with those from earlier studies and with other data to test the reliability of the modelling approach. Two scenarios have been designed to represent the worst and best cases of the development strategies for China’s road transport sector in terms of energy demand and GHG emissions. The model developed has been used to analyse the future trends of energy demand and GHG emissions in China’s road transport sector up to 2030 in these two scenarios. Model structure Motor vehicles have been classified into trucks, buses, cars, minivans and motorcycles. Trucks are classified into heavy-duty trucks, medium-duty trucks, light-duty trucks and mini trucks based on gross vehicle weight, while buses are classified into heavy-duty buses, and light-duty buses based on total vehicle length. Cars comprise private cars and taxis based on their utilization characteristics. All vehicles are further differentiated by fuel type: diesel, gasoline, compressed natural gas and liquefied petroleum gas vehicles. It is assumed that bioethanol can be used in all gasoline vehicles (in the form of E10) and biodiesel can be used in all diesel vehicles (in the form of any biodiesel and diesel blends). In summary, the present study includes ten vehicle types and six fuel types. The model used in the present study is developed using a scenario-based energyenvironment modelling tool, the Long-range Energy Alternatives Planning System (LEAP) (SEI 2007). In the model, energy demand in the road transport sector is calculated as a product of several factors as shown in the following expression: Ey = ∑VPi,j,y × FAVDTi,j,y × FAFE–1i,j,y

(1)

i,j

where, E (MJ) is the energy demand, y is the calendar year, i is the vehicle type, j is the fuel type, VPi,j,y is the vehicle population of the fuel type j for vehicle type i in the year y, FAVDTi,j,y (km) is the fleet average annual vehicle distance travelled of the fuel type j for vehicle type i in the year y, FAFEi,j,y (km/MJ) is the fleet average on-road fuel economy of the fuel type j for vehicle type i in the year y. VPi,j,y is calculated by the following expression:

Effects of policy measures on energy demand 79 VPi,j,y = ∑VPi,j,y,v = ∑(Salesi,v × Survivali,y–v × FSharei,j,v) v

(2)

v

where, v is the vintage (the year when a vehicle is put into use), VPi,j,y,v is the remaining stock in the year y for vehicles with fuel type j, vehicle type i and vintage v, Salesi,v is the number of new vehicles added for the vehicle type i in the year v, FSharei,j,v is the share of fuel type j within the Sales for vehicle type i in the year v, Survivali,y–v is the fraction of vehicles surviving after y – v years for vehicle type i. For example, the remaining stock of private gasoline cars sold in 2005 in the calendar year 2015 will be the Sales of private car in 2005 times the share of gasoline vehicles within that sale and times the fraction that survive ten years (2005–15). FAVDTi,j,y is calculated by the following expression:

FAVDTi,j,y =

∑ (VP

i,j,y , v

v

× VDTi,j,v )

VPi,j,y

(3)

Where, VDTi,j,v (km) is the average annual vehicle distance travelled during the lifetime for vehicles with fuel type j, vehicle type i and vintage v. FAFEi,j,y is calculated by the following expression:

FAFEi,j,y =

∑ (VP v

i,j,y , v

× FEi,j,v )

VPi,j,y

(4)

Where, FEi,j,v (km/MJ) is the average on-road fuel economy during the lifetime for vehicles with fuel type j, vehicle type i and vintage v. Since the proportions of gasoline vehicles using E10 and diesel vehicles using biodiesel blends were not available, bioethanol and biodiesel demand were estimated according to the government’s target. Gasoline and diesel demand were calculated by assuming all the gasoline and diesel vehicles used only pure gasoline and diesel and then subtracting the amount substituted by bioethanol and biodiesel, respectively. The GHG emissions in the present study are assumed to include carbon dioxide (CO2 ) only and are calculated by assuming all the carbon in the fuel becomes CO2 after combustion because of limited emissions data and this method can better reflect the strengthening emission regulations. Historical data source Sales: Sales data between 1988 and 2005 for each vehicle type was obtained from the China Automotive Industry Yearbooks (CATRC and CAAM 1991–2006). Production data between 1988 and 1993 was used because of the lack of sales statistics. Since the production volume and sales volume for each vehicle type was very close in China, use of production data is not expected to introduce noticeable errors. Survival: China has for some time set a scrapping standard for motor vehicles (Jiang and Yi 1997; MCC et al. 2000). Survival data for each vehicle type was estimated by the author according to the current vehicle scrapping standard in

80 Xiaoyu Yan and Roy Crookes China. The estimated Survival data in the present study for private cars, minivans and light-duty buses matched very well with those calculated using a probability distribution (Yang et al. 2005). However, Survival data for other vehicle types still need to be tested. Since it is possible to obtain the total number of trucks, passenger vehicles (including buses, minivans and cars) and taxis in each year from the China Statistical Yearbooks (NBS 1996–2006), likely errors can be estimated by comparing the calculated VP for trucks, passenger vehicles and taxis in 2003, 2004 and 2005 with the statistics data, respectively. The Survival data estimated by the authors is thus considered to be fairly reliable since the differences between the results from the authors’ calculations and the statistics data are within a reasonable range. FShare: FShare data for gasoline and diesel vehicles between 1997 and 2005 is available from the China Automotive Industry Yearbooks (CATRC and CAAM 1998–2006), while that before 1997 is estimated linearly. FShare data for gas vehicles is our estimation based on limited statistics from Li and Gu (2006), Ren (2006) and the estimated survival rates for heavy-duty buses and taxis. We assumed that FShare for heavy-duty gasoline trucks is zero because it was less than 1 per cent in recent years and continued to decrease. VDT: Since there are no official statistics for VDT in China, Equation 3 has not been able to be used to calculate FAVDT between 2000 and 2005, which therefore has to be determined directly by taking several earlier studies into consideration (Chen and Lu 2003; Chen et al. 2005; Guo et al. 2007; He et al. 2005; Meng et al. 2006; Wang et al. 2007) and selecting appropriate values. FAVDT for different fuel types in a given vehicle type are assumed to be the same. VDT data in 2005 are assumed to be the same with FAVDT data. FE: FE data for most gasoline and diesel vehicle types were readily available from He et al. (2005) and Wang et al. (2007). FE data for other vehicle and fuel types were estimated based on results from Barnitt and Chandler (2006), Liu and Shao (2007), NDRC (2006), NREL (1999), Silva et al. (2006), Sullivan et al. (2004), Waters (1992) and Zhang (2006). Biofuel substitution: Since the Chinese government has been promoting E10 since 2002, and annual E10 consumption reached 10 Mt in 2005, bioethanol demand in China’s road transport sector is assumed to increase from zero in 2001 to 1.06 Mt in 2005 linearly. When using E10, the effective substitution ratio between added bioethanol and gasoline was derived based on results from ACE (2005). The biodiesel blend used in the present study is assumed to be B20 (20 per cent biodiesel and 80 per cent diesel blend by volume), which is the most common blend. When using B20, the effective substitution ratio between added biodiesel and gasoline was derived based on results from Holden et al. (2006), McCormick et al. (2006), and Demirbas (2007). For details of all the data used, please refer to Yan and Crookes (2009a). Scenarios design The scenario period is 2006–30. We assumed that China’s economy growth will sustain at a high level during the scenario period as it did in the past two decades

Effects of policy measures on energy demand 81 and; fuel prices will remain fairly stable in spite of the fluctuations of international crude oil price because of the tight state control. A ‘Business as Usual’ scenario was established to form a baseline scenario with which a ‘Best Case’ scenario would be compared. Baseline scenario: Business as Usual The key assumption in the Business as Usual scenario is that nothing will be done to reduce the energy demand and GHG emissions in China’s road transport sector. Measures already implemented are disregarded. Therefore, the Business as Usual scenario is not a forecast, but rather a reference vision of how energy demand and GHG emissions in China’s road transport sector would evolve if the Chinese government did nothing to influence long-term trends. Private passenger vehicle population in China has entered a rapid-growing stage as indicated by the high growth rates of private passenger vehicle fleets and low growth rates of commercial passenger vehicle fleets in recent years, especially after China joined the WTO in 2001. Besides rising incomes, the reduced price of motor vehicles after entry to the WTO is the main reason for the rising private vehicle ownership. In the Business as Usual case, since no measure will be implemented to restrict private vehicle purchases or to promote the use of public transport, growth rates for private passenger vehicles are assumed to stay at a high level while those for commercial passenger vehicles at a low level. In medium and small cities, the contribution of taxis in the total passenger travel volume is generally low, and the occupation rates of taxis are also low mainly due to the oversupply of taxis (Jiang 2005). We assume the development of the taxi industry will focus on better management rather than putting more taxis onto the market, therefore the growth in taxis would be at medium levels in the Business as Usual case. Growth rates for motorcycles would be steady due to demand in rural areas. Increasing urban infrastructure construction, energy transportation needs (mainly coal and oil) and logistics needs are the main factors driving the future demand of trucks in China. The growth rates of heavy-duty trucks were very high between 1998 and 2004, but low in 2005 and 2006; the growth rates for medium-duty trucks have been low in recent years while those for light-duty trucks and mini trucks have been high. The main reasons for these trends were discussed in (Yan and Crookes 2009a). Growth rates for heavy-duty trucks and medium-duty trucks are therefore assumed to be low in the Business as Usual case, while those for light-duty trucks and mini trucks are high. The growth trend of VP in developed economies has followed a similar path with a rapid growth phase of 30–40 years, after which VP reaches a saturation level and stabilizes. During this process, the growth rates of new vehicle sales gradually decrease with the growth of the existing vehicle stock (Davis and Diegel 2006). We assume China will follow the same trend. The shares of each fuel type among each vehicle type and FE for all newly added vehicle fleets are assumed to stay at the level of 2005, through the scenario period since there would be no policy incentive to change or improve in the Business as

82 Xiaoyu Yan and Roy Crookes Usual case. FAVDT for private passenger vehicles tends to decrease with increasing levels of vehicle ownership (Schafer 1998). FAVDT for private passenger vehicles in China would be expected to gradually reduce as their VP grows. It is assumed that the FAVDT for private passenger vehicles fleets in China would reduce by 20 per cent by 2030 linearly. FAVDT for other vehicle types are assumed to stay at the level of 2005 through the scenario period. Biofuel demand is assumed to stay at the absolute level in 2005 (0.68 Mtoe of bioethanol) through the scenario period. Best Case scenario In the Best Case scenario, a series of policy measures aiming to reduce energy demand and GHG emissions in the road transport sector are assumed to be implemented. These measures include those already implemented in China in recent years, those going to be implemented according to the government’s plan and those that might reasonably be expected to be adopted because of successful implementation elsewhere. Details of and assumptions for each kind of measure are described as follows. Private Vehicle Control: many factors influence whether or not a person owns a car, how intensively this car is used and whether other transport modes play a significant role in total travel. In addition to income, other factors like prices of motor vehicles, the cost of driving, availability and fare prices of public transport, quality of the transport infrastructure, social patterns and climatic, physical and geographical conditions can play an important role (Wohlgemuth 1997). Singapore and Hong Kong both have shown how motorization can be curbed in the context of rapidly rising incomes by Private Vehicle Control measures. These measures usually are economic constraints on private vehicle ownership and used in parallel with significant investments in public transport, especially a mass rapid transit system (Cameron et al. 2004). Most motor vehicles in China, especially privately owned ones, are concentrated in major cities. Beijing accounted for 6.6 per cent of total VP and 8.1 per cent of privately owned VP in China in 2005, while its population accounted for only 1.2 per cent of the total (NBS 2006). Private Vehicle Control measures would be effective in controlling private vehicle ownership and use in China. In fact, the effectiveness of controlling private vehicle ownership in China by economic constraints is already seen through quite conflicting official attitudes in different regions. For instance, the Beijing Municipal Government has adopted a few policies to stimulate the purchase of private vehicles, such as the provision of vehicle loans and the deduction of relevant fees for vehicle use (Liu et al. 2007), while the Shanghai Municipal Government has adopted policies to restrict the purchase of private vehicles such as high registration fees for private vehicles. The result of these different policies is that, although per capita income in Beijing is lower than it is in Shanghai, private vehicle ownership is much higher (see Figure 5.1). Private Vehicle Control measures in the present study are assumed to include economic incentives to restrict purchase and use such as high vehicle taxes, registration fees, parking fees or congestion charges, in parallel with efforts to promote public

Effects of policy measures on energy demand 83 120

60

Private vehicle ownership in Beijing

50 GDP per capita in Beijing

80

GDP per capita in Shanghai

40

60

30

40

20

20

10

0 1995

1997

1999

2001

2003

2005

GDP per capita / 10 3 RMB

Number of vehicles per 10 3 person

Private vehicle ownership in Shanghai 100

0 2007

Figure 5.1 GDP per capita and private vehicle ownership in Beijing and Shanghai. Source: Calculated from NBS (1996–2007).

transport. These measures will greatly increase the cost of private vehicle purchase and use, and lower demand. On the other hand, a higher level of public transport services will be needed to fulfil the total passenger transportation needs. Fuel Economy Regulation: Fuel Economy Regulation is considered to be an effective measure to improve vehicle fuel economy by forcing or encouraging automobile manufacturers to produce more fuel efficient vehicles, as illustrated by the Corporate Average Fuel Economy standards in the US, the weight-class-based fuel economy standards in Japan and the voluntary agreement in motor vehicle CO2 emissions between the EU and the European Automobile Manufacturers Association (He et al. 2005). Fuel Economy Regulation measures in the present study are assumed to include China’s first mandatory fuel economy regulation for light-duty passenger vehicles (AQSIQ and SAC 2004); another recently implemented standard targeting light-duty commercial vehicles (AQSIQ and SAC 2006), further strengthening regulations. These measures would improve the fuel economy of new vehicle fleets for the targeted vehicle types. Promotion of Diesel and Gas Vehicles: European countries saw an increasing share of diesel cars in recent years, especially France, where the share of diesel cars exceeds 40 per cent in the total passenger car fleet, mainly because diesel vehicles have higher efficiency than gasoline ones and the price of diesel fuel is set lower than gasoline. However, development for diesel cars in China lagged far behind mainly because of severe government constraints, lack of awareness and public acceptance and limited diesel engine technology. Diesel cars accounted for less than 0.6 per cent of the total car sales in 2004 and the existing diesel car population accounted for less than 0.2 per cent of the total vehicle population (Luo and Xiong 2007).

84 Xiaoyu Yan and Roy Crookes Currently, management systems and policy regulations for promoting gas vehicles have already been established in 19 ‘alternative fuel vehicles demonstration’ regions and cities in China. The industry chain spanning from development and production of critical components for gas vehicles, for whole vehicle and refuelling equipment production, to the operation, maintenance and inspection of gas vehicles has also been set up in these areas. Gas vehicle use is increasing steadily, along with construction of refuelling stations. Currently, there are more than 300,000 gas vehicles in China and more cities have joined the programme (CATRC and CAAM 2006). Promotion of Diesel and Gas Vehicles measures in the present study are assumed to include R&D programmes for diesel and gas vehicle technologies, low vehicle tax and road tax for diesel and gas vehicles, government subsidy for gas vehicles in urban transit vehicles and taxies, and investment in gas infrastructures to encourage automobile manufacturers to develop, and people to buy diesel and gas vehicles. The price difference between gas and conventional fuels has often been cited as the most important factor in attracting consumers to switch to gas vehicles. A natural gas pump price 40–60 per cent below the gasoline price is common in most countries that have had successful gas vehicle penetration (Yeh 2007). Due to lower income levels, consumers in China are more sensitive to fuel price than those in developed economies. The price for gas is slightly lower than the price of gasoline in China, but the price gap is not large enough for private consumers to switch to gas vehicles (Zhao and Melaina 2006). The assumed impacts of Promotion of Diesel and Gas Vehicles measures are thus: heavy gasoline vehicle sales are expected to reduce at a fast pace, while light diesel vehicle sales are increasing steadily; shares of gas vehicles among urban transit vehicles and taxis would increase steadily while their share of private vehicles would remain at zero due to a lack of incentives for private use of gas vehicles. Fuel Tax: fuel tax is considered to be an important instrument in climate policy. Currently, most countries are using fuel tax as an instrument for controlling vehicle fuel consumption. Michaelis and Davidson (1996) believed that a 30 per cent fuel price increase due to tax increase would reduce driving by 5 per cent and improve fuel economy by 9 per cent. Litman (2005) believed that a 10 per cent fuel price increase due to tax increase would reduce driving by 3.2 per cent and improve fuel economy by 6 per cent. Turrentine and Kurani (2007) found that US consumers generally did not analyse their fuel costs in a systematic way and ignored fuel economy in their automobile or fuel purchases, and cited the low fuel prices compared with income as a possible reason for this. Sterner (2007) believed that oil demand and CO2 emissions in Europe could be much higher if there were not the high taxation on fuels. Fuel tax also plays a significant role in switching fuels from conventional to alternative types, and the rate of switching was faster when the incentive was higher, as reflected in the Hong Kong experience (Hung 2006). China is among countries that have the lowest fuel price with no fuel tax employed. The Fuel Tax has been endlessly debated and postponed over the past few years, since it would lead to a politically sensitive increase in gasoline and diesel prices. It was assumed that in the Fuel Tax measure, a 30 per cent fuel tax

Effects of policy measures on energy demand 85 on gasoline and diesel, and a lower tax rate on gas, would be implemented in 2006. This would increase the operational costs for all vehicle types (except for heavyduty trucks) especially light-duty vehicles (Meng et al. 2006), and provide direct incentives to private consumers to switch from gasoline vehicles to diesel and gas vehicles, to choose vehicles with better fuel economy and to reduce vehicle use. According to Dargay (2007), private vehicle ownership is less sensitive to fuel prices than to purchase costs in developed countries like the UK, and this is also assumed to be the case in China. The impacts of Fuel Tax implementation are assumed to include: FE improvements in all vehicle types; Sales reduction of light-duty commercial vehicles; Sales increase of heavy-duty commercial vehicles; utilization reduction of private vehicles; a trend of switching from gasoline vehicles to diesel and gas vehicles among both private and commercial users. Biofuel Promotion: the Chinese government is planning to increase the current annual fuel ethanol production capacity of 1 Mt to 3 Mt by 2010 and 10 Mt by 2020, and two-thirds of production should be from non-food sources. The Chinese government is also planning to establish a vehicular biodiesel production capacity of 0.2 Mt by 2010 and 2 Mt by 2020 as stated in the Mid and Long-term Development Strategies for Renewable Energy (Liu 2006). In the Biofuel Promotion measure, it is assumed that the government will make efforts to realize its targets set for the promotion of bioethanol and biodiesel for vehicle use. Impact quantification for each kind of measure: it is very difficult to quantify the impact of different measures in China because it is such a large and populous country within which there are various levels of economic development. The impact quantification for each kind of measure on the driving factors in the present model is based on the author’s best estimates according to the above analysis (Table 5.1). Advocates of energy efficiency acknowledge that some of the savings from efficiency improvements will be taken in the form of higher energy consumption – the so-called rebound effect. This is not surprising since the effect of increased efficiency is to lower the implicit price of an energy supply, and hence make its use more affordable, thus leading to greater use (Herring 2006). As for the road transport sector, improving vehicle FE reduces operation costs, causing vehicles to be used more (VDT to increase). This rebound effect in the transport sector is typically estimated to be 20–40 per cent (Litman 2005), i.e. a 10 per cent increase in FE leads to a 2–4 per cent increase in VDT. It is assumed that in the present study the rebound effect is 30 per cent for private passenger vehicles and this effect will not have a significant impact on the use of motorcycle and commercial vehicles.

Results Past trends Total energy demand is estimated to have increased from 57 Mtoe in 2000 to 86 Mtoe in 2005. The private passenger vehicle fleet contributed nearly half of the demand growth, with its share in the total increasing from 12 per cent to 24 per

Biofuel Promotion

Bioethanol and biodiesel demand will increase from 0.68 and 0 Mtoe in 2005 to 1.94 and 0.2 Mtoe in 2010, 6.45 and 1.82 Mtoe in 2020, and 12.9 and 3.63 Mtoe in 2030, respectively

FShare for heavy- and medium-duty gasoline vehicles will reduce to 0 by 2010 while that for light-duty gasoline trucks by 2020; FShare for diesel cars and minivans will increase from 0 to 20% by 2030; FShare for gas powered commercial vehicles, light-duty diesel buses and mini diesel trucks will increase by 50% by 2030; FShare for gas powered private cars will increase from 0 to 5% and 3% by 2030, respectively

FE for all vehicle types will increase by 20% by 2030

Fuel switching

Fuel Tax

FE for lightduty vehicles will increase by 40% by 2030 (gas vehicles not included)

Vehicle fuel economy

FShare for heavy- and medium-duty gasoline vehicles will reduce to 0 by 2010 while that for light-duty gasoline trucks by 2020; FShare for diesel cars and minivans will increase from 0 to 20% by 2030; FShare for gas powered commercial vehicles, light-duty diesel buses and mini diesel trucks will increase by 50% by 2030 FAVDT for private passenger vehicles will reduce by 10% by 2030

FAVDT for private passenger vehicles will reduce by 10% by 2030

Vehicle distance travelled

Promotion of Diesel and Gas Vehicles

Sales for light-duty commercial vehicle will reduce by 20% while Sales for heavy-duty vehicle increase by 10%

Sales for private passenger vehicles will reduce by 20% while Sales for commercial passenger vehicles increase by 10%

Private Vehicle Control

Fuel Economy Regulation

Vehicle population

Measure

Quantification of estimated impact on each driving factor in the model

Table 5.1 Quantification of estimated impact for each kind of measure.

Effects of policy measures on energy demand 87 cent between 2000 and 2005. Petroleum (including gasoline, diesel and liquefied petroleum gas) demand in China’s road transport sector is estimated to be 84.3 Mtoe in 2005, accounting for 86 per cent of total petroleum demand in China’s transport sector (98 Mtoe according to APEC 2007) and 30 per cent of total petroleum demand in China (280.8 Mtoe according to APEC 2007). Despite recent growth in alternative fuel use, petroleum still accounts for 98 per cent of total energy demand in China’s road transport sector in 2005. GHG emissions are estimated to increase from 168.6 Mt of CO2 in 2000 to 254.9 Mt of CO2 in 2005. Since there are no official statistics for energy demand or GHG emissions in China’s road transport sector, it is difficult to analyse the reliability of these estimations. However, considering gasoline demand is almost entirely restricted to road vehicles, an attempt is made here to use statistical data of China’s total gasoline demand (available from NBS 1998–2006) as China’s road transport gasoline demand, with which the results from the present and earlier studies are compared (see Figure 5.2). Although some uncertainties exist, estimates of gasoline demand in the present study show a better agreement with the statistical data than those in earlier studies whereas estimates of diesel demand appear to vary (see Figure 5.3). Future trends Future trends of total energy demand, petroleum demand and GHG emissions in China’s road transport sector and reduction potentials of each kind of measure are shown in Figures 5.4, 5.5 and 5.6, respectively. Total energy demand, petroleum demand and GHG emissions would reach 444 Mtoe, 438.5 Mtoe and 1,303.7 Mt of CO2, respectively, in 2030 in the Business as Usual case, more than five times of those in 2005. While in the Best Case scenario these would be 260.6 Mtoe, 70

Statistics

He et al. (2005)

Zhang (2004)

The present study

60

50 Mt 40

30

20 1996

1998

2000

2002

2004

2006

Figure 5.2 Past trends of gasoline demand in China’s road transport sector from selected studies and statistics.

40

He et al. (2005)

Zhang (2004)

The present study 30 Mt 20

10

0 1996

1998

2000

2002

2004

2006

Figure 5.3 Past trends of diesel demand in China’s road transport sector from selected studies.

Figure 5.4 Predictions of total energy demand in China’s road transport sector and the effects of each kind of measure.

Figure 5.5 Predictions of petroleum demand in China’s road transport sector and the effects of each kind of measure.

Figure 5.6 Predictions of GHG emissions from China’s road transport sector and the effects of each kind of measure.

90 Xiaoyu Yan and Roy Crookes Table 5.2 Reduction due to each kind of measure in 2030 in the Best Case scenario (%). Total energy demand

Petroleum demand

GHG emissions

Private Vehicle Control

16.1

16.4

15.9

Fuel Economy Regulation

13.1

13.3

13.0

1.7

2.4

1.3

16.8

19.1

16.7

1.6

8.0

1.4

Promotion of Diesel and Gas Vehicles Fuel Tax Biofuel Promotion

231.3 Mtoe and 772.5 Mt of CO2, with relative reduction potentials of as high as 41.3 per cent, 47.2 per cent and 40.7 per cent achieved, respectively. The relative reduction potentials of each kind of measure in 2030 are shown in Table 5.2. Private Vehicle Control, Fuel Economy Regulation and Fuel Tax would be the most effective measures for reducing total energy demand, petroleum demand and GHG emissions. Promotion of Diesel and Gas Vehicles measure would not be very effective in reducing total energy demand and GHG emissions. It would, however, have a larger effect on reducing petroleum demand than total energy demand because of the substitution of petroleum-based fuels by compressed natural gas. It would have a smaller effect of reducing GHG emissions than total energy demand, mainly because diesel has a slightly higher GHG emission rate per MJ than gasoline. Biofuel Promotion measure would not be very effective in reducing total energy demand. However, it would have a much larger effect in reducing petroleum demand because of the substitution of petroleum-based fuels by biofuels. It would have a smaller effect of reducing GHG emissions than total energy demand, mainly because bioethanol and biodiesel have slightly higher GHG emission rates per MJ than gasoline and diesel, respectively. It should be noted that during the cultivation of bioethanol and biodiesel feedstock (such as corn and rapeseed), CO2 is absorbed from the atmosphere. This will be dealt with in the authors’ future work using life-cycle analysis.

Discussions Global impacts IEA’s latest predictions (IEA 2007) showed that China’s oil demand and import in 2030 would reach 808 Mt and 652 Mt in the Reference Case Scenario and 653 Mt and 483 Mt in the Alternative Policy Scenario, respectively. EIA’s latest predictions (EIA 2009) showed that China’s oil demand in 2030 would reach 837, 762 and 692 Mt in the High Economic Growth Case, the Reference Case and the Low Economic Growth Case, respectively. In all of these predictions, China’s oil demand in 2030 would account for about 13–14 per cent of the world total, and of the demand increase between 2005 and 2030, China would account for 26–33 per

Effects of policy measures on energy demand 91 cent of the world total. Furthermore, Nel and Cooper (2008) believed that IEA’s estimation of Chinese oil demand based on concerns related to ‘Peak Oil’ and resource scarcity, was conservative because it diverged significantly from historical trends, and the underestimation could be as high as 680 Mt in 2030 if China follows the lower-bound historical trends exhibited by developed countries. If the predicted peak in oil production before 2020 is correct, the Chinese oil demand could result in severe shortages of international oil supply. The rapid rising oil price in recent years has already affected global economic growth. The oil price reached a new record high of US$126 per barrel in early May 2008 mainly because of strong demand from Asia, China in particular (IEA 2008). Moreover, Zhao and Wu (2007) believed that the international oil price was not a major determinant in China’s oil imports, and China’s rising imports would add further pressure on world oil prices. As for the environmental perspective, China overtook the US and became the biggest CO2 emitter in 2006, and its CO2 emissions are likely to reach 11,730 Mt in 2030, accounting for 29 per cent of world total (EIA 2009). In that case, any reduction in China’s future oil demand and GHG emissions would be important to the world economy and human welfare. The present study shows that 207 Mt of oil could be saved and 531 Mt of CO2 emissions could be avoided in China’s road transport sector alone in 2030 if all the measures included in the Best Case scenario were implemented. This would reduce China’s dependence on imported oil and the pressure on international oil supply and prices. Domestically, selling road fuels at low prices costs the Chinese government billions of dollars every year to subsidize oil companies for their shortfalls. And if oil price were still US$126 per barrel in 2030, these measures could help China save US$186 billion on its annual oil import bill. Furthermore, the accumulated reduction of oil demand in China’s road transport sector between 2005 and 2030 would be 2,145 Mt, which is nearly the same as the current proven oil reserves in China (2,200 Mt). Strategically, all the measures included in the Best Case scenario should be implemented. Analysis from a life-cycle perspective might show different balances and different effects for each kind of measure. Please refer to Yan and Crookes (2009b, 2010) and Yan et al. (2010) for reviews of life-cycle energy use and GHG emissions for various road transport fuels in China. Key barriers to implementation of each kind of measure Inadequate data and information is one of the most serious barriers faced by China in the process of implementating energy-saving measures (Wang et al. 2008). For the road transport sector in particular, vehicle population, vehicle distance travelled and fuel economy by vehicle type and fuel type, need to be better documented to overcome this barrier. China did not agree to binding CO2 emissions reductions in the Kyoto Protocol (Lu and Ma 2004). Therefore, the lack of climate change concerns among policy makers and the public could be another key barrier. The government and academic communities should increase available information on the consequences

92 Xiaoyu Yan and Roy Crookes of overusing fossil energy and try to address climate change issues to the public, through methods such as public awareness campaigns. The government’s attitude towards private motorization is considered to be the key barrier to implementing the Private Vehicle Control measures. The rapid increase in the use of private vehicles in China is largely the result of government policy that promotes economic development through development of the automobile industry and infrastructure (Liu et al. 2007). The long-term economic, energy and environmental impacts of private motorization need to be carefully assessed and fully understood by the government to establish a proper policy direction. High costs and a lack of R&D capabilities for advanced vehicle performance, emission and fuel related technologies are considered key barriers to implementing the Promotion of Diesel and Gas Vehicles measure. International financial and technical aid such as loans, technology transfer and cooperation would help China to overcome these barriers in an effective and efficient way (Wang et al. 2007). The key barrier to implementing the Fuel Tax measure is political concerns. These include: higher fuel prices could cause inflation and reduced competitiveness of exported goods, slowing economic growth in China; the difficulty to distinguish road vehicle fuel use and agricultural vehicle fuel use; deciding on an appropriate tax rate tailored to the levels of economic development in different regions. These political issues need to be carefully evaluated before a comprehensive fuel tax can be implemented. The key barrier to implementing the Biofuel Promotion measure is the growing concern over food security, which has been considered to be China’s first priority. It is therefore beneficial for China to diversify the feedstock for biofuels from the current grain source, to non-food sources.

Conclusions A detailed model has been developed to estimate the past trends of energy demand and GHG emissions in China’s road transport sector between 2000 and 2005, and to project the future trends up to 2030. Compared with earlier studies, the present paper provides more reliable historical trends by employing a more appropriate approach and more up-to-date data. Two scenarios – Business as Usual and Best Case – have been designed to represent the worst and best cases of the development strategies for China’s road transport sector between 2006 and 2030 in terms of energy demand and GHG emissions. The Business as Usual scenario is used as a baseline reference scenario, in which the government is assumed to do nothing to influence the long-term trends of road transport energy demand. The Best Case scenario is considered to be the most optimized case where a series of available reduction measures including Private Vehicle Control, Fuel Economy Regulation, Promotion of Diesel and Gas Vehicles, Fuel Tax and Biofuel Promotion are assumed to be implemented. In the Business as Usual scenario, total energy demand, petroleum demand and GHG emissions in China’s road transport sector in 2030 would reach 444 Mtoe, 438.5 Mtoe and 1,303.7 Mt of CO2, respectively. While in the Best Case scenario

Effects of policy measures on energy demand 93 these would be 260.6 Mtoe, 231.3 Mtoe and 772.5 Mt of CO2, with reduction potentials as large as 41.3 per cent, 47.2 per cent and 40.7 per cent achieved, respectively. Private Vehicle Control, Fuel Economy Regulation and Fuel Tax would be the most effective measures for reducing total energy demand, petroleum demand and GHG emissions. Promotion of Diesel and Gas Vehicles and Biofuel Promotion measures would not be very effective in reducing total energy demand and GHG emissions. However, the Biofuel Promotion measure would have a much larger effect on reducing petroleum demand than total energy demand.

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6

Social networks, innovation and the development of industrial clusters in China Jinmin Wang

Introduction Industrial clusters have been playing an important role in stimulating regional economic development and strengthening the local–global linkage in China since the 1990s. The formation and growth of industrial clusters have taken place within the context of ownership reform of state-owned enterprises (SOEs) and the rapid development of private economy along the coastal provinces in China. Some of them have exhibited similar features to those in Italy (Wang 2001). The phrase – ‘small commodities, big markets’ – is often used to describe the rapid economic growth in Zhejiang province, East China. These commodities used to be mainly daily necessities with small scales of production, limited technology content and lower cost of transportation. The formation of industrial clusters in rural areas of Zhejiang province was demonstrated by hundreds of family workshops engaged in the same industry and agglomerated in neighbouring villages or towns (Shi et al. 2004). There has been deep interaction between the social and economic systems in the Chinese business environment. Social networks play an important role in industrial cluster development in China. There are very close family, private and public–private ties. The family relationship is still one of the most important social relationships in rural China. There is strong trust among family members and relatives. The family network has been extended to include friends, neighbours, fellow villagers; from siblings, kinsmen to regional contacts. What is the role of the social network in cluster building and development in rural China? The paper intends to explore how social networks have contributed to the formation and development of industrial clusters in rural China through a case study of the Yiwu sock cluster in Zhejiang province, East China.

Institution, social network and the development of industrial clusters In recent years, economic sociology has attached much importance to the impacts of social relations on economic activities. According to Hakansson and Johanson (1993: 38), ‘Networking is all about finding people who have mutual advantage in

98 Jinmin Wang co-operating’. There are three aspects to networks: actor bonds, activity links and resource ties. The actors can be individuals, teams and organizations. The links can be knowledge, trust, alliances, customers and suppliers. The ties can refer to interactions between them. Network efficiency depends on the trust and cooperation among networked firms. ‘In market transactions, the benefits to be exchanged are clearly specified and no trust is required. Agreements are bolstered by the power of legal sanction. Network forms of exchange entail indefinite, sequential transactions within the context of a general pattern of interaction. Sanctions are typically normative rather than legal. The value of the goods to be exchanged in markets are much more important than relationship itself; when relations do matter, they are frequently defined as they were commodities’ (Powell 1990: 301–2). The social-network model of industrial clusters has been developed within the literature of economic sociology. It criticizes the neo-classical approach to evolution of institutions. The social network consists of a set of transitive personal relationships among individuals in the social community under the circumstances in which both price signals and monitoring are not sufficient to carry out a particular project or fulfil a special task (Gordan and McCann 2000). They consist of four basic elements, including structure, resources, rules and dynamic factors such as opportunities and restraints to the formation and change of network (Zhang 2001). Granoverter (1985) argues that economic activities are not pure market behaviour, but is embedded within social structures in the modern society. Social relations, rules and institutions influence the economic behaviour of agents through their decision-making. The strength of social relations can be termed as ‘embeddedness’, which emphasizes the role of concrete personal relations and social networks to explain why and how individuals interact with each other. The development of social relationship leads to trust and absence of opportunism. The personal experience ‘generate clearly defined standards of behaviour easily policed by the quick spread of information about instances of malfeasance’ (Granoverter 1985: 492). But he also pointed out that local network with excessive embeddedness might lead to the path-dependence and ‘lock-in’ effects. The idea of new industrial districts was reinvigorated on the basis of Marshall’s tradition and was inspired by the idea of flexible specialization put forward by Piore and Sabel (1984). Marshall (1890) is often cited as the first economist to recognize that the location and proximity of firms can lead to an improvement in their productivity and business performance. In the late 1970s, Italian scholars introduced new definitions of industrial cluster as agglomerations of geographically localized firms that develop and keep up strong social bonds of trust and reciprocity over time that are conducive to specialization and innovation (Bagnasco 1977). According to Becattini (1990: 38), an industrial cluster is ‘a socio-territorial entity which is characterized by the active presence of both a community of people and a population of firms in one naturally and historically bounded area. In the district, unlike in other environments, such as the manufacturing towns, community and firms tend to merge’. Harrison (1992) emphasizes that new industrial clusters not only imply traditional industrial agglomeration, but also the embeddedness of mutual trust and economic relationships within the non-economic institutions of local

Social networks and innovation 99 society. Industrial clusters are able to accommodate both local economic and social forces so as to negotiate present industrial change while keeping up a specific local social-cultural identity. Thus, the advantages of local transactions not only save transportation costs but also establish trust among firms and minimize opportunism and asymmetric information. These definitions attach more importance to sociopolitical factors, links between suppliers and clients and the role of the community in enhancing the performance of firms within industrial clusters. Social networks influence the internal knowledge and information diffusion within industrial clusters and the performance of entrepreneurship. According to Porter’s diamond model, the strategy and organization of enterprises have been taken as the sources of competitive advantages of nations (Porter 1990). Entrepreneurs make and implement the strategies of firms, so they play an important role in the formation of production network partly on the basis of social networks. Nelson and Sampat (2001) discuss the concept of ‘social technologies’ to refer to how institutions constitute means to share information and to support interactions that influence the growth of knowledge. Social networks include a series of private relationships and informal institutions, which imply that networked members must obey a variety of ethical standards and rules of behaviour. Thus, the cost of trust within the social network is no higher than that of moral trust. Besides, there are various means of control among the members, rewarding the cooperative parties and punishing the uncooperative ones, even excluding the parties that break the social rules outside the social network (Zhang 2001). According to Guerrieri and Pietrobelli (2001), the inter-firm network in Italian industrial clusters is more formalized and structured, often involving more equity linkages. It is particularly obvious in less traditional industries such as metalworking. However, in traditional industries such as textiles, clothing and shoes, the informal network of subcontracting and inter-firm cooperation have not changed greatly, but the internal organization of SMEs within industrial clusters has been improved to maintain the competitive advantage. In a study on the formation of social capital in Eastern Europe, Fidrmuc and Gërxhani (2004) found that economic and institutional difficulties have resulted in the gap in social capital among different countries. Therefore, the improvement of the economic and institutional contexts might contribute positively to the formation of trust and social capital. Since social capital is closely related to human capital, increasing human capital may also bring about positive impacts on social capital. However, social capital building is a very slow process. It appears that policies may be able to encourage and accelerate this process in transition economies, so it is important to examine how public authorities can engage productively while maintaining enough space for self-enforcement. The role of social networks varies in different industrial clusters located in different countries. In some high-tech industrial clusters such as the Silicon Valley of the United States, the formation of informal communication network among firms and individuals are mainly attributed to similar educational and career backgrounds as well as informal cooperative traditions (Saxenian 1996). However, in

100 Jinmin Wang transitional economies, inter-firm networks still partly rely on the siblings, kinships and regional contacts. It is interesting to learn how informal social networks have been transformed into a source of extended social trust to promote the cluster development in economic transition.

The development of industrial clusters in Zhejiang province After 30 years of development since the reform and opening up, Zhejiang is now a province with a strong economy with industry as the leading sector. From 1978 to 2006, its GDP achieved an annual increase of 13 per cent, rising from RMB 12.4 billion to RMB 1,564.9 billion, thereby rising from twelfth to fourth place among all Chinese provinces after Guangdong, Jiangsu and Shandong provinces (Zhejiang Statistics Bureau 2006). Zhejiang province has been well known for its private economic development (Shi et al. 2004). In 2006, the total industrial addedvalue reached RMB 753.8 billion, increasing by 17.4 per cent. The state-owned and the state-holding industrial enterprises realized RMB 102.8 billion, rising by 14.6 per cent while the private industrial enterprises RMB 190.7 billion, increasing by 17.4 per cent (Zhejiang Statistics Bureau 2006). Light industry has played an important role in the industrial sector of Zhejiang province and many industrial clusters have developed rapidly. Most of the clusters remain in the traditional labour-intensive industries, including textiles, clothing, plastics, synthetic fibres, general-purpose equipment and machinery. Compared with some other successful provinces in East China, there has been less state investment in Zhejiang since the People’s Republic of China was founded in 1949, and as a result, industrialization there has depended upon the development of labourintensive industries in rural areas. Recognizing the industrial tradition and resource endowments of the region, the local government in Zhejiang province has carried out the industrial policies of ‘one product in a village’ (yi cun yi ping) and ‘one product in a township’ (yi xiang yi ping) since the 1980s (Shi et al. 2004). It has promoted the emergence of many specialized industrial clusters and overseen sufficient capital accumulation to enable industrial upgrading and regional development in the past 30 years. Initially, the industrial clusters in Zhejiang province were characterized by low efficiency, small scale and scattered distribution, while enjoying the advantages of small start-up capital and efficient management. However, with the further development of the economy, this model has generated a series of problems. The spatial distribution of clustered firms became too scattered, limiting the expansion of enterprises and the improvement of technology. In particular, with dense population, scarce land and limited natural resources constrained the land use of SMEs in the industrial clusters. Under the circumstances, the government at various levels has established industrial parks adjacent to the townships specializing in specific products so as to encourage the clustered firms to carry out technological innovation and expand their business scale with a better investment environment. Many clustered firms, which have accumulated the necessary capital, are eager to undertake technological

Social networks and innovation 101 improvement and business expansion. The economic development zone not only solves the issue of land use for clustered firms, but also offers preferential polices including favourable land prices, tax breaks and so on. In addition, the infrastructure in the state-level and provincial-level economic (technological) development zones and the export processing zones are capable of meeting the requirements of a variety of high- and new-tech industrial projects. Fierce market competition has accelerated the transition of traditional industrial clusters to scientific industrial clusters. The emergence and growth of scientific enterprises within the cluster has led to great improvements in the region’s innovative capability. As the clustered firms have strengthened their innovative capacities in science and technology, the pace of industrialization has accelerated (Zhu 2003). .

Research methodology The paper mainly uses the case study approach to look into the relationship between social network and the development of industrial clusters in China in transition with a case study of the Yiwu sock cluster, Zhejiang province. Located in the middle part of Zhejiang province, Yiwu City covers 1,105 square kilometres with a population of 1.67 million, among which 1 million are mobile and are doing business there. Yiwu has become the biggest distribution and exhibition centre of small commodities in China. In 2006, Yiwu city was named ‘China’s Famous Socks City’. The annual output of some large-scale sock enterprises, including Yiwu Langsha Group, Yiwu Mengna Socks Co. Ltd., Yiwu Fenli Socks Co. Ltd. and Yiwu Baonas Socks Co. Ltd., surpassed RMB 100 million in 2006 (Yiwu Commmercial News 2006). In 2009, there were about 1,400 sock firms in Yiwu City. Both annual output and sales volume of sock products exceeded over RMB 10 billion. The gross sales income of the 64 largest sock firms reached RMB 7.4 billion. There are more than 900 registered sock trademarks, among which 15 have been classified as national famous brands. Yiwu has become one of the most important sock production bases in China (Langsha Group 2009). The author interviewed 32 firms in the Yiwu sock cluster, including the 4 biggest sock companies in the world (Yiwu Langsha Socks Co. Ltd., Yiwu Mengna Socks Co. Ltd., Yiwu Fenli Socks Co. Ltd. and Yiwu Baonas Socks Co. Ltd.), 24 small and medium-sized sock companies, 2 sock ironing factories, 1 sock package design company and 1 company dealing in the spare parts of hosiery machines in the spring of 2007. Among the 32 sampled companies, almost all the large-scale sock companies with the number of employees exceeding 1,000 were established around 1995, except Yiwu Baonas Socks Co. Ltd. The majority of small and medium-sized sock companies were established during 1995–2000 when the specialized wholesale market in Yiwu witnessed a rapid expansion (Table 6.1). The proportion of sock enterprises with more than 100 employees has been on the rapid rise, which shows that some family workshops in the rural areas have grown up rapidly in the past decade (Table 6.2).

102 Jinmin Wang Table 6.1 The time period of establishing the sock companies interviewed. Establishment time

Before 1995

1995–2000

2000 till present

Total

Number of sock companies

8

18

6

32

Source: Compiled by the author.

Table 6.2 The size distribution of the sock companies interviewed. Firm size (number Less than 100 of employees) (.09). Having worked abroad was statistically significant to a firm’s positive performance, as was the firm’s level of technology – having a world-class technology, or at least one that is new to China. Interestingly, reliance on an overseas network was negatively correlated with ‘performance’. Perhaps the overseas network was not reliable or maintaining it was too time consuming.

Conclusion Saxenian’s work on Silicon Valley showed that Chinese (both mainlanders and Taiwanese) and Indians who work in the US are actively engaged in developing high-tech industries back home (Saxenian 2002). Thus, she argues that the concept of a ‘brain drain’ is passé – people who go abroad are not lost to their home country; instead are part of a worldwide process of ‘brain circulation’, which fits what is Meyer et al. first defined as the ‘Diaspora Option’ (Meyer et al. 1997), where countries, such as Colombia, reach out to overseas nationals and encourage

140 Huiyao Wang and David Zweig them to contribute to their home country. China, too, has been active in this realm, particularly since 2001 (Zweig et al. 2008). This study shows the depth of the ‘brain circulation’ that is underway and the fact that overseas students are not only serving China from abroad or by returning, but after they return are playing the leading role in many aspects of China’s going out strategy. Having studied at the best universities in the world, been deeply involved in the New Economy, experienced listing companies overseas, and possessing venture capital – perhaps earned by selling their own companies which was established while they were overseas – and having work experience with some of the best MNCs in the world, these returnees contribute enormously to China’s current economic engagement with the world. Even among smaller, less stellar firms, returnees remain actively involved in the global economy, exporting, networking, travelling, and owning overseas enterprises. These overseas connections are clearly important to their business success. But as the world prepares to deal with a globalizing China that is buying companies, listing its own firms, and competing for resources around the world, it must be prepared to deal with a remarkably talented cohort of entrepreneurs, trained overseas, adept at international business and deeply committed to helping China grow.

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Appendices Appendix 1 Degrees received by 50 high-flying entrepreneurs Institution

No. of degrees

Stanford

5

Harvard

3

SUNY

3

U Penn

4

Wharton

3

Columbia

3

Oxford

2

UCLA

2

Others: Princeton, Yale, Carnegie Mellon, University of Chicago, UC Berkeley, University of London, Georgia Tech, Texas Tech, Northwestern, George Washington University, MIT, Boston University, Rutgers, University of Indiana, University of Illinois (Urbana/ Champaign), University of Bonn, Heidelberg University, HEC (Paris), US National Laboratories, York University (Toronto), University of Saskatchewan, University of Arkansas. * Three had degrees from universities in China but had worked abroad.

Appendix 2 Returnee companies listed on overseas markets Successful returnees who led a business to list on Wall Street, interviewed for this study: 1 Tian Suning, founder of Asiainfo, first Chinese returnee enterprise listed on NASDAQ 2 Li Yanhong, founder and CEO of Baidu 3 Deng Zhonghan, founder and CEO of ViMicro 4 Yang Ning, founder and president of Kongzhong Corporation 5 Deng Feng, founding partner of Northern Light Venture Capital 6 Zhu Min, chairman of WebEx 7 Shen Nanpeng, a founder of CTRP and Home Inns 8 Liang Jianzhang, Chair, Board of CTRP 9 Xu Xiaoping, Beijing New Oriental Education Group 10 Wu Ping, President of Spreadtrum.

142 Huiyao Wang and David Zweig Appendix 3 Senior staff in MNCs Successful returnees who played important roles for MNCs, interviewed for this study: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

Ya-Qin Zhang, President, Microsoft China David Li Yi, Chairman and Country Head, UBS, China Kai-Fu Lee, President of Google China Liu Jiangnan, Chairman of Alcatel (China) Investment Co. Ltd. Jack Gao, VP, News Corporation and CEO of Star China Raymond Wang, VP, Siemens China Jack Shu, VP, Hewlett Packard China Huang Hui, CEO, Juneyao Group; former president, resident, BearingPoint China Jeremy Xiao, Managing Partner, Herbert Smith, Beijing Ge Ming, Chair, Ernst & Young Hua Ming (China) Yi Min, VP, BP China Chen Wei, GM of Hay Group Mao Daqing, GM, Capitaland China Investment Co. Ltd., Beijing Operations Chen Xingdong, MD and Chief China Economist of BNP Paribas Peregrine Securities Ltd. Charles Cheng, CEO of China District of Investment Department of Standard Chartered Bank Fred Hu, MD of Goldman Sachs Group (Asia) Inc. Richard Ji, Executive Director of Asia-Pacific District of Morgan Stanley Erfei Liu, Chairman of Merrill Lynch China Christianson Sun Wei, MD of the Chinese District of Morgan Stanley Min Tang, former chief economist of Asian Development Bank Resident Mission in PRC Yichen Zhang, Director and CEO of CITIC Capital Markets Holdings Ltd. Dennis D. Zhu, MD of Oaktree Capital (Hong Kong) Ltd.

Appendix 4 Variables for multivariate analysis of 200 entrepreneurs Dependent Variables: 1 Performance 2 Revenues 3 Export. Independent Variables: 1 Year registered 2 Level of technology

China’s diaspora and returnees

143

3 Transnational capital: — Time spent abroad — Degree abroad — Importance of overseas experience to business — Reliance on overseas network — Job related to skill learned abroad — Overseas subsidiary — Work experience abroad. 4 Social capital: — Friends/family as shareholders — Friends/family as suppliers — Friends/family as distributors — Friends/family as financiers — Government relations — Strategy in dealing with government — Member of Communist Party. 5 Human capital: — Age — Gender — Education — Social class — Years of management experience.

Notes 1 The authors would like to thank Shi Weiwei for her research assistance. 2 Unfortunately, several were captains of ships destroyed by the Japanese in 1895 at the Battle of Weihaiwei. 3 In fact, NASDAQ opened an office in Beijing in 2007 to lure more Chinese firms to list. See www.gov.cn 3 December 2007. Available HTTP: 4 Tian Suning, Mao Daolin, Zhang Chaoyang and Li Yanhong, heads of major IT firms, said that none of them had expected that the Internet era would come to China so quickly. 5 Returnees running VC firms include: Xiong Xiaoge, senior partner of IDG, Wu Shangzhi, chairman of CDH Venture, Yan Yan, chief partner of SAIF, Zhang Fan, Chinese partner of Sequoia Capital, Ding Jian, chairman and GM of GSR Ventures, David Zhang, chairman and GM of WI Harper Group, Xu Xin, founding partner of Capital Today, Kuang Ziping, founder and chairman & GM of Qiming Venture, He Xin, chairman and GM of Carlyle Group, and Wang Shen, partner of Texas Pacific Group. 6 These include Mengniu Dairy, Li Ning, Focus Media, Yurun Group, Super Data, and Yongle Electronic. 7 For instance, one of Microsoft’s most successful research centres worldwide was headed by Zhang Yaqin in China. 8 ViMicro and SpreadTrum, both run by returnees, created ‘China Chip’ with its own intellectual property, which was exported to many countries. Now its Starlight CMOS is widely used by important companies such as Samsung, Philips, Logitech, Fuji, Lenovo, Bird and TCL, covering 16 countries and regions. Vimicro Corp’s CMOS dominates the market of CMOS for computer image processing, taking 60 per cent of all these products.

144 Huiyao Wang and David Zweig 9 This data set was funded by the Hang Lung Center, Hong Kong University of Science and Technology, and collected in collaboration with the Chinese Private Enterprise Association (Zhongguo siying qiye xiehui) and its director, Zhang Houyi. Team members on the Chinese side included Dai Jianzhong, of the Beijing Academy of Social Sciences, and Dr Chen Guangjin, of the Chinese Academy of Social Sciences. Respondents were found from various lists in the hands of local governments and by referral (snowball sampling).

Bibliography Amiti, M. and Freund, C. (2008) An Anatomy of China’s Export Growth. Washington, DC: National Bureau of Economic Research. China Trade Remedy Information (2008) 2006–2007 Chinese Mobile Phone Manufactures Export Report. Online. Available HTTP: (accessed 21 January 2009). Feng, J., Guo, Y. and Guo, L. (2007) Top Careers. Beijing: China Development Press. Huang, H. (2002) ‘Overseas Studies and the Rise of Foreign Capital in China’, International Sociology, 17: 35–55. LaFargue, T. E. (1987) China’s First Hundred: Educational Mission Students in the United States, 1872–1881. Pullman: Washington State University Press. Li, Z. (2007) Movers on Wall Street. Beijing: China Development Press. Meyer, J.-B., Charum, J., Bernal, D., Gaillard, J., Granes, J., Leon, J., Montenegro, A., Morales, A., Murcia, C., Narvaez-Berthelemot, N., Stella Parrado, L. and Schlemmer, B. (1997) ‘Turning brain drain into brain gain: the Colombian experience of the diaspora option’, Science Technology and Society, 2: 285–315. Saxenian, A. L. (2002) Local and Global Networks of Immigrant Professionals in Silicon Valley. San Francisco: Public Policy Institute of California. Song, Q., Zhang, Z., Qiao, B. and Gu, Q. (1996) Zhongguo keyi shuo bu (The China that can say no). Beijing: Zhonghua gongshang lianhe chubanshe. Vanhanocker, W., Zweig, D. and Fung, C. S. (2006) ‘Transnational or social capital? Returned scholars as private entrepreneurs’, in A. S. Tsui, Y. Bian and L. Cheng (eds) China’s Domestic Private Firms: Multidisciplinary Perspectives on Management and Performance. Armonk, NY: M. E. Sharpe. Wang, H. (2007) Contemporary Chinese Returnees. Beijing: China Development Press. Xing, X. (2007) Venture Capitalists. Beijing: China Development Press. Zweig, D., Fung, C. S. and Han, D. (2008) ‘Redefining the “Brain Drain”: China’s diaspora option’, Science Technology and Society, 13: 1–33. Zweig, D., Fung, C. S. and Vanhonacker, W. (2006) ‘Rewards of technology: explaining China’s reverse migration’, Journal of International Migration and Integration, 7: 449–71. Zweig, D. and Han, D. (2008) ‘Chinese research students and scholars in Japan: the impact on Sino-Japanese relations’, Zhongkuo kenzai (China’s Economy), January: 36–51.

9

Corporate social responsibility in China’s largest transnational corporations Dylan Sutherland and Glen Whelan

Introduction Since the CCP’s espousal of the ‘Go Global’ policy at the Sixteenth Party Congress in 2002, Chinese outward foreign direct investment (OFDI) has increased rapidly from only several billion dollars to around US$50 billion in 2008 (MOFCOM 2009). This rapid international expansion of Chinese firms raises numerous questions. One multifaceted question concerns how China’s most internationalized firms conceive of, act upon, and report upon, their social responsibilities. It is this question that the present paper investigates. In doing so, we begin with a brief discussion of the internationalization of Chinese business, the idea of corporate social responsibility (CSR), and of CSR in China. Second, we outline our research questions. Third, we provide a discussion of our method for addressing, and a rationale for asking, each question. Fourth, we present and discuss our findings. In concluding, we suggest that whilst some of China’s most internationalized business groups appear to have embraced the idea of CSR, they appear to have done so in a specifically Chinese fashion.

Background and literature review There is growing interest in the internationalization of Chinese business. Recent studies, for example, have looked at: what motivates Chinese firms to undertake OFDI (Buckley et al. 2007; Child and Rodrigues 2005); the relationship between big business groups and outward investment (Morck et al. 2008; Sutherland 2009); whether domestic institutional constraints motivate Chinese firms to undertake OFDI (Boisot and Meyer 2008); and whether or not, and/or the extent to which, Chinese firms seek foreign brands (Fetscherin and Sardy 2008). What has not been looked into, however, is whether or not internationalizing Chinese business groups concern themselves with the idea of, let alone actually engage in, CSR. Given the opaque corporate governance structure of many Chinese business groups, their poor track record (with regard to social and environmental concerns for example), and burgeoning OFDI from China more generally, this is an important question.

146 Dylan Sutherland and Glen Whelan

Corporate social responsibility CSR can be quickly understood as giving a name to the idea that corporations do, or should, engage in activities that are more than ‘strictly business’. Firms, in addition to their economic responsibilities, it is suggested, have legal, ethical and discretionary philanthropic ones. Some argue, for example, that managers have a responsibility to manage corporations in the name of not just shareholders, but stakeholders as well (e.g. suppliers, consumers, employees, future generations, etc.) (Evan and Freeman 1988; Marens and Wicks 1999). Additionally – and given the continued absence of anything resembling a global sovereign (Griffin 2003) and the continued existence of weak or failed nation states (Rothberg 2004) – it is commonly suggested, within the CSR literature, that corporations might provide various political and/or public goods that are commonly associated with governments (Crane et al. 2008). The general thrust then, of many writings on CSR, is to refute Milton Friedman’s (1970) pithy suggestion that the social responsibility of business is to increase its profits. Despite this general opposition to Friedman’s perspective within the CSR literature, it is important to note that profitability and CSR need not be entirely opposed. Indeed, a great deal of the literature on CSR has been concerned to suggest that those firms who promote the interests of ‘society’ will tend to be financially successful (Orlitzky 2008). In this sense, CSR is commonly conceived in both instrumental and normative terms (Donaldson and Preston 1995).

CSR in China Whilst the CSR literature has flourished more generally, the literature on CSR in China, or on CSR from a Chinese perspective, is rather limited (Whelan 2007). Nevertheless, when it comes to such practical matters as implementation and engagement, it would appear that CSR is becoming increasingly important. Between 2004 and 2008, for example, the number of CSR reports released by Chinese companies increased from 4 to approximately 130 (Syntao 2007, 2008). And, with the 2008 introduction of the Labor Contract Law and development of the Taida Environmental Index in the Shenzhen Stock Exchange, it can be seen that a variety of institutional frameworks that will encourage more ‘socially responsible’ activities amongst Chinese companies are beginning to emerge. Perhaps the most important development regarding CSR in China, though, is a recent initiative of the State Council through its directly controlled body: the State-owned Asset Supervision and Administration Commission (SASAC). On 29 December 2007, SASAC – who is the majority shareholder and ultimate owner of many of China’s largest business groups – issued its ‘Notification on Issuance of the Guidelines on Fulfilling Social Responsibility by Central Enterprises’ (SASAC 2008). In making the Notification their first policy directive for dissemination in 2008, SASAC symbolized its importance. Given thus, and given SASAC’s power, the release of the Notification is a strong indication that CSR is being considered with increasing seriousness. In the Notification, SASAC identify four main reasons for adopting CSR. The

Corporate social responsibility 147 first three emphasize domestic considerations, noting that large groups should contribute to China’s ‘scientific development’ and promoting a ‘harmonious socialist society’. More specifically, SASAC argues that it is particularly important that central enterprises so contribute due to their engagement in ‘backbone activities’ (e.g. power supply and generation, telecommunications, natural resource extraction and processing, automobile production, for example). Further, the Notification indicates that social responsibility is an important way of contributing to the creation of a modern corporate system and in so doing improving firm competitiveness. Among other things, SASAC also envisage that CSR can, at the domestic level, contribute to eradicating corruption, improving product quality and service standards, protecting the environment, protecting employee rights, brand image and corporate solidarity. In contrast to the first three reasons, the fourth reason SASAC put forward for championing CSR is due to their belief that: ‘as the economy becomes increasingly globalized, the international community shows great concern for CSR, and the performance on fulfilling social responsibility has become an important index with which the international community evaluates enterprises’. Indeed, SASAC go so far as to suggest that promoting CSR within Chinese firms may help establish ‘China’s image as a responsible developing country’ (SASAC 2008: 2). Thus, SASAC’s Notification suggests that CSR is important not only for enterprise performance, but for China’s ‘soft power’ as well.

Research questions Given the rapid transnational expansion of Chinese corporations, and SASAC’s ambitious policy to implement CSR, it seems important to try to establish the extent and manner in which CSR has hitherto informed, or impacted upon, the behaviour of China’s most internationalized transnational corporations (TNCs). With this general concern in mind, the remainder of the paper is guided by the following, more specific, questions: 1 Is CSR reporting common amongst China’s most internationalized business groups? 2 What does the content of these reports reveal about the factors driving CSR adoption in China’s largest TNCs? 3 Following from this, and SASAC’s instruction that international practice should be considered, what international CSR initiatives and programmes do China’s largest TNCs engage with? Further, do these differ from those that their leading global counterparts engage with? If so, in what ways and why? The concentration in Question 1 on international CSR initiatives and programmes is of special interest owing to continued proliferation of trans-business and/or industry level CSR initiatives such as the UN’s Global Compact and the Extractive Industries Transparency Initiative (EITI). These, arguably, are becoming increasingly important for CSR today (Detomasi 2007). And second, it is due to the fact that many of these initiatives are obviously influenced by Western/global norms

148 Dylan Sutherland and Glen Whelan – e.g. liberalism, democracy and accountability – which are not necessarily congruent with Chinese values (Chan et al. 2008: 13). One would thus expect that there will be some discrepancy in this regard between Chinese business groups and their international counterparts. Finally, SASAC in the 2008 notification instructed China’s largest TNCs to adopt global standards, raising the interesting question of whether, to what extent and how this objective is being achieved.

Method and rationale Question 1 In addressing Question 1, we examined China’s largest 40 business groups, as listed by MOFCOM, for evidence of CSR reporting (MOFCOM 2008). We searched both company websites and annual reports to ascertain whether CSR reporting is undertaken and the nature of this reporting (Table 9.1). Our sample (China’s 40 largest business groups by OFDI stock) includes high profile companies involved in large transnational deals (such as Chinalco and Minmetals). Most of these are owned by SASAC and are state-owned business groups (consisting of parent and subsidiary companies). A significant amount of Chinese OFDI is concentrated in China’s largest groups. As such, they wield disproportionate influence (they are also role models for other firms). Our sample, therefore, covers an important area of Chinese TNC activity. While addressing Question 1 we took special consideration of the business group structure of Chinese big business, which is quite different to that found among stand alone corporations in the west, although similar to many other developing countries (Khanna and Yafeh 2007). These groups consist of many legally independent firms, typically with a parent or ‘group company’ ( jituan gongsi 集团公司) standing at the apex (see Figure 9.1 for the example of Sinopec, one of China’s largest groups). In general business groups are assembled within pyramidal type ownership structures, often with a non-listed ‘group corporation’ holding a controlling share of the main listed entity in the group and other non-listed entities (see Figure 9.1). Above the ‘group corporation’ stands SASAC as the ultimate owner, at either the central or local level. Further down within the group there may be numerous other listed and unlisted companies that come under the influence of the apex firm. In some instances CSR reporting may take place within a subsidiary as opposed to parent company. Thus in the example of Sinopec Group (Figure 9.1), CSR is only reported upon with regard to the listed company Sinopec Ltd., not with regard to the holding company Sinopec Group. There can be problems if business groups report CSR activities only at the subsidiary level instead of the group level (typically this may be carried out by one of the largest listed corporations in the group obliged to adopt modern corporate practice). This is because reporting at the level of a single subsidiary may allow groups to move their more harmful activities away from the reporting company. Sinopec Group, for example, which has interests in Sudan, moved these assets to its parent company prior to its IPO. Given the large numbers of firms participating within

Corporate social responsibility 149 China’s large state-owned groups such intra-group transfers may be a relatively simple avoidance measure. Within China’s 3,000 or so business groups, for example, there were around 28,000 directly held subsidiaries (at the first tier) (SSB 2008). Beneath this first-tier are many more, lower level subsidiaries. Among the largest groups examined in this paper, for example, Sinopec has at least 18 subsidiaries, Sinosteel 76 and Baosteel Group Corporation 14 (Table 9.1). There are numerous ways in which harmful and damaging activities may be moved between member firms within groups. It may, for example, be possible to move funds from firms actively reporting CSR (and those therefore appearing to be safe to lend to) within the group, to other firms that are not doing so. In China this is facilitated by the existence of finance companies within the largest centrally controlled groups. By 2008 nearly 37 per cent of the State Council’s 104 trial big business groups had established internal finance companies, making this type of avoidance activity a real possibility (SSB 2008). This problem has not gone unnoticed by NGOs and other observers. As one recent critique of China’s oil producers and their activities in Sudan has noted: Petro China has made it a practice to place much of its cash on hand with China Petroleum Finance Company, the wholly owned finance subsidiary of CNPC (otherwise known as CP Finance), which then uses this cash to make loans to other CNPC subsidiaries (including, potentially, those subsidiaries active in Sudan). This practice of placing publicly traded subsidiary cash in the finance arm of a state-owned parent is prevalent in China and has been widely criticized by shareholder activists who note that the action amounts to funding of projects by the subsidiary (like, potentially, CNPC’s operations in Sudan) without shareholder approval. (Taskforce 2007) The distinction between group-level and subsidiary-level reporting has not, as yet, been given the attention it warrants. Research to date has classed a group as having a CSR report regardless of whether the report is published within a subsidiary or parent company (Syntao 2008). The distinction, however, is important and should be made given the past history of asset movement within groups. Question 2 In addressing Question 2, we analysed the content of the reports and other company releases in an effort to identify any domestic factors – e.g. CCP directives, domestic events specific to China – that appear to be driving Chinese business groups to engage and report upon their CSR activities. Importantly – and while there is evidence to suggest that as many as 11 Chinese Business Groups have published a CSR report (Table 9.1) – only 5 of these reports were able to be found, accessed, and analysed by the authors: i.e. the reports of Sinopec, CNPC, CNOOC, COSCO and CMCC. A sixth report, Sinosteel’s, was found and accessed, but could not be analysed due to it only being accessible to the researchers in a format that was difficult to read (i.e. the typeface was very small, and there was no capacity to zoom

Table 9.1 Summary of CSR policies in China’s largest TNC business groups (based on OFDI stock, 2007). Name of company and ranking 1. Sinopec (China Petrochemical Corporation) 中国石油化工集团公司 Zhongguo shiyou huagong jituan gongsi

Additional notes on group, including CSR policies Report at subsidiary level (website: http://www. sinopecgroup.com/english/Pages/default.aspx). Main Business: Oil and gas operations. See Figure 9.1 for more details of structure. Sinopec Ltd. has controlling shares in numerous other listed companies (i.e. Yizheng Chemical Fibre Co. Ltd.). Claims to undertake work on poverty relief. At least 17 subsidiaries, first tier. SASAC, 2nd and 6th policy. Driven by: ‘competitiveness and various societal factors as a good corporate citizen, energy conservation and environment protection, so that the Company would achieve sustained, effective and harmonious growth, and realize the goal of becoming a multinational energy and chemical corporation with strong competitiveness’ (Annual Report 2007: 2).

2. China National Petroleum CSR report, at group level (website: http://www. Group Corporation cnpc.com.cn/en/). CNPC owns oil and gas assets and 中国石油天然气集团公司 interests in 27 countries, and provides oilfield services, engineering and construction in 49 countries worldwide. Zhongguo shiyou tianranqi Operations in Sudan. At least 41 subsidiaries. Listed on jituan gongsi Hong Kong and New York exchanges in 2001. 3. The China National Offshore Oil Corporation 中国海洋石油总公司 Zhongguo haiyang shiyou zonggongsi

4. COSCO Group 中国远洋运输集团 Zhongguo yuanyang yunshu jituan

CSR report at group level. www.cnooc.com.cn/. SASAC, four listed companies in group (two listed subsidiaries in HK). The China National Offshore Oil Corporation (CNOOC) is one of the largest state-owned oil giants, as well as the largest offshore oil and gas producer. Total staff of 51,000. ‘As a key state-owned company, CNOOC is an active participant in social welfare and public initiatives. Our mission is to create a bright future for our country and people, and to forge ahead in the harmonious development of people, society and the environment.’ CSR report at group level. (Group website: http:// www.cosco.com/en/about/index.jsp?leftnav=/1/1). SASAC, six listed subsidiaries. First in China to join UN compact. COSCO specializes in shipping and modern logistics, serving as a shipping agency and providing freight forwarding, shipbuilding, ship repairing, terminal operation, trade, financing, real estate and IT services. It aims to take a lead role in these areas. There are CSR reports online for 2005–2007 at the group level. There are six listed companies within the group. ‘COSCO Group companies have set up their respective

Name of company and ranking

Additional notes on group, including CSR policies Commission on Sustainable Development’ COSCO Group ‘shoulders the political responsibility to construct a harmonious society’.

5. China Resources National No group CSR report, brief mention on web page Corporation (website: http://www.cre.com.hk/). SASAC, 22nd largest. Twenty-plus subsidiaries. 中国华润总公司 Zhongguo huarun zonggongsi

It is a diversified group involved in retail, beverages, food processing and distribution and textiles. See interim report for CSR details, p. 10). See 2007 Annual Report (p. 32) for more information.

6. CITIC Group

No group CSR report, but mention in annual report (website: http://www.citic.com/). Has 44 subsidiaries (in Hong Kong, the United States, Canada, Australia and New Zealand). CITIC’s core business ranges from financial industry, industrial investment to service industries. On CSR: ‘As a state-owned backbone enterprise group, CITIC Group took seriously in fulfilling its corporate social responsibilities by proactively repaying the society and vigorously nurturing a sound corporate culture’. (Annual Report 2007: 42)

中国中信集团公司 Zhongguo zhongxin jituan gongsi

7. COFCO Group Ltd. 中粮集团有限公司 Zhongliang jituan youxian gongsi

8. China Mobile Communications Corporation 中国移动通信集团公司 Zhongguo yidong tongxin jituan gongsi

No group CSR report (website: http://www.cofco. com/en/index.asp). SASAC (31st), 14-plus 6 listed companies. COFCO is a leading grain, oils and foodstuffs import and export group as well as one of China’s largest food manufacturers. On social responsibility (http://www.cofco.com/en/responsibility/ society.aspx#): ‘Enterprises create social wealth, but often at the cost of the natural resources and environment of the place in which they are located. They serve as the benchmark for a country’s economic development. Just as the performance of Chinese enterprises decides China’s competitiveness as a nation, their social ethics and responsibility is crucial in building a harmonious society in China.’ Yes, group CSR report (website: http://www. chinamobile.com/en/mainland/about/profile.html) ‘China Mobile believes that besides pursuing their own development, businesses are also responsible for assisting the poor and the disadvantaged in the society . . . Our goal is to create a healthy and positive social environment to procure the harmonious development of society.’ Extensive CSR reports for 2007 and 2008, with performance metrics as well. Quite impressive. (continued)

Name of company and ranking 9. Sinochem Corporation 中国中化集团公司 Zhongguo shihua jituan gongsi

10. China Merchants Group 招商局集团有限公司 Zhaoshangju jituan youxian gongsi 11. Shum Yip Holdings Co. Ltd. 深圳控股有限公司

Additional notes on group, including CSR policies Group-level CSR report (website: http://www.sinochem. com/tabid/63/Default.aspx). SASAC (7th). ‘As our major businesses concern sensitive areas including recourses, environment and safety; Sinochem ought to assume the responsibility to protect the environment, to conserve recourses, to conduct safe production and to promote the harmonious coexistence between the human beings and the nature. As a huge conglomerate with high public attention, Sinochem has the responsibility to follow lofty business ethics and the code of behavior, observe laws and regulations, to contribute to the society and to make an excellent corporate citizen.’ No group CSR report (website: http://www.cmhk.com/ en/). Very little on CSR. Has around 20 listed subsidiary companies owned by the group, heavily involved in transport infrastructure (toll roads). Listed as a large overseas company because of interests in Hong Kong. No group CSR report. Very little if nothing on CSR. Probably included as large overseas investor owing to Hong Kong interests.

Shenzhen konggu youxian gongsi 12. China Shipping Group Company 中国海运集团公司总公司 Zhongguo haiyun jituan gongsi zonggongsi 13. China National Aviation Holding Corporation 中国航空集团公司 Zhongguo hangkong jituan gongsi

No group CSR report (website: http://www. chinashipping.cn/). SASAC (40th). Has 31 subsidiaries. In general very little on CSR. http://www.cscl.com.cn/ info/sms.jsp lists State Council regulations, though has not gone nearly as far as COSCO. No CSR section in annual report of the listed company. No group or subsidiary CSR report (website: http:// www.airchinagroup.com/cnah/). China National Aviation Holding Co. is the parent of mainland flag carrier Air China Ltd. It is therefore a state-owned Chinese holding company (CNAHC). CSR not mentioned on the parent company website. It does, however, discuss the ‘scientific concept of development’ and the role it has in working towards it. Annual report of Air China does not include a section on CSR, though mentions it is following SASACs guidelines on scientific development: http://www.sasac.gov.cn/n1180/n6130640/ n6192763/index.html

14. China National Chemical No group-level CSR report (website: http//:www. Corporation chemchina.com.cn). Owns numerous other groups, SASAC (35th). A large-scale state-owned group 中国化工集团公司 company approved by the State Council on the basis of Zhongguo shihua jituan gongsi China National Bluestar (Group) Corporation, China National Haohua Chemical (Group) Corporation and

Name of company and ranking

Additional notes on group, including CSR policies other companies affiliated with the former Ministry of Chemical Industry. No CSR reports mentioned on the website. At least 11 listed subsidiaries, though see http:// www.chinahaohua.com.cn/members/MemberDetail. asp?sclassId=76).

15. China State Construction No group-wide CSR report (website: http://www.cscec. Engineering Corporation com.cn/). SASAC (13th), subsidiaries (21 domestic and 16 abroad). The largest construction conglomerate 中国建筑工程总公司 in China. China Overseas Group Holding Ltd. Zhongguo jianzhu (中国海外集团有限公司) is listed in Hong Kong. gongcheng gongsi China Overseas Land & Investment Ltd. (‘COLI’ or the ‘Company’), a Hong Kong listed subsidiary, controls (along with observation group subsidiaries) China State Construction International Holdings Limited is also listed on Hong Kong. 16. Sinosteel 中国中钢集团公司 Zhongguo zhonggang jituan gongsi

17. China Network Communications Group Corporation 中国网络通信集团公司 Zhongguo wangluo tongxin jituan gongsi

18. Aluminum Corp of China 中国铝业公司 Zhongguo lvye gongsi

Group level CSR report. Extensive. Reference to role as global citizen. www.sinosteel.com Formerly China Iron & Steel Trade & Industry Group. Sinosteel includes 76 subsidiaries. It has established iron ore and chrome ore resource bases in Australia and South Africa, providing abundant mineral resources for the sustainable development of China. One of few reports to mention international concerns. Sinosteel has also released a report on CSR in Africa. No group-wide CSR report. China Network Communications Corporation (CNC) is a state-owned enterprise and the ultimate controlling shareholder of publicly traded China Netcom Group and its subsidiaries, including CNC China. CNC operates a national and international fixed telecommunications network that covers the whole country – it is the leading provider of fixed-line telecom services, including broadband and Internet access, data, and business communications. The company, which also provides limited wireless services, has more than 100 million wire-line subscribers. Merged with China Unicom. Yes, group CSR report (Chinese) (website: www.chinalco.com.cn/). SASAC (ranked 21st), 38 subsidiaries. Chinalco has 34 directly owned or controlled subsidiaries, and approximately 200,000 employees. ON CSR: ‘At Chinalco, the respect for human dignity and diversity is central to all operations. It seeks to contribute to sustainable development and to be an outstanding corporate citizen.’ Recently invited Australian Aborigines to China to view some of their mining project. (continued)

Name of company and ranking 18. Aluminum Corp of China (cont.) 中国铝业公司 Zhongguo lvye gongsi

19. GDH Limited 粤海控股集团有限公司 Yuehai konggu jituan youxian gongsi

20. China Minmetals 中国五矿集团 Zhongguo wukuang jituan

21. CITS Corporation 中国国际旅行社总社有限 公司 Zhongguo guoji lvxingshe zongshe youxian gongsi 22. Shanghai Automobile Industry Group Co. 上海汽车工业集团总公司 Shanghai qiche gongye jituan zonggongsi

Additional notes on group, including CSR policies Is strenuously attempting to improve corporate image and raise awareness in Australia. ‘The members of the Aurukun Aborigines Community Delegation have developed new understanding of CHINALCO through the exchange, and expressed their support to CHALCO’s Aurukun Bauxite Project in Australia’. Looking to take large share in Rio Tinto, one of world’s largest mining groups. No group CSR report. Subsidiaries unclear. GDH Limited (‘GDH’ or ‘The Group’) is an investment holding company established by the collaboration of the former Guangdong Enterprises (Holdings) Limited, Nam Yue (Group) Company Limited and the Guangdong Province Dongshen Water Supply Management Bureau (see http://www.gdh.com.hk/english/corporate_value_e. php for corporate values). This group is further from the centre (i.e. Beijing) and appears less encumbered by social duties. Recent CSR report. Though in general limited evidence in subsidiaries (website: http://www.minmetals.com. cn/). SASAC (16th), 37 subsidiaries (China), many overseas branches. China Minmetals Corporation, founded in 1950, is a large-sized group dealing worldwide in development, production, trading and operation for metals and minerals. The Group is China’s largest nationwide supplier of raw materials for the metallurgical industry and also the largest steel trading company. The Group has established a joint venture with CODELCO to develop copper resources in Chile and has activities in Peru. ‘Cherish limited resources, pursue boundless development’, company slogan. Also involved in real estate, logistics and financing – quite typical in this respect. Minmetals controls shares of Minmetals Resources and Minmetals Land, two listed red-chip companies in Hong Kong. None found in Minmetal Resources Ltd. No group-wide CSR report (website: http://www. citsgroup.com.cn/enbak/index.asp). ‘China International Travel Service is the biggest and strongest international travel service group, with a registered capital of RMB 280 million and 2,300 employees. Some group-wide CSR awareness, no report though (website: http://www.saicgroup.com/chinese/index. shtml). Shanghai SASAC (14th). ‘With a view to future industry and state economy, SAIC concentrates preponderant resource to develop new energy cars, and has a breakthrough now.

Name of company and ranking

Additional notes on group, including CSR policies In the 11th 5-years, SAIC will realize series production of hybrid cars in both own brand and JV brands. In World Expo, SAIC will serve the hybrid car for demonstration run.’ No annual reports for listed subsidiaries.

23. Legend Holdings 联想控股有限公司 Lianxiang konggu youxian gongsi

No group-wide CSR report (website: http://www. legendholdings.com.cn/). Established in 1984 with 11 researchers and an investment of RMB 200,000 from the Institute of Computing Technology of the Chinese Academy of Sciences. In 2006, turnover of Legend Holdings reached RMB 138.9 billion, total assets of RMB 65.1 billion. ‘With dedication to the service of society through development and growth, Legend Holdings is committed to be a respected and trusted global holding company that holds interests in leading enterprises worldwide.’

24. China Power Investment Corporation

No group-wide CSR report (website: http://eng. cpicorp.com.cn/). Claims to aspire towards green credentials. In general appears limited, though as a 中国电力投资集团公司 power producer clearly in an area requiring CSR. Zhongguo dianli touzi jituan China Power Investment Corp. contrasts with the State gongsi Grid, which has already published several CSR reports (it claims to be among the first corporations in China to do so). 25. Haier Group 海尔集团 Haier jituan

26. China Metallurgical Group Corp. 中国冶金科工集团公司 Zhongguo yejin kegong jituan gongsi

No group-wide CSR report (website: http://www.haier. cn/) (owner: local government/ employees (similar to Legend). SASAC (20th) Haier refrigerators and washing machines as among China’s ‘Top Global Brands’. Haier is the world’s fourth largest white goods. As of 2007, the Haier Group has established a total of 64 trading companies (19 located overseas), 29 manufacturing plants (24 overseas), 8 design centres (5 overseas) and 16 industrial parks (4 overseas). No group-wide CSR report (see http://www.mcc.com. cn/). A driving force behind the growth of China’s steel industry. The company is a leading investor licenced by China’s government in natural resources exploitation businesses. MCC has to date invested as much as US$1 billion in mining resources abroad, and owns many production facilities and claims of resources including iron ores, copper, gold, nickel, cobalt, zinc, lead and aluminum, etc. Construction activities also in Africa. (continued)

Name of company and ranking 27. Guangzhou Yuexiu Holding Limited 广州越秀企业集团公司 Guangzhou yuexiu qiye jituan gongsi

28. China National Foreign Trade Transportation (Group) Corporation 中国外运长航集团有限 公司 Zhongguo waiyun changhang jituan youxian gongsi

29. Bao Steel Group 宝钢集团有限公司 Baogang jituan youxian gongsi

30. ZTE Corporation 中兴 Zhongxing

Additional notes on group, including CSR policies No group-wide CSR report. Guangzhou Investment Company Limited (SEHK: 123) is a conglomerate engaged in property, newsprint and toll road located in Guangdong, China. Its major shareholder is Yue Xiu Enterprises (Holdings) Limited, the investment corporation of the Guangzhou Government in Hong Kong. It is incorporated in Hong Kong and it was listed on the Hong Kong Stock Exchange as red-chip stock in 1992. No group-wide CSR report (website: http://www. sinotrans.com). Founded in 1950, China National Foreign Trade Transportation (Group) Corporation (SINOTRANS) operates under the direct administration of SASAC. Involved in integrated logistics and shipping. SINOTRANS is China’s largest company specializing in international freight forwarding, air cargo and international express and the second largest shipping agency and the third largest shipping company. On CSR: ‘Sinotrans is actively involved in social events, environment protection, endeavoring for a better life of the people and a more harmonious community.’ It has three listed companies within the group. Very limited mention of CSR in annual reports. Yes, group-wide CSR report (website: http://www. baosteel.com/group/). SASAC (8th), 14 subsidiaries. Baosteel Group Corporation is the parent company of BaoSteel Ltd. (listed) which owns 55% of Baosight, also listed. Five listed companies in total. Extensive group-wide CSR reporting. Report over 100 pages long, published since 2005. Describes activities of 13 main branches/subsidiaries. Among the most detailed published in China. Recent CSR report (website: http://wwwen.zte.com.cn/). Chinese telecoms equipment provider, first to pursue business in overseas markets. ZTE now has about 50,000 employees and 8,000 of them are working in about 100 representative offices around the world. As a leading global provider of telecommunications equipment and network solutions, ZTE plays an important role in the international telecoms community. Little discussion or mention of CSR in annual report of listed arm until recently when it became a member of the UN Global Compact. It will abide by the Ten Principles of the Global Compact in developing and carrying out its CSR. ZTE is also set to release its first CSR report as part of its 2008 annual financial report in March 09.

Name of company and ranking

Additional notes on group, including CSR policies ZTE has been chosen as the only representative in the communications industry in The Wall Street Journal’s ‘10 Most Respected Enterprises in China’.

31. Shanghai Overseas United Investment Co. Ltd.

No information.

上海海外联合投资股份有 限公司 Shanghai haiwai lianhe touzi gufen youxian gongsi 32. China Huaneng 中国华能集团 Zhongguo huaneng jituan

33. China Unicom 中国联合通信有限公司 Zhongguo lianhe tongxin youxian gongsi 34. China Nonferrous Metal Mining and Construction (Group) Co. Ltd. 中国有色矿业集团有限 公司 Zhongguo youse kuangye jituan youxian gongsi

Yes, group-wide CSR report (website: http://www.chng. com.cn/). SASAC (26th), 23 China Huaneng Group (CHNG) was reorganized into a central-governmentadministered state-owned enterprise on the foundation of its predecessor by the State Council. CHNG is a state-authorized investment entity and a trial enterprise of state-holding corporations. CHNG is an incorporated business entity primarily focusing on the development of power with a diversified business portfolio. China Huaneng Group has released Sustainable Development Reports since 2006. The reports mainly cover six areas, showing the achievements Huaneng has obtained in fulfilling security responsibility, environmental responsibility, economic responsibility and social responsibility. Huaneng made satisfactory progress in the year 2007, ‘realizing the harmonious development of the enterprise, society, and the environment’. No group-wide CSR report (website: http://www. chinaunicom-a.com/about/index.html). SASAC (25th). See China Unicom Holding Ltd. For more information.

No group-wide CSR report (website: http://www. cnmc.com.cn/en/jtjj/index.asp). CNMC is a stateowned enterprise under direct supervision of SASAC. Its business covers investment in, development and management of mines at home and abroad with its focus on nonferrous metals. CNMC boasts the most overseas nonferrous metal resources in China. At present, the projects both under development and operation include: Chambishi Copper Mine of Zambia (sackings and riots reported), Tumurttin-Ovoo Zinc Mine of Mongolia, Tagaung Taung Nickel project of Myanmar, Thai-China lead-Antimony Alloy Plant, Mongolia Oyu Tolgoi Copper-Gold Project and so on. (continued)

Name of company and ranking 34. China Nonferrous Metal Mining and Construction (Group) Co. Ltd. (cont.) 中国有色矿业集团有限 公司 Zhongguo youse kuangye jituan youxian gongsi

35. Shougang Group 首钢集团 Shougang jituan

36. China Poly Group Corporation 中国保利集团公司 Zhongguo baoli jituan gongsi 37. TCL Corporation TCL集团股份有限公司 TCL jituan gufen youxian gongsi

Additional notes on group, including CSR policies CNMC successful enters Australian capital market through the purchase of ORD shares of Australia. CNMC cooperates with Iran Mining Enterprise in the development of lead and zinc resources. CNMC invests in North Korea to upgrade the nonferrous metal mines there. CNMC has access to risk exploration areas in Cambodia and Laos. CNMC has been committed to the development of overseas nonferrous metal resources including copper, aluminium, zinc and nickel. No group-wide CSR reporting. (website: http://www. shougang.com.cn/main.html). Beijing SASAC (38th). Large integrated iron and steel works. One listed subsidiary and numerous other member enterprises (over 40 listed). Little mention of CSR. A notorious polluter at one point in time. Global Compact member since 20 April 2005, however, and forced to suspend operations during Olympic games. Issues with mineworkers in Peru, among other things. Little or no discussion of CSR (website: http://en.poly. com.cn/newEbiz1/EbizPortalFG/portal/html/about. html). Poly Group has two core industries, one is the international trade of military products and civil products, the other is the real estate developments. No. (Website: http://www.tcl.com/main_en/index. shtml) TCL employs more than 50,000 people in over 80 operations, including 18 R&D centres, 20 manufacturing bases, and more than 40 sales offices around the world. With 2007 global sales of USD$5.8 billion, and serving more than 100 million consumers worldwide.

38. Guangdong Province No. (Website: http://www.cks.com.hk/images/english/ Navigation Holdings Co. Ltd. enzzjg.htm) 广东省航运集团有限公司 Guangdongsheng hangyun jituan youxian gongsi 39. Xinjiang Zhongxin Resources Co. Ltd. 新疆中新资源有限公司 Xinjiang zhongxin ziyuan youxian gongsi

Consists of a major listed subsidiary. No mention concern of CSR. No information. Zhongxin Resources is a subsidiary of CITIC. Established in 2006, Zhongxin Resources exploits energy and mineral resources in central Asian countries, especially Kazakhstan. It has become an important destination for China to establish cooperative relations in oil exploration.

Corporate social responsibility 159 Name of company and ranking 40. Shenzhen Investment Holdings Co. Ltd. 深圳市投资控股有限公司 Shenzhenshi touzi konggu youxian gongsi

Additional notes on group, including CSR policies No. Shenzhen Investment Limited, through its subsidiaries, engages in the investment and development of real estate properties primarily in mainland China. It develops residential, industrial, and commercial properties.

in and out on the document itself). With regard to the other five business groups, it should be noted that Sinochem’s CSR report could not be downloaded, and that neither the reports of Chinalco, Minmetal, Baosteel, nor ZTE, could be found on the Internet. Question 3 In addressing Question 3, we again analysed the content of the five CSR reports released by Chinese business groups. In addition to this, however, we examined CSR reports published by three of their leading international counterparts taken from the Fortune Global 500 2008 rankings (Fortune 2008). More specifically, we identified the industry category to which each of the Chinese business groups were assigned: i.e. Sinopec and CNPC (petroleum refining); CNOOC (mining, crude oil production); COSCO (shipping); and CMCC (telecommunications). We then identified the top three ranked counterparts in terms of revenue to the Chinese business groups, and obtained copies of the latest CSR report released by each company: Exxon Mobil, Royal Dutch Shell, BP (petroleum refining); Pemex, BHP Billiton, CVRD (mining, crude oil production); A.P. Møller-Mærsk Group, Nippon Yusen, Mitsui OSK Lines (shipping); and AT&T, Verizon Communications, and Nippon Telegraph and Telephone (telecommunications). When it came to analysing the reports, the authors were specifically concerned to identify what, if any, international CSR initiatives and programmes the five Chinese business groups are engaging with or utilizing; and, whether or not there was any notable difference between the Chinese business groups and their international counterparts in such matters.

Results and discussion Question 1 Findings Following from Question 1, how common is CSR reporting in our sample? In improving on previous research, moreover, does the CSR reporting emanate from the parent of the group and cover the major activities of the entire group? Interestingly, we found evidence for group-wide CSR reporting surprisingly common. In total

160 Dylan Sutherland and Glen Whelan there was evidence that 11 of the top 40 overseas groups produced group wide CSR reports (though, as noted, the reports were not actually publicly available in all cases). Coverage of CSR, moreover, typically emanated from the parent companies. From the largest 40 this included China National Petroleum Group Corporation, (second largest by OFDI stock, Zhongguo tianranqi jituan gongsi 中国石油天然气集团公司), China National Offshore Oil Corporation (third largest, zhongguo haiyang shiyou zonggongsi 中国海洋石油总公司), COSCO Group (fourth, zhongguo yuanyang yunshu jituan 中国远洋运输集团), China Mobile Communications Corporation (eighth, zhongguo yidong tongxin 中国移动通信), Sinochem Corporation (ninth, zhongguo shihua jituan gongsi 中国中化集团公司), Sinosteel (16th, zhongguo zhonggang jituan gongsi 中国中钢集团公司), BaoSteel Group (29th, baogang jituan youxian gongsi 宝钢集团有限公司), Chinalco (18th, Aluminum Corp of China, zhongguo lvye gongsi 中国铝业公司), China Minmetals (20th, zhongguo wukuang jituan 中国五矿集团), China Huaneng (32nd, zhongguo huaneng jituan 中国华能集团) and ZTE Corporation (30th, zhongxing 中兴). The main industries producing CSR reports included oil and petrochemicals (4 groups), steel (2), mining (2), transportation (1), telecommunications hardware (1) and telecoms (1). Our findings also showed notable differences in the level of reporting within similar industries. In shipping, for example, COSCO Group has clearly made greater efforts to report CSR activities. COSCO is one of China’s most transnational corporations. It has been commended by the UN and is involved with the Global Compact. It has comparatively extensive group-wide CSR policies. China Shipping Group, by contrast (12th largest by OFDI stock) has very little on CSR. In steel production, both Sinosteel and Baogang have produced among the most impressive CSR reports to date. Shougang, by contrast, historically a well-known polluter (owing to its factories’ close proximity to Beijing) has little to no mention of CSR. It is also noticeable that the construction groups, which are among China’s largest overseas investors, have no CSR reporting. If we account for the relative number of firms in each industry it would appear the concentration of reporting is much higher (and also more comprehensive) in certain industries. In particular mining and energy groups, of which there are comparatively few, have a higher chance of undertaking CSR. Discussion Is CSR reporting within China’s largest TNCs more common than among other corporations in China? By 2008 there were, reportedly, 50 non-central enterprises engaging in CSR reports, 20 of SASAC’s central enterprises, 22 foreign enterprises or joint ventures and 29 private Chinese enterprises (Syntao 2008). There are only, however, around 150 or so central SASAC enterprise groups but many hundreds of provincial and lower level state-owned business groups and private firms. While in nominal terms there were fewer central enterprises with CSR reports, as a share of this enterprise category it was actually far higher than for other types of enterprise. CSR reporting in China’s largest TNCs, therefore, appears to be more common than in non-centrally owned firms. Our results also showed that those groups with

Corporate social responsibility 161 no formal CSR reporting mechanism were still engaged in various forms of philanthropic activities. Without exception, nearly all groups were keen to publicize these philanthropic activities. The speed and vigour with which CSR reporting has been adopted in China’s TNCs is surprising. As CSR practices become more standardized and extended to other groups, and as China’s TNCs expand, their reach and influence is likely to become more important both domestically and internationally. So too will their CSR policies come under greater scrutiny. Question 2 Findings Why then do China’s largest TNCs adopt CSR reporting? Further analysis of the CSR reports shows that the strongest common theme running through them is the commitment to implement government policy. This is most commonly captured in language that closely echoes that of central policymakers. In particular, promotion of a ‘harmonious society’ and contributions to ‘scientific development’ are frequently repeated. The exact elaboration of what these slogans means in practice is not discussed in great detail in the CSR reports. As such these stock phrases are clearly meant to signify adherence to political ideology of the CCP. To illustrate: COSCO (fourth) notes it is ‘propelled by a scientific outlook on development’ and ‘it shoulders the political responsibility to construct a harmonious society’; China Resources (fifth), ‘keeping in mind its social responsibilities, is dedicated to promoting the mutual progress of the industry and society’; China Mobile’s (eighth) goal ‘is to create a healthy and positive social environment to procure the harmonious development of society’ (emphasis added); CITIC, as a state-owned backbone enterprise group, ‘took seriously . . . its corporate social responsibilities’; COFCO notes: ‘Just as the performance of Chinese enterprises decides China’s competitiveness as a nation, their social ethics and responsibility is crucial in building a harmonious society in China’; Sinochem, ‘in accordance with the Party and state policy, the Corp is to construct a harmonious enterprise under the concept of scientific development’; Chinalco ‘conducts its business with integrity, harmony and fairness by complying with the relevant laws and regulations’. A typical example can be found in Liu Zhenya’s (President of State Grid Corporation China [SGCC]) introduction: State Grid Corporation of China (SGCC) is a state-owned enterprise that is crucial to national energy security and economic lifelines. Adhering to a scientific outlook on development and the ten principles of the United Nations Global Compact, we vigorously assume our social responsibilities. We are committed to building a world class utility through securing a safe, quality, convenient and clean power supply, and unremittingly improving services for the country, customers, business partners as well as economic and social development. With joint efforts from all circles of society, we will make greater contribution to building a harmonious socialist society. (SGCC 2008)

162 Dylan Sutherland and Glen Whelan SGCC mentions the UN Compact here (to which we return in [3]). The overwhelming focus of this report as others, however, is on stressing domestic considerations and promoting the government line. Discussion Our analysis suggests that the CSR reporting undertaken in China, even in the largest TNCs, is still strongly driven by domestic considerations despite their relatively (by Chinese standards) large holdings of overseas assets. The reports talk largely to their domestic constituencies. Why could this be? It is worth keeping in mind that even in China’s most internationalized groups, their overseas assets, sales, employees and affiliate numbers still only account for a small share of group activities. CNPC, for example, has US$178.8 billion in assets but only US$6.3 billion overseas (5 of a total 53 subsidiaries). It has a trans-nationality index of only 2.7 per cent (the TNI index is calculated by an average of three ratios: foreign assets to total assets, foreign sales to total sales and foreign employment to total employment). The average trans-nationality index for Chinese groups listed in UNCTAD’S (2008) listing of the top 100 developing country TNCs was only 24. This compared with an average of 54 for the top 100 non-financial TNCs from all other developing countries. In other words, most of the business activities are still predominantly focused on the domestic market, as are their stakeholders. Most of China’s largest TNCs are not highly transnational. To add to this, appointments and promotion of senior executives still remains a Party matter. There are strong incentives, therefore, to follow state policy. NGOS and civil society, moreover, remains weak. As such it is hardly a surprise that one of the main factors influencing CSR adoption in China appears to be state policy. Given this policy has also asked for the adoption of international standards, it is interesting to further explore this question, to which we now turn. Question 3 Findings From our analysis of the content of the five CSR reports released by Chinese business groups, and our analysis of the reports of three of their leading international counterparts it is possible to identify a number of interesting patterns (see Table 9.2). With regard to the petroleum refining, mining and crude oil production companies most particularly, there are a number of important differences that serve to distinguish the Chinese business groups (i.e. Sinopec, CNPC and CNOOC) from their international counterparts (i.e. ExxonMobil, Shell, BP, Pemex, BHP Billiton, and CVRD). For example, all six of these international companies are supporters of the Extractive Industries Transparency Initiative (EITI) whilst none of the Chinese business groups are. The EITI ‘is a coalition of governments, companies, civil society groups, investors and international organizations’ which ‘aims to strengthen governance by improving transparency and accountability in

Country

China

China

US

Sinopec (China Petrochemical Corporation)

CNPC (China National Petroleum Corporation)

Exxon Mobil

Petroleum refining

Group company

2007 Corporate Citizenship Report

2007 CSR Report

No

Yes, mention of support/one of their five commitments

No/very cursory mention of transparency

Undeclared No, but declare themselves to be in agreement with basic principles

Yes, set up CBCSD

No

No, but have sought to apply its reporting principles

Supporter of eiti/ transparency

No No (but No, but PetroChina do refer/ are) catalogue with reference to GRI Guidelines 2006

2007 Yes Sustainability Report

Latest report

Listed Partner participant GRI rating for of of UNGC latest report WBCSD

Table 9.2 Summary of international initiatives/programmes that China’s TNCs have joined.

Yes

No

No

(A)

Yes. Mention of Voluntary Principles on Security and Human Rights

Comply with labor law of PRC and host countries

Section on human rights (1 page)

Human rights

(continued)

ISO 14001 OHSAS 18001

ISO 14001 OHSAS 18001

ISO 14001

ISO standards

China

Mexico

CNOOC

Pemex

Mining, crude oil production

Britain

BP

2007 Sustainability Report

2006 Sustainability Report Yes

Yes

Sustainability Yes Review 2008

Netherlands 2007 Yes Sustainability Report

Royal Dutch Shell

Latest report

Country

Group company

A+ GRI Checked

No

A+ Ernst & Young

A+ Self Declared

No

No

Yes. No mention in report

Yes

Listed Partner participant GRI rating for of of UNGC latest report WBCSD Yes

(A)

Yes. Mention in report

No

No

No

Yes. Mention/ Yes support. Jermyn Brooks of TI sits on external review committee

Yes. Mention that they are strong supporters

Supporter of eiti/ transparency

ISO standards

Yes, quite a bit discussed

None

Yes. Brief mention in report

ISO 9001; ISO 14001; OSHAS 1800

ISO14000

ISO 14001

ISO 14001 Yes. Mention of Voluntary Principles on Security and Human Rights. Mention of ILO

Human rights

Australia

Brazil

BHP Billiton

CVRD (Vale)

China

Denmark

Japan

COSCO (China Ocean Shipping (group) Company)

A.P. MøllerMærsk Group

Nippon Yusen

Shipping

Country

Group company

CSR Report 2008

2007 HSE Report

2007 Sustainability Report (Online)

Sustainability Report 2007

2008 Sustainability Report

Latest report

Yes

Yes

Yes

No

No. Use GRI No system though

B+ GRI Checked

B+ GRI Checked

A+ GRI Checked

Yes. No. Brief Mention in mention of report GRI

Yes. No mention in report

Yes, Clearly branded

Yes

Yes

Listed Partner participant GRI rating for of of UNGC latest report WBCSD

N.A.

N.A.

N.A.

Yes. No mention in report

Yes. Mention in report

Supporter of eiti/ transparency Human rights

N.A.

N.A.

N.A.

No

Brief mention

Mention that future reports will go into human rights

Mention of training with regard to human rights

Yes. Mention of UDHR, ILO, etc. throughout the report

Yes. Yes, throughout Mention the report in report

(A)

(continued)

ISO 14001; mention of ISO 9000, ISO 14000

None mentioned

ISO 9000; AA1000

ISO 9001; ISO 14001; OSHAS 18001

ISO 14001; OHSAS 18001; SA 8000; ISO 14043

ISO standards

Japan

Mitsui OSK Lines

Citizenship & Sustainability Report 2007/2008

AT&T

2008 CSR Report

Nippon Telegraph & Telephone

No.

No

No

Yes. Mentioned briefly

No

No

No. Brief mention of GRI

No

Yes. One mention

No

No. Very brief No mention of GRI in report

B Self declared. Mentioned in the report

No. GRI Guidelines referred to

Note: Member of Voluntary Principles on Security and Human Rights.

Japan

2007 CSR Report

Verizon US Communications

US

2008 CSR Report

2008 Yes. Environmental Mentioned and Social Report

Latest report

China Mobile China Communications Company

Telecommunications

Country

Group company

Listed Partner participant GRI rating for of of UNGC latest report WBCSD

N.A.

N.A.

N.A.

N.A.

N.A.

Supporter of eiti/ transparency

N.A.

N.A.

N.A.

N.A.

N.A.

(A)

ISO 14001

ISO standards

Brief mention of human rights and discrimination

Very brief mention

No mention

ISO 9001; mention of participation in ISO 26000

None mentioned

None mentioned

ISO27001 Mention of human rights, and Hu Jintao’s definition: i.e. prioritizing right to meet basic needs and their right to develop

Brief mention

Human rights

Corporate social responsibility 167 the extractives sector’. In short, the EITI is concerned to promote the adoption of ‘Western’ notions of best-practice in terms of transparency and accountability with specific regard to corporate–government relations in the extractive industries (see http://eit.org/ more generally). This Western-centrism of the EITI is reflected by the fact that it is supported by Australia (the home country of BHP Billiton), Great Britain (BP), the Netherlands (Shell) and the US (ExxonMobil). It is not, however, supported, or currently being considered for adoption, by Brazil (CVRD), Mexico (Pemex) or China (Sinopec, CNPC and CNOOC). Nevertheless, both Pemex and CVRD are – unlike Sinopec, CNPC and CNOOC – supporters of the EITI. Similarly, each of the four companies from Australia (BHP-Billiton), Great Britain (BP), the Netherlands (Shell), and the US (ExxonMobil), are participants of the Voluntary Principles on Security and Human Rights (even though Australia, unlike the other three countries, is not a government participant). The Voluntary Principles ‘are a unique tripartite, multi-stakeholder initiative established in 2000 that introduced a set of principles to guide extractives companies in maintaining the safety and security of their operations within an operating framework that ensures respect for human rights and fundamental freedoms’ (see, more generally, http://www.voluntaryprinciples.org/). In effect, the Voluntary Principles seem concerned to avoid the sorts of human rights abuse allegations that have been made against various companies around the world who have employed security forces (that are commonly more or less directly linked to a host government), and who, subsequently, are accused of committing some sort of human rights violation in the process of carrying out the task for which they have been employed (e.g. protecting equipment used in the production of an oil pipeline). While neither Pemex nor CVRD are members of the Voluntary Principles, they do, along with ExxonMobil, Shell, BP and BHP Billiton, make fairly extensive reference to their concern to respect human rights throughout their reports. More important, all six companies – who commonly reference documents such as the Universal Declaration of Human Rights in their publications – report much more extensively on human rights than either Sinopec, CNPC or CNOOC (who don’t actually mention human rights at all). In contrast to these differences, all six petroleum refining and mining, crude oil production companies are similar in that they are all either members of, participants of, or make mention of: 1 The United Nations Global Compact (UNGC): a ‘soft’ global governance initiative concerned to promote learning and best practice amongst corporates with regard to ten principles (see http://www.unglobalcompact.org more generally); 2 The Global Reporting Initiative (GRI): which is concerned to see that disclosure on economic, environmental, and social performance is as commonplace and comparable as financial reporting (see http://www.globalreporting.org more generally); and 3 ISO certification programmes such as ISO 14000 or ISO 14001 (which are environmental standards).

168 Dylan Sutherland and Glen Whelan With regard to the shipping and telecommunications industries, it is interesting to note that the ‘tables are turned’ somewhat. COSCO (Chinese, shipping) for instance, are members of the UNGC and also make considered use of the GRI. By contrast, A.P. Møller-Mærsk Group (Denmark), Nippon Yusen (Japan) and Mitsui OSK Lines (Japan), are only members of the UNGC (although Mitsui OSK Lines do make some reference to the GRI guidelines in their report). Further, COSCO make much more extensive reference to their human rights activities than any of their international counterparts (albeit with a specifically Chinese slant: e.g. their report notes that ‘COSCO group organized a series of six human rights training courses, five of them about the human rights content of the Seventeenth National Congress of the Communist Party of China . . . and one about the new Labor Contract Law’). Importantly, A.P. Møller-Mærsk Group does state that future reports will engage more fully with human rights. A similar state of affairs is evidenced with regard to telecommunications. Once again, it is the Chinese business group, CMCC, who is a member of the UNGC and makes most use of the GRI. None of the other three companies – i.e. AT&T (US), Verizon Communications (US) and Nippon Telegraph & Telephone (Japan) – are members of the UNGC. With regard to the GRI, however, AT&T and Nippon Telegraph & Telephone do make some rudimentary reference to it (i.e. they make considerably less use of the GRI than do CMCC). Once again, it is CMCC who provides most discussion of human rights (this time with specific reference to Hu Jintao’s definition thereof: i.e. a definition which prioritizes the right of people to meet basic needs and the right of people to development). With regard to both the shipping and telecommunications companies more generally, it should also be noted that the only companies that do not make any reference to some sort of ISO standard are the A.P. Møller-Mærsk Group, AT&T and Verizon. The final point to make is that of the five Chinese business groups here investigated, two are members of the World Business Council for Sustainable Development, or WBCSD (i.e. Sinopec and COSCO); whilst four of the twelve international counterparts are also members (i.e. Shell, MP, BHP Billiton and CVRD). The WBCSD has over 100 corporate members from all over the world. As an institution, ‘it is committed to sustainable development and to promoting the role of Eco-Efficiency, Innovation and Corporate Social Responsibility’. Membership is by invitation, and ‘member companies pledge their support and contribution to the WBCSD by making available their knowledge and experience, and appropriate human resources. They are asked to publicly report on their environmental performance and to aspire to widen their reporting to cover all three pillars of sustainable development – economic, social and environmental’ (see http://www.wbscd.org more generally). Of all the International CSR initiatives mentioned, the WBCSD is the most business-centric. Discussion The above findings are suggestive of a number of interesting points. First, they indicate that Chinese business groups are – as a recent work by Chan, Lee and Chan

Corporate social responsibility 169 (Chan et al. 2008) begins to suggest – adopting those International CSR initiatives/ programmes that are ‘technical’ by nature, and not so closely related to issues of ‘politics’ (and/or ‘security’, and/or ‘human rights’). Thus, all five Chinese business groups make some use of the GRI, all five Chinese business groups make reference to ISO standards and two of the five Chinese business groups are members of the WBCSD, which, importantly, companies need to be invited to join). Not all of their international counterparts, by contrast, do the same. Second, when Chinese business groups do engage with some sort of ‘political’ CSR initiative/programme, they choose those that are developed by institutions in which nation states are a major player (with the UN being the archetype here). By contrast, they are less likely to choose ‘coalition’ initiatives involving a diversity of actors: e.g. states, NGOs and businesses. Accordingly, all five Chinese business groups are members of the UNGC, but none of them are members of political coalition initiatives such as the EITI or the Voluntary Principles. This finding is consistent with the clear and continued emphasis that the CCP places on state sovereignty and on the fundamental role of the state in governing social concerns (Bailes and Dunay 2007). Third, the findings suggest that Chinese TNCs are continuing to refrain from getting involved with those voluntary regimes that are most ‘political’: e.g. the EITI and the Voluntary Principles. With specific regard to the EITI for instance, there has been pressure placed on China to support this initiative since as far back as 2005 (Chan et al. 2008), and yet no Chinese group (let alone the Chinese government) has signed up as of early May 2009. One reason why this might be the case is that such initiatives could be understood as an attempt to institutionalize ‘Western’ ideals within non-Western countries. Such initiatives then, seem largely opposed to the manner in which China is currently presenting itself as a promoter of, or, at the very least, as being tolerant of, ‘international pluralism’ (Bailes and Dunay 2007; Barma and Ratner 2006; Barma et al. 2007; Chan et al. 2008).

Conclusions Very little is still known about the nature of CSR in China’s most internationalized groups. These groups belong to a special batch of big business groups, owned by SASAC, which are also going to ‘set examples for all other enterprises in China’ (SASAC 2008). As such the nature of CSR activities and reporting enacted in these groups is important. As they increase their outward overseas investments, moreover, their international reach and influence will also increase. To conclude, we first of all highlight a methodological issue pertinent to understanding CSR in China. Owing to the formation of extended business groups (affiliations of legally independent firms), monitoring CSR in China is somewhat different to most other developed economies. Given the complex nature of China’s business groups we must be careful in establishing where in the group CSR reporting takes place. This is somewhat different to what is found in the Anglo-Saxon type economies where CSR reporting has evolved in the context of stand-alone firms. Second, we note that CSR reporting in China’s TNCs is expanding extremely

170 Dylan Sutherland and Glen Whelan quickly. Eleven of China’s largest TNCs already have formal CSR policies. These policies, moreover, have been extended to all member firms within the groups. Third, despite being China’s largest TNCs, the reports testify to the very strong influence of central policy making in shaping Chinese CSR. The hand of the state is very much present in the development of CSR in China. Finally, we looked at the types of international initiatives/programmes adopted. When such international programmes are adopted we found they tend be more ‘technical’ in nature, eschewing overtly political programmes. When political programmes are adopted, moreover, they tend to be those that are developed by institutions in which nation states have significant input, further indicating the close relationship between CSR and state sovereignty in China. The emergence of CSR in China has been as dramatic as expansion of Chinese outward investment. If China’s TNCs want to take their place on the world stage they will undoubtedly have to show that they can comply with current international norms regarding CSR. Attaining high levels of transparency and building social responsibility into their activities, therefore, may well be necessary for the success of future internationalization efforts. Here we have touched upon some important issues regarding Chinese CSR and the internationalization of Chinese business. The situation, however, is highly dynamic and changing quickly. Future research, therefore, could look to further explore and extend some of the questions we have raised here using the more comprehensive sample of CSR reports that will become available in the near future.

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10 Nationalism versus democracy China’s bloggers and the Western media David K. Herold

Introduction The year 2008 carried many Chinese hopes for a brighter future for China, and for more respect for China from other countries. Chinese netizens in particular expected China to open up more and to allow them unrestricted access to those parts of the World Wide Web that had only been accessible through Internet proxies from within China. Outside China, many expected an opening-up of China as well. Editorials in Western newspapers suggested that the Olympics would contribute to irreversible political change in China that would ultimately lead to free and multi-party elections. To the contrary, both Chinese netizens and others discovered that there was an unbridgeable chasm between their views on China’s current situation. Many in Europe and America thought of China as a country firmly under the control of an oppressive and hated communist regime, whose ‘subjects’ were trying to duplicate the wave of revolutions against totalitarian regimes in Eastern Europe during the late 1980s and the 1990s. They thought that the Beijing Olympics would provide a stage for a grass-roots movement to emerge from hiding and – with the support of Western politicians and the Western media present at the Olympic games – push for human rights and democratic changes in China (see e.g. Miles 2007; Spiegel Online 2007; Tisdall 2007; Watts 2007). China’s netizens had very different expectations for the Beijing Olympics, and far less of a desire to start a revolution. China’s Internet users were interested in more freedom – but only on the Internet. They wanted their voices to be heard and respected, not censored – but only on the Internet. In general, China’s netizens showed that they were proud of China and its achievements over the past 30 years, and that they supported the Chinese government as the agent of reforms behind China’s economic development.

Chinese cyberspace: a brief background The Internet in China The Internet in China emerged a few years after the Internet in Europe and America, and its structures and set up reflected the different settings under which it emerged. (For more details on the history of China’s Internet see CNNIC 2008.)

Nationalism versus democracy 173 Four organizations were set up by the central government to provide Internet access in China: the China Education and Research Network (CERNET) and the China Science and Technology Network (CSTNet), both of which were set up for academic and research institutions, and ChinaNET, as well as the China Golden Bridge Network (ChinaGBN) to provide commercial Internet access. The first Internet café opened in China 15 November 1996 (CNNIC 2003), and the general public was allowed to connect privately to the Internet for the first time in early 1997, but had to use the already established networks instead of creating competing private initiatives. This has had the effect that China’s netizens are only able to access and use spaces that the government or government-controlled institutions have established and still exercise control over. The state or state-controlled entities own the physical backbone of the Internet in China, including the limited number of connections between the Chinese and the worldwide Internet, and so the central government can exercise greater control over Chinese cyberspace than most other governments can over the Internet their citizens access. The government in China is not so much trying to restrict their citizens’ access to the Internet, rather it implicitly or explicitly allows everything that goes on in Chinese cyberspace. The relative freedom Chinese netizens enjoy in cyberspace is a freedom ultimately granted to them by the central government or its agencies, although often more from a laissez-faire attitude than from a decision to grant them more freedom. The Chinese central government’s attention focuses on content that is judged to be harmful to Chinese society, for example, pornography, religion, political activism, ethnic separatism, and so on. These types of content suffer under close scrutiny and periodic government crackdowns. The emphasis of the Chinese state is not laws and regulations, but instead co-option of netizens through self-regulation and self-discipline. Since 1997, state-run and state-controlled institutions have repeatedly called on Internet users to exercise self-discipline. When pushed, the central government has quickly shut down those parts of the Chinese Internet that displease China’s leaders. Such interventions are the exception rather than the rule, though. Even the ‘Great Fire-Wall of China’ (GFW) presents itself to the user not as an inflexible and clearly defined barrier, but instead as a multi-faceted and everchanging system of highly localized rules. The only ‘national’ rule is that access to websites outside China is relatively slow when compared to websites inside China, which is the result of the limited number of connections between Chinese cyberspace and beyond. This technological bottleneck makes frequent visits to websites outside China unattractive, which diminishes the interest of casual Chinese Internet users in sites perceived to be plagued with a lack of speed and frequent time-outs. In addition to the GFW, the Chinese government also employs ‘soft’ barriers for Chinese netizens who want to access the Internet, the ISP-enforced blacklisting of specific words, or phrases, the coercion of multinational technology corporations, and real-world access controls through obligatory photo-ID-based registration in Internet cafés. None of these barriers is insurmountable. Savvy Chinese Internet

174 David K. Herold users and expatriates in China regularly avoid them through the use of proxies, web-page-forwarding or mirroring. Their value lies more in the deterrence of casual Internet users than in the containment of advanced or expert users, which seems good enough for the Chinese government (Herold 2008 for more details). Chinese netizens Since 2005, numerous incidents in China’s cyberspace have demonstrated growing feelings of community among Chinese Internet users and indicated the development and the official acceptance of something like a civil society in China’s cyberspace. This virtual civil society has repeatedly caused disturbances in the real world and in the willingness of Chinese netizens to criticize the government and those developments in Chinese society they disagree with. Events that disturbed both online and offline China were, for example, the charges of infidelity a World of Warcraft gamer posted against his wife in April 2006 (French 2006), the uncovering of slavery in brick-making factories in 2007 (Watts 2007; Associated Press 2007), the story of ‘Beijing Boy’ in 2007 (Soong 2007; Agence France Presse 2007; Zhang 2007), and many more. Each of these events demonstrated the willingness of Chinese netizens to discuss societal and political problems in cyberspace and their ability to mobilize enough support that the government acceded to their demands. The Chinese government has displayed a surprising degree of permissiveness towards these online debates in China, although they do shut down any debates that openly discuss politically sensitive topics. Netizens have been able to continue their discussions through the use of euphemisms and code words, which again demonstrated the lax character of official Chinese controls of the Internet. Netizens have been permitted to organize themselves, to discuss problems they have with the government or government policies, and to attack and persecute others both online and in the real world through the use of the infamous ‘Human flesh search engines’ (Renrou sousu). From the treatment different groups of netizens have received over the past years, online dissent has to be coupled with outspoken activism offline, before the authorities intervene, arrest people, and order the shutdown of sites. As Hartford (2005) has shown in an article about the electronic mailboxes of the mayors of Hangzhou and Nanjing, parts of the Chinese government have even used the Internet to interact with ordinary people in China. The response of Chinese netizens has shown that there is a willingness of Chinese cyberspace to engage with government officials and a trust in the government, despite the history of the past 50 years (see also Guo 2007; Tang 10 July 2008; Yang 2003). China’s netizens have shown themselves to be patriotic and supportive of China and its future development. Any grass-roots movement that fights for democracy in China is unlikely to develop as long as the Communist party manages to improve the objective conditions and the subjectively felt and perceived state of the Chinese economy (MacKinnon 2008). China’s netizens approve of the strengthening of China, which means they approve of the Chinese Communist Party provided it improves the

Nationalism versus democracy 175 country domestically and on the international stage. This might explain the willingness of state officials to allow Internet users the freedom they currently enjoy. One issue Chinese netizens do complain about is any form of corruption and censorship in Chinese cyberspace, often using materials published on European or US news websites.1 In February 2008, several netizens around the former Nanjing University professor Guo Quan attempted to start the China Netizen Party (CNP, see Kennedy 2008). This party was immediately shut down and all mention of the CNP eradicated on the Chinese Internet. Netizens were, however, not discouraged from discussing the issues raised by the CNP through using codes and hiding the debates inside discussions of other topics. However, 2008 was supposed to be the year in which China opened up to the world, the year in which the Chinese Internet would be less censored, the year of China’s ‘coming-out party’, and many netizens anticipated great change. With people from all over the world coming to China to take part in the Beijing Olympics, many expected that the Chinese government would be forced to make irreversible changes to the way in which China was governed. Netizens in particular seemed to expect easier access to overseas websites and support for their issues from outside China. However, an article by Zhang Heci (2008) on Observechina.net had already warned that people outside China had very different agendas from those inside China and that even democracy activists outside China do not want to face the reality that is China, with all the huge changes in recent years. [. . .] They need to portray China today as the darkest and cruellest era. They need to posit that the Chinese people cannot live any longer under the brutal rule of the Chinese Communists. (Zhang 2008) Tibet exploded on 14 March 2008, and the world sided with the Tibetans against China. China’s netizens decided that they had to protect China against the treachery and the attacks launched in particular by European and American media organizations.

Betrayed rage: China’s netizens and the Western media Two angry Chinese youths A widely read Chinese blogger by the handle of ‘Hecaitou’ published an entry on his blog in March 2008 with the title ‘When helping becomes hurting’ (Soong 2008a). The post contained several images from Western news reports about protests against China that were taking place across Europe during the Tibetan unrest in March 2008 and an attack against Western ‘prejudices against the Chinese people’. He wrote that the European protesters’ ‘efforts not only provide no material help, but they stir up the nationalistic fervour of the Chinese people and let the resulting anger flow and spread everywhere’.

176 David K. Herold Hecaitou accused Westerners of believing that ‘the Chinese have been brainwashed’ and that ‘all Chinese are ignorant, undeveloped and close-minded’. He insisted that ‘many Chinese people know as much as they do and in fact visited a lot more websites than they have’. After all, young Chinese do access a variety of European and American news sources and websites, and also interact with other Chinese netizens in Chinese cyberspace, while only very few non-Chinese have the language skills necessary or the desire to access Chinese sources. He was full of contempt for the presumed attitudes of Europeans and Americans: The westerner stoops down condescendingly to stretch out a helping hand to the wretched little yellow men so as to educate and instruct them. They are totally oblivious to the possibility that they are dealing with live human beings who are thoughtful and sentient. (Soong 2008a) While the language is harsh, netizens across Chinese cyberspace agreed fully with the sentiments expressed. The young and affluent Chinese who populate Chinese cyberspace and who regularly access Western reports on China, felt betrayed, hurt, and increasingly furious. Euro-American calls for the freedom of expression and their insistence on the virtue of listening to diverging opinions seemed not to apply to them. Chinese opinions were a priori wrong and the result of brainwashing by the propaganda machine of a totalitarian communist regime. In the absence of respect and equality, what is the point of dealing with the westerners? Presently, the westerners must be wondering about the reaction of the Chinese people to the current events. Once again, they treat the unexpected outcome as the result of successful brainwashing or overflowing nationalism. But they would never reflect on the implications of their actions on the Chinese people. (Soong 2008a) The perception of Hecaitou and others, that Westerners treated them with contempt and did not acknowledge the legitimacy of their opinions, enraged many Chinese netizens and other Chinese people. The Olympic year of 2008 had been anticipated with unrealistic hopes by many Chinese as the year during which China would be accepted as an equal by the developed world. However, the contempt and criticism that China’s netizens encountered on Western websites during March and April 2008 destroyed such hopes. Instead many, including Hecaitou, began to feel furious and saw China threatened by an unwarranted and unfair attack: Previously, I did not particularly care about the Olympics because I did not feel that it had anything to do with me. But now the Olympics is like a pair of testicles that someone else is holding in his hands in a threatening manner, but his purpose is not to change the practical situation of the Chinese people

Nationalism versus democracy 177 at all. [. . .] Thanks to their concerns, the Chinese people have rallied at an unprecedented speed underneath the national flag. They have voluntarily given up many rights and freedoms, in order to avoid more injuries and insults from the outside. These westerners are not helping their friends. They are only helping to create an enemy as well as an Asiatic orphan. (Soong 2008a) Although it is tempting to disregard Hecaitou’s comments as just one voice among millions of Chinese netizens, he was far from alone in expressing these sentiments. His blog entry was copied to many of China’s major bulletin boards and discussed widely. Most Chinese netizens agreed with him. Additionally, it would be wrong to dismiss these feelings of Chinese netizens as mere ignorance of the diverse and broad mediascape of European and American countries. Many thousands of young Chinese at universities and in employment in the USA, Canada and Europe are highly media-savvy. These Chinese, living abroad were just as upset about the European and American news portrayals of China, as their fellow netizens back in China. On 1 April 2008, a Chinese living in Germany with the Internet handle ‘Schweinsteiger’ posted a long entry on the ChinaRen BBS forum (see Soong 2008b). In his entry he described the interactions and in some cases verbatim conversations with his co-workers in their shared office during March 2008, beginning before the Tibetan unrest and the following few weeks. The entry caused a stir in China, with over 650 replies on the original posting and multiple cross-postings of the entry on other websites. According to the post, his co-workers repeatedly used German news reports in their attempts to convince him that the Chinese government was evil. They attacked China, the Chinese government, the Chinese Communist Party, and the Chinese people in general, and refused to believe anything reported within China. They told him: Your media are lying and what you see is not real! If you want to criticize German media, you better go home and criticize your own Chinese media first! [. . .] Your television channels are telling lies. What right do you have to say that the German media are lying? (Soong 2008b) After several days of the poster attempting to set the record on Tibet and China straight, his German colleagues tried to strengthen their argument by enlisting the help of non-German news sources. These Western news sources supported the German version of events in Tibet, although they did not offer any additional proof, but instead merely used the same images and sources as the German news media. In the end, this led to the following exchange, which demonstrates some of the frustration felt by increasing numbers of young Chinese when interacting with Westerners:

178 David K. Herold She said: ‘Even this Spanish website is saying that the Chinese government is suppressing and killing peaceful demonstrators, etc.’ I said: ‘I know. The western media are all lying.’ She said: ‘But why is the whole world saying that and only China does not say so! Don’t you feel that your government is lying to you? It is obvious that your government is the liar! Why else would all the countries condemn China?!’ I said: ‘Right. All the countries are saying that China is bad, but none of them can produce any evidence to support their version. Only the Chinese government has produced the evidence. We have the video images. Those people were not demonstrating peacefully. They were murdering people. None of those video images were shown in the western media, which used those fake photos to smear China.’ She said: ‘You are showing the fake video images fabricated by the Chinese government!’I don’t know what to say to a person like that. (Soong 2008b) After recounting the interactions during this time, ‘Schweinsteiger’, the poster, summarizes what he believes are the main problems for China’s image in Germany, and therefore for any Chinese wanting to live or study in Germany: 1 The propaganda in the western media has achieved their goals – the German people believe. Not only do they believe, but they believe it firmly to the point where all dissident voices are regarded as lies. 2 The marketing effort by the Dalai Lama over the years has been successful beyond expectations. Every German that I come across treats him as a ‘great spiritual leader.’ Everything that he says is true and everything that he does is correct. 3 Chinese students in Germany are unpopular. My colleagues indirectly reveal those feelings. They even tell me directly: ‘We are really worried about what happens if one day you learn what we know.’ 4 It is a mistake for China to even exist. The faults of China can be stacked from the ground to the heavens. Furthermore, under the leadership of this demon government, things are getting worse and worse. 5 Bloodshed and massacres occur everywhere in China. When a Chinese citizen says the wrong thing, he will be arrested immediately and subjected to extreme torture in jail. 6 China does not have the right to host the Olympics. Anyone who attends the Olympics is supportive of genocide to a certain extent. (Soong 2008b) He ends his posts with a number of frustrated statements that portray how much he feels betrayed by the West in general, and Germany and its news media in particular. These sentences echo the betrayal expressed by Hecaitou on his blog and are in turn mirrored in many of the comments left on blogs and bulletin boards across Chinese

Nationalism versus democracy 179 cyberspace. However, these sentences also demonstrate the growing conviction among young Chinese that China should no longer listen to other countries, and should instead focus on growing stronger, so that one day it might no longer have to listen to the lies and accusations of the Western media and Western governments: Anything good about China must have been fabricated by the Chinese government; visual images favourable to China were staged by the Chinese government; any photo favourable to China was the result of PhotoShop work. [. . .] China is hopeless with no redeemable value. All the opposing voices against China are right, and they will support those voices. [. . .] I feel that it is a long and endless struggle with them. This struggle cannot be resolved through any debate or discussion of facts. This can only be done through the construction of the motherland. When the motherland is strong, even stronger, they will shut their mouths! Each one of us Chinese overseas students is working hard and enduring the suffering. Several decades into the future, will China collapse like the Germans hope? Or will China be so strong that they will collapse? (Soong 2008b) China’s cyberspace declares war on the Western media The frustrations expressed by individual Chinese netizens like Hecaitou or Schweinsteiger grew into a feeling of rage across China’s cyberspace. This rage and the desire to take action grew throughout the Tibetan unrest and the subsequent disturbances during the Olympic Torch relay in Europe. It led to two Internet expressions of anger that challenged Western media organizations and served as a call-to-arms for China’s youth. On 15 April 2008, ‘a twenty-eight-year-old graduate student in Shanghai named Tang Jie’ (Osnos 2008) uploaded a short video clip to a video-sharing website under the Internet name ‘CTGZ’ entitled ‘2008 China Stand Up!’ The video was later also cross-posted to YouTube, and on YouTube alone it was watched 50,000 times and attracted over 1,500 mostly positive comments (see clover19862003 2008 for the video and the comments). It was a homespun documentary, and it opened with a Technicolor portrait of Chairman Mao, sunbeams radiating from his head. Out of silence came an orchestral piece, thundering with drums, as a black screen flashed, in both Chinese and English, one of Mao’s mantras: ‘Imperialism will never abandon its intention to destroy us.’ Then a cut to present-day photographs and news footage, and a fevered sprint through conspiracies and betrayals. [. . .] A cut, then, to another front: rioters looting stores and brawling in Lhasa, the Tibetan capital. The music crescendos as words flash across the scenes: ‘So-called peaceful protest!’ A montage of foreign press clippings critical of China – nothing but ‘rumours, all speaking with one distorted voice’. [. . .] ‘Obviously, there is a scheme behind the scenes to encircle China. [. . .] One final act of treachery: in Paris, protesters attempt to wrest the Olympic torch from its official carrier, forcing guards to fend them off – a ‘long march’ for a new era. The film ends with the image of a Chinese flag, aglow in the

180 David K. Herold sunlight, and a solemn promise: ‘We will stand up and hold together always as one family in harmony!’(Osnos 2008). Evan Osnos managed to track Tang Jie down on behalf of the New Yorker and interviewed him about the video and what led to its creation. Similar to Hecaitou, Tang Jie had been angered by the events surrounding the Tibetan unrest and the protests in Europe, which he had followed on American and European news sites, in addition to China’s official media. Like others his age, he has no hesitation about tunnelling under the government firewall. [. . .] He is baffled that foreigners might imagine that people of his generation are somehow unwise to the distortions of censorship. (Osnos 2008) In his view, most young Chinese are very aware of censorship and of the way the media report events in China. Instead of seeing this as a disadvantage, though, he argued that the awareness of censorship is an advantage young people in China have over their peers in Europe and America, as ‘we are always asking ourselves whether we are brainwashed. [. . .] But when you are in a so-called free system you never think about whether you are brainwashed’. The reports Tang Jie was able to access on European and Western websites, however, were filled with negative reports and attacks on the Chinese government, the Chinese Communist Party, the Chinese people who did not rise up against the oppressive regime. To Chinese netizens it smacked of a conspiracy. It shocked people like Tang, who put faith in the Western press, but, more important, it offended them: Tang thought that he was living in the moment of greatest prosperity and openness in his country’s modern history, and yet the world still seemed to view China with suspicion. [. . .] Like many of his peers, Tang couldn’t figure out why foreigners were so agitated about Tibet – an impoverished backwater, as he saw it, that China had tried for decades to civilize. Boycotting the Beijing Games in the name of Tibet seemed as logical to him as shunning the Salt Lake City Olympics to protest America’s treatment of the Cherokee. (Osnos 2008) While Osnos attempts to trace Tang Jie’s attitudes back to a general feeling of discontent with China’s increasing Westernization, Tang Jie himself, and many others like him in China’s cyberspace seem to disagree. What they express is not a fear of the Westernization of China, but instead the belief, based on their experience and their perusal of Chinese and Western news sources, that the United States will seek to obstruct China’s rise [. . .]. Disparate issues of relatively minor importance to Americans, such as support for Taiwan and Washington’s calls to raise the value of the yuan, have metastasized in China into a feeling of strategic containment. (Osnos 2008)

Nationalism versus democracy 181 Echoing the thoughts of many young Chinese, Tang Jie dismissed human rights and democracy as unimportant for the moment, while stating that ‘we value all the values of human rights, of democracy’ and calling the Tiananmen movement of 1989 ‘misguided and naive’. These sentiments disturbed Osnos to such an extent that he felt compelled to get a second opinion on Chinese views of democracy and the Tiananmen movement from Liu Yang, a Chinese studying at Stanford University in the USA. However, this 26-year-old student not only agreed with Tang Jie’s sentiments, but argued that ‘if 4 June had succeeded, China would be worse and worse, not better’. Liu Yang concluded by stating a common sentiment in today’s China: Liu said that he is not willing to risk all that his generation enjoys at home in order to hasten the liberties he has come to know in America. ‘Do you live on democracy?’ he asked me. ‘You eat bread, you drink coffee. All of these are not brought by democracy. Indian guys have democracy, and some African countries have democracy, but they can’t feed their own people. Chinese people have begun to think, ‘One part is the good life, another part is democracy’, Liu went on. ‘If democracy can really give you the good life, that’s good. But, without democracy, if we can still have the good life why should we choose democracy?’ (Osnos 2008) The restrictions placed on the Chinese population by the Chinese government and the Chinese Communist Party are seen as necessary evils that support China’s rapid development. Most of the steps deemed necessary for the continued development of China, for example, a strict birth control system, government control of exchange and interest rates, strict investment rules, a flexible interpretation of existing laws, etc. would be impossible to maintain in a democratic system under a strict rule of law. Tang Jie is not a single, naive, lone, nationalistic young man, and his video is not just the result of successful brainwashing. His video expressed the thoughts and feelings of many young Chinese as the comments on his video and the discussions across Chinese cyberspace show. Just how organized, and how well-read in Western news sources Chinese netizens are, was shown around the same time by the reactions to a new Chinese website Anti-CNN (http://www.anti-cnn.com). During the height of the Tibetan unrest in March 2008, and its attendant media frenzy in Europe and America, many Chinese felt that the Western reporting of the events left a lot to be desired. Many of the reports about Tibet in the Western media contained mistakes and misrepresentations. They portrayed the situation as the brutal suppression by the Communist Chinese state of a non-aggressive, peaceful movement led by Tibetan monks. Rao Jin, 24, the founder of a small technology company in Beijing, said he was so angry about what he sees as foreign journalists’ prejudice against China that last week he created a Web site, http://www.anti-cnn.com, to document what

182 David K. Herold he calls mistakes and bias in Western media. He said more than 1,000 people have e-mailed, volunteering to spot errors. (Drew 2008) Anti-CNN started in late March 2008 as a single web page with pictures of Western news programmes, reports, and web pages, and proof of the mistakes they contained (the website has changed since then, but their initial reports have been discussed by MacKinnon 2008b; People’s Daily Online 2008; and the entries in Soong 2008a). By now, Anti-CNN has grown into a massive website with original articles, opinion pieces, news reports, videos, and a discussion forum which attests to its immense popularity among Chinese netizens. The original web page, however, led with a statement that expressed Rao Jin’s disgust with Western reporting standards: See the true despicable and shameless face of western media. For a long time now, certain western media best represented by CNN and BBC, in the name of press freedom have been unscrupulously slandering and defaming developing nations. In order to achieve their unspoken goal they mislead and they ensnare, switching black for white, confusing right and wrong, fabricating . . . willing to go to any length. In their reports on the riots in Tibet Western media’s performance once again shows to the world their repulsive true face. (Kennedy 2008b, also the following quotes) This was followed by a call-to-arms to all Chinese netizens who were asked to join in and to track down other falsehoods in Western media reports ‘not limited by language, content (text or photos) or country’, as ‘the more evidence of their crimes we collect, the more space we’ll have fought and won for ourselves’. The enthusiastic response by Chinese netizens to this call-to-arms demonstrated within a few days not only how biased and erroneous Western reports about the situation were, but also how well informed and widely read Chinese netizens were, as well as how angry they were with ‘the West’. Western media organizations had been allowed to get away with such – to the Chinese netizens – obvious falsehoods without being penalized for them by European or American authorities using laws, for example, against libel or defamation. This signalled to most Chinese that the Western media were acting with the approval of Western governments, and so the introductory statement closes with a wider ‘declaration of war’: This is a struggle of resistance against western hegemonic discourse. We need to fully recognize that this will be a long-term, difficult and complex battle. But regardless of the outcome, we all firmly believe: Western nations’ days of using several of their crap media in an absurd attempt to fool people with their rotten words will soon be over for good! (Kennedy 2008b, he also uses the phrase ‘declare war’)

Nationalism versus democracy 183 As Western journalists, expatriates living in China, people going to see the Olympic torch relay, people coming to Beijing for the Olympic Games, etc. discovered, many young Chinese took this appeal to stand united and to protect China against all attacks very seriously. Young Chinese are proud of their country, and they do not appreciate the constant criticism and scorn heaped on China by Western countries and the Western media. As Schweinsteiger put it in his conversation with his colleague: China is developing rapidly now and the western nations are scared and uneasy. Therefore, everybody is against China. I have been in Germany for two years, and I have not read a single piece of good news about China. China is always wrong in everything that it does. Do you feel that such a grand country can do nothing right? (Soong 2008b) Reflections on a bad year Since the end of the Beijing Olympics, Chinese cyberspace has become quieter, at least in its attacks on Western media organizations, although this might have more to do with the much-reduced interest in China in Europe and America, than with any change in sentiments. Western journalists and Chinese netizens have moved to new topics and the misrepresentation of China in non-Chinese news reports is no longer a matter of daily debates. These sentiments had not been forgotten. The calm led to calmer reflections of the relationship between China and other countries. Two essays, posted online in early September, show that the earlier events and passions may have led to a much deeper rift between China and Europe or America, and that Western concepts such as ‘democracy’ may have been discredited as a result. On 2 September 2008, a Chinese netizen by the name of ‘Mr Li’ submitted a letter of complaint ‘to the Chinese section of the BBC website with the challenge to publish it. The BBC did just that. The essay has been re-posted widely across Chinese Internet websites’ (Soong 2008e). Mr Li claimed to be a pro-Western Chinese man who had graduated from university in 1990 and ‘actively participated in the entire process of the student movement’ of 1989. He stated that he used to believe in China’s need for democracy and that he used to think that Western media ‘were the only credible media that are fair, balanced and truthful’. Mr Li’s attitude towards Western news media began to change when he spent several years in eastern Europe during the 1990s and realized that ‘during the four or five years when I could only see the western media, all the reports that I saw about China were negative and critical’. He pointed out that this struck him as odd as the struggling China that he saw reported in the media was very different from the prosperous and fast developing China that he encountered during his visits home. During the years that followed his belief that Western media were deliberately misrepresenting China in their reports was strengthened, such as the reporting on Hong Kong’s return to China as the ‘Death of Hong Kong’. During 2008, the misrepresentations reached a climax and Mr Li charged that

184 David K. Herold the western media may not realize that they are losing China! They are losing the admiration and trust of the young generation of China, pushing them towards nationalism. All this occurs because the western media do not really understand China and they have no intention of really understanding China either. (Soong 2008e) Instead of trying to understand China, its people, and its government, Western media were projecting East European labels onto China, in the belief ‘that the Chinese government is a dictatorial and totalitarian government, which must necessarily be unpopular among the people’. This misunderstanding has led Western media to assume that the only truthful voices in China are those of dissidents, or ‘overseas political exiles’. Claiming to speak for the ‘middle-class and intelligentsia that came into being’ since the reforms in China started in the late 1970s, Mr Li argued that the Chinese ‘want China to go even further with reforms’ and affirmed that ‘they basically support the Chinese government’. These reforms were mainly economic reforms at the moment, but even so, it was his belief that ‘democracy and the rule of law are the ultimate goals of modernization for China’, even if in the present circumstances it was more important for China to ‘maintain a strong and powerful central government’. His criticism of Europe and America, and in particular with the Western media was that they ‘seem to want democracy for the sake of democracy and they don’t care what happens to China after democracy and freedom come’ and he accused them of using ‘democracy and freedom as pretexts to divide and weaken China’ so that China would not rise up to challenge the current status quo but follow the lead of the former Soviet Union and disintegrate into a number of small and largely irrelevant successor states. Following Mr Li’s essay, the BBC also published comments on the essay by several netizens. Almost all of the Chinese commentators agreed with the opinions expressed by Mr Li, while non-Chinese commentators refuse to engage with the arguments put forward. They instead attempt to devalue the essay and its supporting comments, arguing that ‘many Chinese people are still the wrong audience with whom to discuss democracy and freedom’. Through this highly problematic prejudice against the entire essay and the refusal to engage in a constructive debate with its points, Mr Li’s position is ironically supported as it proves that these nonChinese ‘have no intention of really understanding China’. About a week later, on 9 September 2008, another Chinese netizen with the handle ‘300 Spartan Heroes’ posted an entry on the popular Tianya bulletin board (see Soong 2008d for a translation and the quotes below) with the title ‘How the Western Media Lost the Young Generation in China’. The essay itself repeated many of the accusations against Western media that others had written about earlier in the year, but in an interesting twist, the article seemed to receive the blessing of the Chinese government through the so-called ‘50 cent Party’ (Wu-Mao-Dang), bloggers who are suspected of being paid to produce pro-government comments on bulletin

Nationalism versus democracy 185 boards and blogs in Chinese cyberspace (Xiao 2008). Many of the comments left for the essay on Tianya were too supportive and positive, while also praising the quality of CCTV programming or the accuracy of Chinese news reporting. Other commentators pointed to the ludicrousness of such statements and the debate in the comments soon evolved into a debate about the existence of the ‘50 cent party’ instead of talking about the originally posted essay (Pan 2008). Nevertheless the original essay raised a number of important points in the debate between Chinese netizens and the Western media. It should not be ignored, particularly as it attempted to move beyond even Mr Li’s letter to the BBC to provide an analysis of the process by which the Western media ‘lost’ the Chinese youth instead of merely accusing them of wrongdoing. The main premise of the essay was that ‘Western nations’ are intent on ‘promoting their values’ through the ‘hard methods’ of waging wars (in Afghanistan and Iraq) and the ‘soft methods’ of the ‘Western media using their international speech rights to say awful things about countries which do not have Western-style democracy. [. . .] The Western media are very good at that and they can pull these types of reports out of thin air’. While Europeans and Americans tend to see ‘the government’, ‘the media’, and ‘the public’ as separate and as having different beliefs and agendas, for the author of this essay, there is a highly apparent continuity between non-Chinese attitudes towards, and statements about, China and the Chinese people. This continuity was based on the monopoly the Western media has held over information about China, but has recently begun to be undermined through the increase in the number of people travelling from or to China. If there are no western tourists coming to China and no Chinese studying overseas, the western media could say whatever they want and they own the international speech rights. If you cannot see for yourself, you have to trust them. But times are different, as more and more western visitors come to China and more and more Chinese tourists travel overseas. [. . .] The western tourists are perplexed because China is completely unlike what their own media are reporting. The overseas Chinese students are perplexed because very few western media reports have anything good to say about China. [. . .] Those who have seen the real China realized that they had been deceived by the western media. (Soong 2008e) The author ‘300 Spartan Heroes’ continued his essay by arguing that this discrepancy between the experienced reality of China and the reports in the Western media have had an especially damaging impact on China’s new middle class and on intellectuals, the two main groups supporting (and driving) the development of China – and the ones who profit the most from the continuing economic development. Over the past three decades, the Chinese government has led the country to an astonishing economic growth, and many citizens have benefited from it. The Chinese who travel overseas during this period are the rapidly rising middle

186 David K. Herold class and the intelligentsia. When they see the good things in China being badmouthed in the western media, what else is this but hypocrisy? (Soong 2008e) Echoing the opinion of many Chinese today, the essay then reiterated the desire of the Chinese people to live in a democratic China, but that a democratic system for China was not as important as the well-being of the Chinese people and the Chinese economy. Using the government actions (and the implied media reactions to them) of the USA in Iraq and of France and Great Britain in Africa as illustrations for his point, ‘300 Spartan Heroes’ argued that ultimately, the Chinese people want to achieve prosperity and national power through democratization. But the western media seem to only want democracy for the sake of democracy and they don’t care what happens to China afterwards. The Chinese form of democracy guarantees first and foremost the right to survive and develop. But the western media wants to promote its own form of democracy according to its own ideas. They don’t care what happens to a country afterwards. (Soong 2008e) The poster finished his essay with an appeal to the Western media ‘to keep up with the times’, in that the current levels of global travel between different countries meant that even in the media ‘truth should come first’ as lies would no longer be tolerated by people who have experienced the truth first-hand: ‘The media ought to observe the basic rules – to report in an objective and fair manner. This is easier said than done for the Western media.’

Some conclusions During the course of 2008, Chinese netizens demonstrated repeatedly that they are both media savvy and active in their perusal of Western media reports on China.2 However, they also showed great naivety in expecting Western media reports to comment on China in a positive manner, or to acknowledge China’s status in the world community. The combination of their expertise in accessing European and American news reports with these naive beliefs caused them to be bitterly disappointed and enraged when unrests erupted in Tibet in March 2008, and Western media reports sided unanimously with the Tibetan people against China. While more aware of many of China’s problems, and engaged in almost constant criticism of Chinese officials at all levels of the country’s governmental structures, Chinese netizens are ultimately patriots and proud of China’s achievements over the past 30 years. They belong to the winners of the Chinese reforms since 1978, to the newly emerging middle class and intelligentsia, who are enjoying unprecedented levels of freedom and comfort in today’s China. They were deeply hurt by the reporting style and the content of articles on China in the Western media,

Nationalism versus democracy 187 which they saw as malicious lies and fabrications published with the intention of stopping China’s rise in the global community. When they complain about unfair treatment on Western news sites, their complaints are ignored, belittled, made fun of and become the basis for more criticism of China. They found that anything positive they wrote about China, and their posts defending China and its government, were treated as evidence of the success of the brainwashing techniques of the evil communist government in Beijing. Engagement was not wanted, only a ‘conversion’ to the Western point of view was acceptable to both Western media organizations, and Westerners leaving comments on blogs and news sites where Chinese netizens dare to raise their objections (Bianxiangqiao 2008; Branigan 2008; Fassler 2008; Forney 2008; Jenne 2008; Morford 2008). Western bloggers insulted Chinese netizens further by stating that they did not understand how Western media worked, that Western media was very diverse, that Western media was much better than Chinese media, that they had been brainwashed and that they were too sensitive. Yet the vast majority of these Western ‘experts’ on China and its government could not read enough Chinese to access the Chinese Internet. The unfairness of the situation, and their own inability to convince Westerners that maybe they were wrong about China, caused many young Chinese to disassociate themselves from the West and Western ideas. The Olympics are over and slowly being forgotten, but for the relationship between China’s youth and the Western media little has changed. The rift and the disillusionment among young Chinese belonging to the increasingly vocal and powerful middle class and Chinese intelligentsia is a serious and dangerous development for China’s relationship with the rest of the world. After the end of the Olympic games, a disappointed Chinese netizen put his feelings into a poem that spread through Chinese cyberspace like a wild-fire (Soong 2008c for a translation). The poem is built around the idea that no matter what China does ‘there will always be someone’ who criticizes China. Nothing China does is right or good. While the poem only mentions the Olympic Games, many of the commentators in Chinese cyberspace added lines about Chinese policies in general, giving the poem an even greater significance. The perceived behaviour of the Western media and Europe and America in general has disillusioned many of China’s netizens with the West. They have led to an attitude in Chinese Cyberspace that is very pro-China, and very supportive of the continued rule of the Chinese Communist Party and the stability this rule brings. Chinese netizens are very much in favour of the continued economic development of China, and convinced that China does not need democracy or the rule of law. To silence its critics, it instead needs to grow much stronger, so that Europe and America will no longer dare to criticize it. Instead of an opening-up of China, it seems that Western reporting on China during 2008 has provoked a circling of the wagons, and a strengthening of nationalist feelings coupled with a thorough distrust of the Western media and their message of freedom, democracy and the rule of law that will be difficult to overcome.

188 David K. Herold

Notes 1 See, for example, the archive of translated blog posts on Roland Soong’s site, EastSouthWestNorth, at http://www.zonaeuropa.com/archive.htm 2 See the aggregator of links to Western news stories at the Back China site, http://rss. backchina.com/eng/

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(accessed 18 October 2008). Jin, R. (2008) Anti-CNN.com. Online. Available HTTP: (accessed 18 October 2008). Kennedy, J. (2008a) ‘China: Netizen Party announced’, Global Voices, 8 February 2008. Online posting. Available HTTP: (accessed 30 October 2008). —— (2008b) ‘China: bloggers declare war on Western media’s Tibet coverage’, Global Voices, 24 March 2008. Online posting. Available HTTP: (accessed 18 October 2008). MacKinnon, R. (2008a) ‘Flatter world and thicker walls? Blogs, censorship and civic discourse in China’, Public Choice, 134: 31–46. —— (2008b) ‘Anti-CNN and the Tibet information war’, RConversation, 26 March 2008. Online. Available HTTP: (accessed 18 October 2008). Miles, J. (2007) ‘The challenge to Beijingoism’, The Economist, 26 December 2007. Online. Available HTTP: (accessed 31 October 2008). Morford, M. (2008) ‘Note to China: Please Implode/Could the Olympics rain down shame on Chinese oppression and Tibet abuses? Let’s hope’, SFGate, 21 March 2008. Online. Available HTTP: (accessed 18 October 2008). Osnos, E. (2008) ‘Letter from China: angry youth’, The New Yorker, 28 July 2008. Online. Available HTTP: (accessed 30 October 2008). Pan, K. (2008) ‘Chinese youth on Western Media: a diversity of opinion’, CN Reviews, 14 September 2008. Online. Available HTTP: (accessed 18 October 2008). People’s Daily Online (2008) ‘CNN: What’s wrong with you?’, People’s Daily, 3 April 2008. Online. Available HTTP: (accessed 18 October 2008). Soong, R. (November 2007) ‘The Haidian “Teacher Abuse Gate” special’, EastSouthWestNorth, November 2007. Online posting. Available HTTP: (accessed 30 October 2008). —— (2008a) ‘Daily brief comments March 21–31, 2008’, EastSouthWestNorth, March 2008. Online posting. Available HTTP: (accessed 18 October 2008). —— (2008b) ‘Three days with a German’, EastSouthWestNorth, 1 April 2008. Online posting. Available HTTP: (accessed 29 October 2008). —— (2008c). ‘Daily brief comments – there will always be someone who says’, EastSouthWestNorth, 26 August 2008. Online posting. Available HTTP: (accessed 29 October 2008). —— (11 September 2008d) ‘Daily brief comments – 03: how the Western media lost the young generation in China’, EastSouthWestNorth, 11 September 2008. Online posting. Available HTTP: (accessed 18 October 2008).

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Index

Note: page numbers in bold refer to figures and tables. 50 cent Party 184 advantage hypotheses 16, 30 Agricultural Bank of China 17–18 agriculture: and climate change 63; decollectivization of 39 air pollution 64 Aluminum Corp of China see Chinalco Anti-CNN 181–2 Asian financial crisis 19 backbone activities 147 bank efficiency 13–14, 16–17, 27–9, 28–9, 31, 33–4 bank privatization 13–14, 16, 30, 33 banking reform: beginnings of 18; effectiveness of 32; policy recommendations for 33–5; purposes of 15 banking sector: assets quality in 28; cost model of 21–2, 30; deregulation of 18–19; history of 17–18; importance of 13; statistics of 23; structure of 20 banks: in centrally planned economies 15; foreign acquisition of 14, 16, 30–2, 34; listed on stock exchange 17, 25, 30; ownership of 15–16; support for SMEs 137 BaoSteel Group 149, 156, 159–60 Beijing: private vehicle ownership in 82, 83; privileged position of 42 Beijing Boy 174 biodiesel see biofuels bioethanol see biofuels biofuels 77–80, 82, 85–6, 90 blogs 175, 177–8, 184–5, 187

BOC (Bank of China) 13, 17–19 brain circulation 139–40 budget constraints, soft 19 business groups 145–9, 159–60, 168–9 candy gang 104 capital: human see human capital; physical 23, 25, 43, 50; social 99; transnational 139 capital adequacy requirements 19–20 capital markets 17, 22, 137 capital risk 25 capitalism 1–4, 6, 67 capitalists see private enterprises, owners of carbon dioxide (CO2) 68–9, 71, 79, 84, 90–3 CCBs (city commercial banks) 20, 22, 30, 35n3, 35n4 CCS (carbon dioxide capture and storage) 71, 73 cell phones 134 censorship 175, 180 CERNET (China Education and Research Network) 173 Chen Wei 133, 142 China: coastal provinces of see East China; economic geography of 40, 42, 55n3; energy needs of 69; going out policy see zou chu qu; Great Fire-wall of see GFW; innovation system of 64–5, 74; international bargaining power of 72; international collaborations with 68; opening of 124; relationship with other countries 183; sovereignty of 132; Western beliefs about 131, 176–9, 184–7

192 Index China Automotive Industry Yearbooks 79–80 China Banking Regulatory Commission (CBRC) 20 China Golden Bridge Network 173 China Huaneng 157, 160 China Merchants Group 152 China Metallurgical Group Corp 155 China Minmetals see Minmetals China Mobile Communications Corporation see CMCC China National Aviation Holding Corporation 152 China National Chemical Corporation 152 China National Foreign Trade Transportation 156 China National Petroleum Group Corporation see CNPC China Netizen Party (CNP) 175 China Network Communications Group Corporation 153 China Nonferrous Metal Mining and Construction 157 China Petroleum Finance Company 149 China Poly Group Corporation 158 China Power Investment Corporation 155 China Resources National Corporation 151, 161 China Shipping Group Company 152, 160 China State Construction Engineering Corporation 153 China Statistical Yearbooks 22, 39, 80 Chinalco 148, 153, 159–60 ChinaNET 173 Chinese communities overseas see Chinese diaspora Chinese diaspora 109, 139–40 Chinese nationalism 175, 177, 179–80, 182–4, 186–7 Chinese sovereignty 169–70 Chinese values 148 CHNS (Chinese Health and Nutrition Survey) 48, 55n7 CITIC 130, 151, 161 CITS Corporation 154 civil society 162; virtual 174 climate change: China’s contribution to 61, 73–4; Chinese attitudes to 91–2; Chinese vulnerability to 63; and cultural issues 69; global negotiations on 66; as social problem 60 CMCC (China Mobile Communications Corporation) 149, 151, 159–61, 168

CMSC (China Maritime Service Centre) 111 CNG (compressed natural gas) 78, 90 CNOOC (China National Offshore Oil Corp) 134–5, 149, 150, 159, 162, 167 CNPC (China National Petroleum Group Corporation) 149, 150, 159–60, 162, 163, 167 coal 70–3, 81 COFCO Group Ltd 151, 161 collective enterprises 7 commodity distribution 105–6 communication networks 99 competition, fair 8–9 competitive advantage 99 corruption 175 COSCO Group 109, 149, 150, 159–61, 168 cost and profit frontiers 27, 33 cost efficiency, in Chinese banks see bank efficiency CP Finance see CNPC CPC (Communist Party of China): acceptance of private sector 1–4, 8; action on inequality 38, 53; and appointment of executives 162; corporate allegiance to 161, 168; ‘Go Global’ policy 145; membership of business owners in 4–6, 6; public support for 169, 174, 181, 187; and sovereignty 169; stability of rule of 174–5; Western attacks on 177, 180 CPCC (China Petroleum & Chemical Corp) 135 credit quotas 20 credit risk 25, 32–3 CSFB Asian China Investment Bank 134 CSR (Corporate Social Responsibility): definition of 146; benefits of for China 146–7; international initiatives 147, 159, 165, 167–9; monitoring 169–70; policies 150; reporting 147–9, 159, 161–2, 170 CSTNet (China Science and Technology Network) 173 Dalai Lama 178 democracy 148, 174, 181, 183–7 Deng Feng 128, 136, 141 Deng Xiaoping 3–4, 7, 124, 128, 131 Deng Zhonghan 131, 134, 141 developing countries: banking systems in 14; and global advantage 16 development: scientific 64, 147, 161; sustainable 133 diamond model 99

Index 193 diesel 78–80, 83–5, 87, 90, 92–3; demand for 79, 87, 88 Ding Jian 129 dissidents 184 dropout rates 46

fuel prices 81, 84–5, 91–2 fuel security 64 fuel tax 77, 84, 90, 92–3 fuels, alternative 78 fund market see capital markets

E10 77, 79–80 East China 40, 42–3, 45, 53–4, 54n2, 97, 100, 104, 114–15, 117–18, 122 economic development: regional 43, 97, 106, 119, 120, 122; zones 101 economic growth: and banking system 13, 15, 18–19; forecasts of 65; and height 48; and human capital 43, 50; and inequalities 54; and life expectancy 46; private sector in 4; and reforms 39; unsustainability of 66 education: access to 45; and economic growth 43; improvements in 53–4; maritime 108–9, 114–15 educational attainment 39 EITI (Extractive Industries Transparency Initiative) 147, 162, 163–6, 167, 169 embeddedness 98 energy demand: and export market 63; growth of 61–2, 85, 87; and lowcarbon innovation 69; model for 78–9; predictions for 88; in transport sector 77–8, 81–2, 87, 92 energy efficiency 63–4, 69, 85 energy production 70–2 energy transportation 81 entrepreneurs, and venture capital 128–9 Equity/Total Assets ratio 31–2 export processing zones 101

Gao Qunyao 132–3 Gao Xiqing 135 gas: compressed natural see CNG; liquefied petroleum see LPG; price of 84 gas vehicles 77–8, 80, 83–5, 90, 92 gasoline 78–80, 83–5, 87, 90; demand for see petroleum demand Gates, Bill 133, 135 GDH Limited 154 GFW (Great Fire-wall of China) 173 GHGs see greenhouse gases (GHGs) Gini Coefficient 39–40, 54n1 glass door see private sector, market access for GLM see labour market, global Global Compact see UNGC global economic crisis 61, 66–7 globalization 67, 108 Gong Yujie 102–3 governance: in banking sector 14–15, 20, 25, 26, 30, 32, 34; in private sector 10 governments, goals of 15 greenhouse gases (GHGs): Chinese emissions of 60–2, 62–3, 91; possible trajectories for 68, 90; and transport sector 77–9, 81–2, 87, 89, 90, 93 GRI (Global Reporting Initiative) 165–6, 167–9 gross regional product (GRP) 51–3, 52 Guangdong Province Navigation Holdings Company Limited 158 Guangxi 42 Guangzhou Yuexiu 156 Guo Quan 175

FBs see foreign banks FDI (foreign direct investment) 42, 110, 124, 134, 137; outward see OFDI FE see fuel economy FIEs see foreign-owned enterprises financial crisis see global economic crisis Five-Year Plans 34 foreign banks 15, 18, 20, 22, 30–1, 33, 139 foreign brands 145 foreign direct investment see FDI foreign-owned enterprises 7–9, 132–3 free-rider problem 15 free seamen 110–13, 112, 122 Friedman, Milton 146 fuel economy 77–9, 83–5, 91; regulation 83, 90, 92–3 fuel efficiency 64

Haier Group 155 harmonious society 11, 54, 64, 151, 161 He Dingyong 136 health provision 47, 48, 53 Hecaitou 175–80 height 38–9, 47–54, 49–52 high-tech zones 125 Home Inns 127, 136, 141 Hong Kong 10, 19, 84, 130, 183 household registration 53 Hu Jintao 168 hukou see household registration

194 Index human capital: and foreign investment 16; indicators of 38–9, 46, 50–1, 53; and inequality 38–9; and social capital 99 human flesh search engines see renrou sousu human rights 163, 165, 167–9, 172, 181 hydropower 70 ICBC (Industrial and Commercial Bank of China) 13, 18–19 ideology, state 54 income, measures of 38 individual economy 1–2 industrial clusters: definitions of 98–9; formation of 97; and innovation 103; and social networks 98–100; and wholesale markets 104–6; in Zhejiang province 100–2 industrial networks 102–3, 106–7 industrial parks 100, 155 industrial policy 68 industrialization: and GHG emissions 63; rural 105; in Zhejiang province 100–1 industry: energy efficiency of 63; largescale 5 inefficiency effect model 14, 25, 30, 31 inequality: increase in 38, 53; non-monetary measures of 51, 53–4; regional 41 information networks 103 Inner Mongolia 42 innovation: capacity 61, 66–8, 71–3; cosmopolitan 69; industrial 103; literature on 65; and social networks 103, 106 input prices 14, 17, 21–2, 27–8, 33 intellectual property rights 11, 131 interest rates: liberalization of 15, 20; structure in China 25, 28 international pluralism 169 Internet: access to in China 127, 172–4; Chinese-language 187; limits to control over 174–5 Internet companies 127 investment banks 130, 134 investment houses, global 128, 130, 137 investment modes 10 IPOs (initial public offerings): and bank efficiency 14, 16–17, 31–2, 34; returnees’ contributions to 126–7, 134–5; of SOCBs 19 IT (information technology) 124–5 Japan 126; returnees from 126 ji zhi 129

Jiangsu 7, 54n2, 121 JSCBs (joint stock commercial banks) 17–18, 20, 22, 30, 33 knowledge, international pools of 67 Kyoto Protocol 60, 74, 91 Labor Contract Law 146, 168 labour: global market for 108, 110, 113, 122; hire of 2; laws 110, 146, 168; layoffs from SOEs 125; mobility of 108; price of 23, 25; rural 103–4 Langsha Group 101, 104–5 language skills 108, 176 LEAB see life expectancy, at birth Legend Holdings 155 Lenovo 130, 135, 143n8 Li Yanhong 141 Liang Jianzhang 127, 141 life expectancy 38–40, 47, 50, 54; at birth (LEAB) 46–7, 51, 53, 55n5 light industry 100 liquidity risk 25, 33 literacy 38–40, 43, 45, 50–2, 52 Liu Erfei 130, 134–5 Liu Yang 181 Liu Zhenya 161 local authorities 109–10 lock-in 65 Long-range Energy Alternatives Planning System (LEAP) 78 longevity 46, 50, 52 low-carbon innovation: definition of 64–6; capacity for see innovation capacity; disincentives for 72–3; and GHG reduction 68; and international collaboration 73; international collaboration in 60–1, 66–9 LPG (liquified petroleum gas) 87 Macau 10 management, styles of 10 managers, shortage of 131 Mao Zedong 179 market access 8–9, 11 market risk 25, 33 markets, discipline of 15 Marxism 2, 132 M&As see mergers and acquisitions mergers and acquisitions 126, 135 MFN (most favoured nation) 132–3 migration: constraints on 53; and development 109 Minmetals 148, 154, 159–60

Index 195 MNCs (multi-national corporations) 126, 131–3, 140, 142, 148, 161–2, 169, 173 monetary policy 17–18, 20 monopoly 9, 110, 185 moral hazard 16 mortality 38, 40, 55, 57 motorization 82, 92 National Development and Reform Commission (NDRC) 9, 80 neoliberalism 67 network efficiency 98 New Economy 124–5, 140 NGOs (non-government organisations) 149, 162, 169 non-performing loans see NPLs ‘Non-public Sector 36’ 8–9 Northern Light Venture Capital 128–9, 141 NPLs (non-performing loans) 19–20, 28–30, 32–3 nuclear power 70 nutrition 39–40, 47–8, 52, 54 OFDI (outward foreign direct investment) 145, 148, 160 oil: demand for see petroleum demand; prices 91 Olympic Games 2008, 105, 172, 176, 178, 180, 183, 187 open-door policy 1–2, 6 open policy see zou chu qu PBC (People’s Bank of China) 17–18, 20 Peak Oil 91 People’s Bank of China see PBC People’s Construction Bank 17–18 Petro China 149 petroleum demand 77, 84, 87, 89–91, 89, 93, 96 philanthropic activities 161 policies, industrial 72, 100 policy banks 18–19 principal-agent framework 15 prisoner’s dilemma 66 private enterprises: affiliation to state or collective units see red-caps; business group structure of 148; and competitive advantage 99; number of 11; overseas listing 127; owners of 4–7, 6; and returnees 130–1, 135–9, 136, 138, 141 private equity (PE) 128–9 private property 8 private sector: emergence of 1–4; growth of 5, 9–10; and international initiatives

165; internationalisation of 145, 170; legal restrictions on 6–7; market access for 8–11 Private Vehicle Control 82, 90, 92–3 privately owned banks 16 profit efficiency, in Chinese banks see bank efficiency protests 64, 175, 179–80 provinces, municipal-level 40, 42 public transport 83 Rao Jin 181–2 R&D (research and development) 64, 71–3, 84, 92, 132, 136 recruitment agencies 110 red-caps 7–8 renewable energy 64, 70, 72, 85 renrou sousu 174 returnee enterprises see private enterprises, and returnees returnees: in business world 125–7; and Chinese government 133; as executives 131–2, 134; historical contribution of 124–5; as lawyers 133, 135; qualifications of 141; and VC 128 risk-taking behaviours 31–2 rote-learning 65 rural credit cooperatives (RCCs) 18 SASAC (State-owned Asset Supervision and Administration Commission): and business groups 148; and CSR 146–8 school fees 53 schooling: investment in 43; years of 39, 43–5, 44–5 Schweinsteiger 177–9, 183 scientists 125 seafarers: Chinese supply of 109–10; entrances of 111, 112; freelance see free seamen; global labour market for 108, 122; hierarchy of 112–13, 112; and local eco-social profiles 119; provincial supply of 113–15, 117–18, 117, 122; registration of 109, 112; supply bases see SSB SEPA (State Environmental Protection Agency) 61, 64, 94 SFA (stochastic frontier approach) 13–14, 20 SGCC (State Grid Corporation China) 161–2 Shandong 54n2, 114 Shanghai, private vehicle ownership in 82, 83

196 Index Shanghai Automobile Industry Group Co 154 Shanghai Overseas United Investment Co 157 Shen Nanpeng 127, 141 Shenzhen Investment Holdings Co 159 shipping sector 110 Shougang Group 158 Shum Yip Holdings Company Limited 152 Sinochem 152, 159–61 Sinopec Group 148–9, 150, 159, 162, 167–8 Sinosteel 149, 153, 160 SMEs (small and medium enterprises) 8–9, 99–100, 128–9, 137 SOCBs (state-owned commercial banks) 17–20, 22, 28–30, 32–4 social networks: aspects of 97–9; and economic development 106; and returnee firms 135; in Yiwu 102 social responsibility 11; corporate see CSR social technologies 99 socialist market economy 1, 3–5, 8 socialist society, harmonious 147, 161 SOEs (state-owned enterprises) 7–9, 19, 72, 97, 110, 125, 128, 134–5 solar power 70, 72 Soong, Roland 188n1 Soviet Union 15, 184 specialization, flexible 98, 102 SSASAC (State-owned Asset Supervision and Administration Commission), and CSR 146 SSB (seafarers supply bases) 116–17, 120–1, 122 standards: environmental 167; ethical 99 state-owned banks 15–16; commercial see SOCBs state-owned enterprises see SOEs STI see China, innovation system of strategic investors 9 students: overseas 124; returned see returnees subsidies 38, 91 Sudan 148–9 Sun Wei 134 Sun Yuhong 133

technology: dependence on foreign 71; diffusion of 43 technology transfer 61, 92 Tian Suning 141 Tibet 40, 55n4, 175, 177, 179–81, 186 TNCs see MNCs TNI (transnationality index) 162 transaction costs 103, 105–6 transition economies 14–16, 38, 99–100 transparency 32, 162, 167, 170 transport sector: data sources for 78–80; growth in 77, 81; impact of changes on 86; and urbanisation 63 two unwavers 8

Taida Environmental Index 146 Taiwan 10, 180 Tang Jie 179–81 tax breaks 101, 125 TCL Corporation 158

Yang Ning 141 Yiwu 101–6, 102

UNGC (United Nations Global Compact) 147, 160–2, 163, 167–9 urbanization 34, 40, 41–2, 51, 52, 63 VC see venture capitalists VDT (vehicle damage tracking) 80 venture capitalists 126–30, 135–7, 139–40 Vimicro Corp 131, 134, 143n8 Voluntary Principles on Security and Human Rights 163–4, 166, 167, 169 VP (vehicle population) 79–82 wage convergence 53 WebEx 127, 141 welfare, indicators of 38 Wen Rongjin 104 West China 40, 42n1 49, 53–4, 109, 114–16, 118, 122–3 Western regions see West China wind power 70, 72 workers see labour WTO (World Trade Organization) 13, 19, 81, 125 Wu Ping 141 Wu Shangzhi 128 WuMao-Dang see 50 cent Party Xia Yingqi 137 Xiao Zhiyue 135 Xinjiang Zhongxin Resources Co 158 Xu Xiaoping 141 Xu Xin 129

Zhang Fan 128–9 Zhang Yaqin 132

Index 197 Zhejiang province 7, 54n2, 97, 100–1, 114 Zheng Yichen 130 Zhu Min 127, 137, 141

Zhu Yunlai 134–5 Zong Guying 105 zou chu qu 124–6