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BUS 487 - POLITICS AND ECONOMICS AND DEVELOPMENT

Professor Marvin Zonis

Courtney BickertIsabelle BonneauPrashant Gandhi

Anthony HaroSastry Penumarty

APRIL 2000

ACKNOWLEDGEMENT

We would like to thank our sponsors, who made our trip to China possible:

CNA

DEUTSCHE BANK

DIAMOND TECHNOLOGY PARTNERS

PFIZER

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TABLE OF CONTENTS

I. INTRODUCTION 1

Objectives and approach 1

Trip Overview 1

Summary of findings 1

II. A BRIEF HISTORY OF ECONOMIC REFORM IN CHINA 2

III. ANALYSIS OF FIRST TIER ISSUES 3

Political stability 3

Reform of State-Owned Enterprises 5

Banking Reform 6

Development of the West 9

WTO 11

IV. ANALYSIS OF SECOND-TIER ISSUES

Foreign Direct Investment 11

Domestic Private sector growth 12

Corruption 13

V. THE FUTURE OF HIGH TECHNOLOGY IN CHINA 14

VI. OVERALL CONCLUSIONS 15

EXHIBIT A: ITINERARY

EXHIBIT B: CHINA CONTACT LIST

EXHIBIT C: YEAR-TO-YEAR CHANGE IN CHINA’S GDP

EXHIBIT D: PROFITABILITY OF STATE-OWNED ENTERPRISES

EXHIBIT E: ESTIMATE OF THE BANK RESTRUCTURING COSTS(*)

EXHIBIT F1: AGGREGATE BALANCE SHEET OF THE STATE-OWNED BANKS AS OF JUNE

1998

EXHIBIT F2: AGGREGATE BALANCE SHEET OF THE STATE-OWNED BANKS AS OF JUNE

1998

EXHIBIT G : TRENDS IN FDI IN CHINA

EXHIBIT H : GEOGRAPHIC CONCENTRATION OF FDI IN CHINA

EXHIBIT I : BIBLIOGRAPHY

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I. INTRODUCTION

Objectives and Approach

The purpose of this study was to ascertain both the short-term (12-18 months) and longer-term

growth (3-5 years) outlook for China, and to identify some key challenges that lie ahead. The report begins

with a brief history of economic reform in China in order to provide a context for current and future

economic trends. We then dive into what we have characterized as first-tier and second-tier issues affecting

China’s future growth. The first-tier issues include political stability, reform of State-Owned Enterprises

(SOEs), banking reform, development of the west, and the effect of China’s entry into the WTO. In addition,

foreign direct investment, private sector growth, and corruption will also impact China’s short-term growth

although to a lesser degree. Therefore, we have categorized these as second-tier issues. Finally, given all the

recent hype and publicity, our report also addresses the future impact of the high-technology industry in

China.

From an expenditure approach, any nation’s GDP can be expressed as being the sum of consumption

expenditure, government spending, fixed asset investment and net exports.1 Our report will not only explain

why we think the chosen set of variables issues are important, but it will also tie their effects back into this

fundamental identity.

Trip Overview

Our team consisted of five 1st and 2nd year MBA and IMBA students from the University of Chicago.

In order to ascertain the future prospects and to closely study both the first and second-tier issues, we visited

four cities, which have several unique attributes. Specifically, we visited Hong Kong, Xiamen, Shanghai and

Beijing (Exhibit A). Hong Kong has for many years been a key player in foreign investment in China. For

instance, much Taiwanese investment in China flows through Hong Kong. Xiamen is a Special Economic

Zone (SEZ), which has special policy rights to foster industrial development and foreign investment.

Shanghai is home to the first Special Economic Area, Pudong, where the central government is making

targeted investments to build up infrastructure that will attract foreign and local investment. Shanghai is also

widely regarded as the economic capital of China, as well as a future competitor of Hong Kong. Finally, as

the capital, Beijing is the center of national and international politics. In total we conducted over 35

meetings with a broad cross-section of people, including: government officials, representatives of US and

European MNCs, Chinese business school students, industrialists, e-commerce entrepreneurs, bankers,

economists, journalists and representatives of the US and French embassies (Exhibit B).

1 (GDP = S + I + C + CA)

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Summary of Findings

The officially reported GDP growth rate in China has been around seven percent for the last few

years. We believe that China’s economy will continue to grow at about the same rate in the next two to three

years. Our team predicts that the economic growth will accelerate a little to around 7.5% in the next 12

months due to resumption in investment and export growth. The fixed-asset investment growth, which

slowed significantly in 1999 is expected to pick-up again in 2000 owing to the official launch of the Western

Area Development Program and increase in foreign direct investment. Also, net exports are most likely to

increase with China’s entry into the WTO. In addition, political stability will be maintained, allowing for

economic growth to continue at its current pace. SOE reform will also contribute positively to short-term

economic growth, but, in the long term, this impact will be tempered by the decline in consumption caused

by the massive layoffs required for restructuring. The positive impact of banking reform is also likely to be

felt more strongly in the longer term (7-10 years) as reforms are completed.

In the longer-term beyond 2-3 years, we believe that the economic growth might moderate if the

central government’s direct investment capacity weakens. The debt-to-equity swap program run by AMCs

may not be as successful as government expects, while the program may engender some new bad loans.

Finally, the long-term difficulties in resolving the unemployment problem during the economic transition

period as well as the ensuing social instability in rural regions may also contribute to the slow-down.

We also believe that investment in China is still quite risky for foreigners. The government is

aiming to use foreign investments and partnerships to increase exports, improve human capital, gain access

to up-to-date technology, and develop the western regions. These goals are not always compatible with those

of the average foreign investor, possibly leading to complications. For instance, MNCs attempting to gain

domestic market share in China seem to have more trouble with the government than do firms aiming to

export their products. In addition, the rule of law in the business sector is weak making it difficult, if not

impossible, for investors to recoup money lost through corruption. While the risks are quite high, the returns

to investing in China can also be high. Many MNCs have established extremely successful business ventures

in China. The Chinese economy will continue to grow and over the long term market reforms will be largely

successful. In conclusion, investment in China is risky, but if it is for the long-term, the payoffs are likely to

be very high.

II. A BRIEF HISTORY OF ECONOMIC REFORM IN CHINA

For centuries, China’s economy was based primarily on agriculture. In 1949 the Chinese Communist

Party (CCP) came to power and founded the People's Republic of China (PRC). The Party leaders decided to

focus on the development of heavy industry as they saw this as the means to achieve a self-contained

industrial economy. Self-containment was important because of the high level of uncertainty due to the

Korean War and China’s military confrontation with the Nationalist Party in Taiwan.

While this development strategy was extremely capital intensive, China’s economy was quite poor.

This imbalance between China’s goal and the availability of resources made it impossible to accelerate t

economic development through market mechanisms. Therefore, the CCP adopted a planned economy and

created institutional arrangements to lower the barriers to the development of heavy industries, i.e., low

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interest rates, depressed product and factor prices, and a central resource allocation system. While this

system quickly established a relatively complete industrial structure and likewise led to economic growth

resulting from massive investment (Our research revealed that China’s annualized GDP growth between

1953-1978 was close to 6%2), the costs associated with economic inefficiency were extremely high. For

instance, there were no links between the expansion of an enterprise and its economic efficiency, or between

workers’ income and their productivity. This lack of incentives severely suppressed productivity and

resulted in low economic efficiency.

Beginning in 1978, the CCP, under the leadership of Deng Xiaoping, established a national objective

of modernizing agriculture, industry, defense, and science and technology. Since 1979 China’s economic

reform has gone through three main phases. The focus of the first phase (1978-1984) was to increase the

economic efficiency of all industries by improving the incentive structures. During this period total

agricultural output increased by 42 percent.3 The primary goal of urban reform efforts during this phase was

to increase enterprises’ autonomy. The objective of the second phase of reform (1984-1991) was to improve

resource allocation mechanisms. The main focuses of the reforms were (a) the material management system,

(b) the foreign-trade management system, and (c) the banking system. The third phase of reform (1992-

present) has focused on the macro-policy environment, including the reform of pricing, exchange-rate and

interest-rate policies.

The results of these reform efforts have been astounding. The annual GNP growth rate between

1978-94 averaged about 10 percent,4 which is far higher than the world average of 3 percent during the same

period. In addition, the per capita annual income of rural residents rose from 133.5 yuan to 1,220 yuan

between 1978-94 with an annual growth averaging 8.25 percent (3.5 times the worldwide average annual

growth between 1952-78). However, the growth of the Chinese economy has slowed a bit in the last five

years (Exhibit C). Some economists have argued that the first two decades of reform reflected “catch-up”

growth for China, and that the country has “run out of easy things to reform”5.

III. ANALYSIS OF FIRST TIER ISSUES

Political Stability

Political stability in China can be defined as the continuance, in the next five to ten years, of the

existing governance systems at the federal, provincial and local levels. The government should serve a

strong coordination and control function. It is also important that the leadership continue its commitment to

economic reforms.

Political stability in China will have a strong impact, direct as well as indirect, on the GDP growth in

four main ways. First, it will ensure steadfast commitment to economic reforms, even in the face of short-

term challenges. Second, it will help maintain strong consumer and investor confidence in the economy.

Third, it will provide a foundation for continued government infrastructure investment. Fourth, it will bolster

2 The China Miracle, Justin Yifu Lin, Fang Cai and Zhou Li; The Chinese University Press, 1996.3 The China Miracle, Justin Yifu Lin, Fang Cai and Zhou Li; The Chinese University Press, 1996.4 calculated according to comparable prices5 The Economist, April 8th 2000.

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the development of a strong legal system and minimize problems such as corruption and smuggling. Despite

numerous challenges, there are no significant threats to political stability, in the next 1-3 years.

Though it is unlikely that there will be any major shift in the political system in the next three to five

years, there are several challenges that the government will have to deal with. One potential threat to

stability is a change in the leadership in Beijing.6 Many members of China’s current leadership are

septuagenarians, who rose up the ranks of the Communist Party and had taken part in the 1949 revolution. In

late 2002, the Chinese Communist Party will hold its 16th National Congress. At that time, all the first-tier

members of the current leadership hierarchy are expected to make way for a younger leadership team.

Among the leaders whose current terms could expire, in late 2002, are President Jiang Zemin, Premier Zhu

Rongji and Chairman of the national legislature, Li Peng. These younger people are believed to be less

ideologically shackled than their elders, and so can be expected to increase the pace of current reforms, many

of which are in fact designed to strengthen the CCPs grip on power.

In addition, there is a threat from social unrest. The SOE reforms have caused massive

unemployment. According to recent statistics from the Ministry of Labor and Social Insurance7, newly laid-

off workers in 1999 totaled 56.4 million, while the total laid-off workers in urban areas alone reached 117.4

million. The real unemployment rate in urban areas has reached 8.2% (end of 1999), although the registered

unemployment rate was only 3.1%.

The SOEs used to provide health insurance, pensions, housing, and education to their employees. In

the absence of an adequate social safety net, many of these benefits have either vanished or decreased

substantially since the layoffs. Even though the Chinese government has stepped up its efforts to create a

social safety net and has increased the total benefits to the unemployed workers, these efforts are insufficient.

With the target to complete SOE reforms within the next three years, these problems will only worsen.

The disgruntlement of these SOE workers poses the most significant threat to China’s political

stability in the near-term. There have been numerous reports of protests of street protests and violence across

China, especially in the northeastern and western provinces.

Falun Gong8 has also been seen as a threat to the political establishment. Falun Gong is a religious

sect that teaches meditation, breathing techniques and self-discipline. While there are numerous such sects

in China, Falun Gong is one of the largest with reported membership from 2 million (Chinese government

figure) to 100 million (Falun Gong leadership). The membership of Falun Gong consists of intellectuals,

laid-off SOE workers, and farmers. In June 1999, about 10,000 Falun Gong members quietly surrounded

Beijing’s Zhongnanhai leadership compound. Since the Zhongnanhai incident, Falun Gong has been banned

and most of its key leaders have been arrested. Li Hongzhi, Falun Gong’s founder, lives in exile in New

York.

Finally, China-Taiwan relations play a significant role in China’s politics. The election of Chen

Shui-Bian as President of Taiwan has only intensified China’s sabre-rattling towards its neighbor. The

United States government’s close relations with Taiwan combined with the Chinese government’s avid

interest in reunifying Taiwan with the mainland make for a lot of tension in the region.

6 Court Intrigue, Asia Week, February 11, 2000.72 Counterpoint, a publication of SG Global Research, March 2000 issue.8 A Two-way Siege, Asia Week, February 11, 2000.

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Despite all the above challenges, China’s political stability is in no imminent danger. The reasons

for our conclusion are three-fold. First, the Chinese government is aggressively addressing the problem of

social unrest by boosting the benefits to the laid-off workers and setting up programs to re-train them. Even

though it is not entirely clear that these measures will be adequate in the long-term, they are sufficient for the

short-term. Second, the Falun Gong has been banned and most of its key leaders have been arrested since

the Zhongnanhai incident. There is no serious threat from these organizations and addressing the economic

problems in the country will alleviate whatever tension there is. Third, both China and Taiwan have made

some concessions and have indicated a willingness to hold talks. Similarly, the president-elect of Taiwan has

announced concessions, saying that he is open to discussing anything (however, Chen has pointedly not

agreed to the One-China framework). Therefore, the Taiwan issue does not pose a significant threat to

political stability in China in the short-term. However, it could definitely play a very important role in the

medium and long-term.

Reform of State-Owned Enterprises (SOEs)

State Owned Enterprises (SOEs), are a main driver of the Chinese Economy as they represent one

third of China’s GDP. The other two-thirds consist of the collective economy and the private sector in

approximately equal proportions. SOEs also employ a large portion of the population. Effective reform of the

SOEs will have a positive impact on the GDP through more efficient allocation of resources gradually over

time. This positive impact will be offset, however, by declines in consumption associated with the massive

layoffs required for restructuring.

SOEs (mostly large industrial firms) have proven to be extremely inefficient, accumulating debts, in

some cases just to pay wages (bad debt is estimated to represent 30 to 60% of the total amount of debt of

SOEs). Overwhelmed by the financial burden and willing to develop the market economy, the Chinese

government intensified its policy of SOE reforms in 1997.

In pursuing reform, the government has to balance between two potential pitfalls. On the one hand, it

has to conduct the reforms fast enough to avoid further debt accumulation and to enable the economy to

develop. On the other hand, since SOE reform will lead to massive layoffs, restructuring too rapidly could

cause increased political instability and result in a deep crisis for the whole economy by slowing down

consumption.

In order to avoid these two pitfalls, the government is conducting the reform progressively. Rather

than shutting all non-profitable SOEs at once, the government is restructuring them industry by industry

and/or geographic area by area. The policy is to try to make the SOEs profitable through reorganizations

and/or collaboration with Western firms. For example, SOEs in the aerospace industry now subcontract with

Airbus and Boeing to both improve their profitability and acquire up-to-date technology. If the SOEs do not

show a potential for profitability, they are usually closed. Any restructuring or closing involves layoffs. The

aim of this step-by-step approach taken by the government is to allow enough time to create new jobs to

absorb the surplus labor. China’s entry into the WTO will put additional pressure on the Chinese

Government to accelerate SOE restructuring, but it will also provide an explanation to the public for the

painful reforms.

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There are several factors that may cause SOE reform to fail. First, the government may not manage

to maintain political stability in the face of the massive layoffs. As mentioned above, the situation of the

unemployed is worsened by the fact that workers lose their social coverage when they are laid off. The

government has managed so far to contain the numerous protests happening around the country, but social

unrest due to unemployment could hinder SOE reform.

Furthermore, the lack of management skills among SOE leaders could be a barrier to successful SOE

reform. The current top managers of SOEs do not have skills to work in a market economy as they were

trained in the Communist era. According to some of our interviewees, SOE managers are focusing their

“restructuring” efforts on diminishing costs rather than on increasing revenues. Not only does this mean that

the underlying unsuccessful structures of these enterprises remain unchanged, but it results in additional

layoffs. On the other hand, there is some promising evidence that some of the SOE managers are beginning

to focus on increasing revenue (i.e. aerospace ventures mentioned above)

Finally, SOE reform in many geographic regions in China may be hindered by a lack of skilled labor

and insufficient infrastructure. According to one of our interviewees, only five percent of the Chinese

population has a university-level education and most college-educated citizens live in urban areas. One

interviewee told us of a visit to a small western town in which he could not find anyone on the street who

could read a set of directions in Mandarin. Moreover, those who do have skills leave the rural areas in search

of better opportunities in urban areas. Finally, the lack of infrastructure development makes it fundamentally

impossible for rural enterprises to increase their access to inputs or to expand their markets beyond the

immediate area. Therefore, SOE reform outside of the major urban centers will be very challenging.

Despite these difficulties, some efficient restructuring will take place in the coming three years. This

will be driven by the government’s strong commitment to reform as well as by the pressures associated with

WTO entry. Statistical figures confirm this analysis: SOEs reported a 77.7% year-over-year increase in their

profits in 1999.

In summary, then, we feel that SOE reform is an issue of central importance to future economic

growth in China. A significant portion of the SOE sector is value-destroying and should be restructured, and

Beijing knows this. The central government is thus trying to time the closure of SOEs to coincide with the

development of jobs for the newly unemployed. Despite the fact that the SOE reform effort has only recently

begun in earnest, this discontinuity between job creations and destruction is already creating problems for the

economy and the government. We feel that Beijing has the resources to manage this dilemma in the near

term, with the advent of new development projects in the west and the center, as well as with a projected

increase in FDI. However, such gradualism must eventually give way to an inevitable radical restructuring of

the society and the economy. We feel that Beijing has at least five years before it must confront these issues,

but when it does, the country may enter severe social turbulence.

Banking Reform

Successful reform of the banking sector is a key prerequisite to building a financial infrastructure

that will make China’s economic growth sustainable. The Chinese government has instituted banking

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reforms9 to overcome the deep-seated structural problems of profitability (Exhibit D), non-performing loans

(NPLs) (Exhibits E and F), and capital adequacy plaguing China’s banks. Because of the weaknesses in

China’s current banking system, there is a very small chance of a crisis.

Banking reforms have a strong positive impact on the GDP growth in two main ways. First, an

efficient banking system ensures the adequate availability and efficient allocation of investment resources

(“I” in the GDP Demand equation). Second, a healthy banking system boosts consumer confidence and

maintains growth in consumption (“C” in the GDP Demand equation) and the high-savings rates. In China

the high savings rate has contributed to rapid growth in the past. Banking reform in China will continue and

will contribute positively to economic growth. The positive impact of reform will be felt much more

strongly in the long run, however.

China’s banking sector consists of one central bank, four large state-owned banks, thirteen other

commercial banks, several hundred urban cooperative banks, and trust and investment companies plus over

fifty-thousand urban and rural cooperatives. In addition, there are a handful of small foreign-funded and

joint-venture banks, hundreds of branches and representative offices of foreign banks, six finance companies

and one joint venture investment bank. We focus mainly on the four state-owned banks: Agricultural Bank of

China, Industrial and Commercial Bank of China, Bank of China and Construction Bank of China. Together,

these banks account for over 70 percent of loans and over 60 percent of deposits in China’s commercial

banking system.

Non-Performing Loans (NPLs) are one of the key problems facing the Chinese banks. The credit

rating of Chinese banks is amongst the lowest in Asia. The People’s Bank of China (or PBC, China’s central

bank) estimates that at the end of 1997, around 20-25 percent of total bank loans, or about RMB $1,500

billion were non-performing. This is equivalent to about 20 percent of GDP. Of the total NPLs, about 6-7

percent is deemed unrecoverable. It is important to keep in mind that the exact amount of NPLs, in the

records of state-owned banks, is not transparent. The NPL problem has a stock and a flow dimension. The

stock problem arises from the bad loans undertaken in the past. The flow problem refers to future loans to

state-owned enterprises (SOEs) operating at a loss, which will not be able to service them.

Many of the non-performance problems of Chinese banks can also be explained by the directed

lending practices prevalent in the centrally planned economy. As provincial governments maintained

authority over bank personnel within their localities, they strongly influenced decisions pertaining to credit

allocation without sufficient due diligence. Banks were made to lend generously to support ambitious

projects of local governments in a race to outgrow neighboring cities and provinces. As credit was allocated

to the local SOEs, construction of huge commercial centers, office skyscrapers and luxury apartments for

which there was no genuine demand, a significant portion of the loans turned “bad” and became

unrecoverable.

The sheer size of the NPLs can be explained by structural factors – under a centrally planned

economy, banks acted on behalf of the government to finance investment and working capital needs of state-

owned capital enterprises (SOEs). A large proportion of SOEs is suffering losses and therefore, a large

proportion of the loans extended to them have become doubtful. Pulling the plug on SOEs would push them

9 Strengthening the Banking System in China: Issues and Experience, a joint conference held by Bank for International Settlements (BIS) and the People’s Bank of China (PBC), Beijing, China, 1-2 March 1999.

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into bankruptcy, resulting in massive layoffs. As a result, banks are still carrying the NPLs on their balance

sheets.

In 1998, the Chinese government put forward a number of reform measures to deal with the issues of

NPLs and to guard against financial risks in the banking sector. These reforms are discussed in detail below:

(i) Strengthening the capital base of state-owned banks

In August 1998, special government bonds were issued to the tune of RMB 270 billion to re-

capitalise (Exhibit 3) the state-owned banks. The plan was implemented in conjunction with the

reduction of the deposit reserve requirements from 13 to 8 percent. This was aimed at further

increasing bank liquidity. The re-capitalization plan raised the capital of the state-owned banks from

RMB 208 billion to RMB 478 billion.

(ii) Asset Management Corporations (AMCs)

In March 1999, the government established the first of the AMCs to clean up the balance sheets of

the state-owned banks and then repackage and sell the loans of the state-owned banks. The Cinda

Asset Management Corporation has been setup to manage the bad debts of the China Construction

Bank. Cinda has taken over RMB 200 billion of the bank’s bad loans. The goal of Cinda is to

(a) clean up the China Construction Bank’s balance sheet of bad loans by purchasing bad loans at

face value,

(b) increase the recovery rate of such loans,

(c) sell assets or extend maturity for partial payments, and

(d) advise on restructuring and operations

(iii) New standards for classifying NPLs

The Chinese government has introduced a risk-based classification system for NPLs. The new

system follows the international standards of dividing NPLs into four categories: special mention,

substandard, doubtful and loss. The old system loosely classified loans as overdue, doubtful, and

bad. Under this system, loans would still be classified as “performing” long after an enterprise

ceased functioning due to financial difficulties.

(iv) Requiring banks to make loans on a commercial basis

Effective from January 1998, the PBC abolished the mandatory quota system for credit allocation.

Banks are now free to lend according to commercial considerations, subject to constraints on

asset/liability ratios and monetary policy targets of the PBC. The goal of this policy is to reduce the

risk of future bad loans.

(v) Independence of the PBC

The PBC has been reorganized and efforts are underway to de-politicize the banking supervision and

examination process. Similar to the streamlined structure of the United States Federal Reserve, the

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PBC’s provincial offices have been combined into regional headquarters overseeing several

provinces. The goal is to deter local governments from encouraging banks to finance their favored

projects, many of which are over-ambitious and not profitable.

The banking reforms in China are subject to six constraints that will hinder their efficacy. First, the

RMB 270 billion injection is not likely to be sufficient to re-capitalize the banks. Moreover, an even greater

shortfall is likely to surface if China does not contain the flow problem of NPLs properly. Second, the

under-estimation of the real size of the NPLs and the urgency that may result in the event of China’s entry

into the WTO may further aggravate this problem. Third, our research indicated that all AMCs seem to have

overestimated the real value of NPLs. They also appear to be overconfident about the future of these NPLs

after the restructuring. AMCs don’t seem to understand that they will have to sell these NPLs at huge

discounts in the future. Also, since most of the NPLs are from the traditional sectors like steel and cement

where serious over-capacity problems persist, it would be difficult for AMCs to find markets for these

products. Fourth, high levels of NPLs are likely to hold back economic growth as lending behavior turns

cautious and losses get recognized and absorbed. Likewise, slower economic growth may impede banking

reforms. Fifth, in the next few years, bank lending will still be mostly to SOEs and therefore, the ultimate

obstacle to the profitability of the banks is the success of the SOE reforms. The management of banks also

has to transform itself from the “directed lending” culture of the past to a credit culture. Developing credit

analysis and project evaluation skills among bank personnel will be very critical. Finally, shortcomings in

supervisory, regulatory, legal and accounting frameworks need to be addressed and these frameworks need to

be brought up to international standards.

In conclusion, despite the weaknesses in China’s banking system, the imminent threat of a crisis is

not significant. The reasons for this belief are three-fold. First, the public has strong confidence in the

banking system. In addition, PBC funding support is significant and deemed to be stable. Two, China has a

high savings rate of over 40 percent of GDP but limited investment vehicles. Therefore, households and

enterprises place most of their funds as deposits in the banking sector. Three, banks are generally fairly

liquid, with steady growth in deposits and a loan-to-deposit ratio of slightly over 80 percent. All these

factors reduce the risk of deposit runs and illiquidity-induced bank failures. The banking reforms will

positively contribute to economic growth, especially in the long run.

Development of the West

The Chinese government is paying a great deal of attention to the development of the western region

of the country. Zeng Peiyan, the director of the State Planning Commission, recently described a new set of

aggressive policies, which may come to be known as the “three seventy percents.” First, Beijing will

allocate seventy percent of its revenues from this year’s 100 billion RMB bond offering to western

infrastructure development projects. Next, RMB308.14 billion, or seventy percent of the central

government’s disbursements to the regions, will go to western regions. Finally, seventy percent of all foreign

aid received by Beijing will be spent in the west.10 Though these policies will have a net positive effect on

10 “China to Focus on Western Development, Minister”: www.chinaonline.com, 8 March 2000.

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economic growth through investment, their impact will be tempered by factors that make investment in the

west difficult and potentially unattractive.

In order to understand its impact on economic growth it is important to understand how this

financing (3% of estimated 1999 GDP) will be invested. First, and perhaps most importantly, the

government is investing heavily in transportation infrastructure. Many of the professionals with whom we

spoke in China indicated that distribution was a major problem confronting their businesses.11 In an effort to

improve the situation, the central government is sponsoring the development of at least three major railroads

in the west. For instance, Beijing is spending RMB23.23 billion to lay 955 kilometers of track between Xian

and Hefei, the capital of Anhui province.12 Furthermore, the central government plans to pave

approximately 17,000 kilometers of highway in the west over the next decade.13 This is of great importance

from an investor’s perspective as it will reduce the cost, and improve the efficiency, of road transportation.

The government is also in the midst of renovating and constructing nineteen airports throughout the country.

Finally, Beijing is actively investing in pipelines, water conservation projects, and telecommunications

facilities throughout the west.

However, investors, particularly foreign investors, are not rushing into the region. First, the central

and western parts of China are among the poorest places on the planet. Guizhou Province, for instance, has a

per-capita GDP of only $277, far below the prevailing level in Shanghai ($3,043).14 Furthermore, human

capital in these regions is not well developed. One professional with whom we met told of a new factory that

his firm had become involved with in Sichuan Province’s capital, Chongqing. In a city of several million

people, the firm was unable to locate a single person who was proficient enough in English to work as a

receptionist. The firm was forced to hire someone from Shanghai.15

We also heard reports from several sources of political unrest in central and western China. Ninety

percent of China’s 80 million people living in poverty reside in these regions.16 Additional social pressures

are being generated by a series of agricultural reforms which, while intended to rationalize the sector,

continue to force farmers off the land. While the government has created town and village enterprises (TVEs)

to absorb the excess labor, there is still a tremendous flow of migrant labor from the farms into the large

cities on the eastern seaboard. Several sources reported that the number of undocumented residents of

Beijing is close to four million. Finally, we heard of daily peasant protests throughout China’s

underdeveloped regions. These issues also negatively affect foreign investors’ interest in western China,

while giving the central government good reason to focus its own investment efforts on this region.

However, all is not completely bleak for the west. As Professor Susumu Yabuki of Tokyo University

points out in a recent article, “Zhu Rongji has begun to use the word ‘strategic’ to describe the west in the

same way that his predecessor Zhao Ziyang used it to describe the eastern seaboard in 1978.”17 Whether the

government can or will make good on its commitments vis-à-vis the west remains to be seen. We agree,

11 Conversation with Mr. Thomas McLeod, Director of Public Relations, Boeing China, Inc. 23 March 2000.12 “China to Open Up Region”:www.ft.com, 13 April 200013 IBID.14 China Country Profile 1999-2000. The Economist Intelligence Unit (EIU), London, 2000. Page 41.15 Conversation with Mr. McLeod.16 China Country Page. www.worldbank.org

17 “China Opens Up the West”, www.chinaonline.com, 8 March 2000.

10

however, with Professor Susumu’s argument that the stakes in the west are simply too high for failure this

time. Clearly, we are not alone. In recent years, western firms such as Boeing, Seimens, Motorola, Toyota,

and P&G have all made substantial capital investments in the region. Therefore, in the short run the overall

investment strategy for western China will contribute positively to economic growth.

WTO

While it is beyond the scope of this report to comment on the political machinations in Washington

and Brussels that will impact the China-WTO issue, we believe that it China’s membership is likely to be

approved. China’s accession to the WTO will have a positive impact on economic growth. First, it will

increase FDI. Second, it will speed banking reform, which will increase access to capital and thereby the

growth of the private sector. Third, it will likely boost exports such as light industrial products, textile,

electronics and some of the labor-intensive agricultural products. Finally, it will catalyze the reform of SOEs

as surplus labor can be absorbed by new foreign and private enterprises. These positive impacts will be

tempered, however, by reform complications that are likely to continue.

Taking as given that China will join the WTO this year, the road ahead will still be rocky. For

instance, one of the most contentious areas of negotiation is financial services liberation. Despite the fact that

the Chinese government has agreed to open the RMB commercial lending market to foreign institutions two

years after WTO accession, The Economist points out that “banks will be able to do serious business in

China only if interest rates are deregulated.”18 Many of our contacts in China expressed a more sanguine

view, namely that China’s joining the WTO will force it to do things (such as deregulate interest rates) that it

wouldn’t have the strength to do without some “legitimate” external pressure.19 Also, while the Chinese

government has expressed anxiety over the cellular telecommunications industry, they have agreed to allow

U.S. firms to engage in distribution in China. Finally, and most importantly, WTO entry will aid China in

what is perhaps it’s most critical effort in the future: the cultivation of healthy private enterprises to soak up

excess labor from defunct farms and SOEs, as well as the young people who enter the work force each year.

IV. ANALYSIS OF SECOND-TIER ISSUES

Foreign Direct Investment

While the inflow of foreign direct investment has been in decline since 1994 (Exhibit G), the

general prognosis for foreign direct investment (FDI) in China is that it will increase and thereby positively

contribute to short-term economic growth. There are many factors behind the recent decline in FDI. The first

is perhaps best conveyed anecdotally. When we remarked to our contacts that published statistics showed

that only thirty five percent of western and Japanese investors would ever again enter into a joint venture

18 “New Hurdles: Foreign Banks in China.” The Economist, 8 April 2000, page 85.19 Conversation with Mr. David Hsieh, Beijing Bureau Chief, AsiaWeek. 22 March 2000.

11

(JV) with a Chinese partner, invariably the response was: “is it really that high?” Most of these

businesspeople expressed extreme frustration with what they considered the “shady” business practices of

their Chinese partners. Specifically, these individuals reported to us their opinion that the goal of their

Chinese partners was to gain access to technology quickly, rather than to enter into long-term commercial

relationships. Amplifying this negative sentiment have been some well-publicized corruption scandals.

According to the Nihon Keizai Shimbun’s (Nikkei) Beijing bureau chief, these highly-publicized problems,

many of which occurred in the southern province of Guangdong, had a significant negative impact on the

Japanese investment community.20

The influence of these factors on FDI seems to be wearing off, however. For instance, after a

general retreat from the southern region in 1999, the Nikkei’s Beijing bureau chief feels that Japanese

investors will be back in full force in the upcoming year. Underscoring this has been the recent decision of

Toyota to enter into a major, long-term joint venture agreement with a Tianjin-based SOE to manufacture

taxis.21 Furthermore, Japanese consumer and household electronics manufactures have once again begun to

make capital investments. Finally, if China joins the WTO later this year this will further facilitate Beijing’s

efforts to increase FDI. Therefore, FDI will increase in China over the next several years positively

contributing to GDP growth through investment and consumption.

One of the challenges facing Beijing is that this investment continues to be concentrated along the

eastern seaboard. Critical observers have noted that, despite Beijing’s recent “Go West” rhetoric, the

government has been unsuccessful in persuading the provincial and local governments of the west to put

attractive, FDI-generating tax schemes in place to facilitate investment. Again, however, the importance of

maintaining political stability in rural China should improve these efforts and thereby decrease the

geographical concentration of FDI. (Exhibit H).

Domestic Private Sector Growth

The private sector - including foreign investments - represents one third of the Chinese GDP and it is

growing fast. Having come from zero, it is now estimated to represent more than 50% of the GDP in coastal

provinces (Guangdong, Fujian, and Zhejang). The private sector in China will continue to grow and thereby

positively contribute to economic growth. Its continued growth will be further stimulated with China’s

accession to the WTO and the subsequent increased availability of private sector financing.

The private sector employs 100 million people, or 15% of the total labor force of the country.

Although the government is still officially opposed to the development of the private sector for ideological

reasons, it has to support it to help solve the country’s unemployment problems. Everyday in 1999, 4,000

employees who had been laid off by SOEs were subsequently hired by a privately owned company.

The private Chinese company, Legend, illustrates the potential of the Chinese private sector. Legend

has 90 percent of the personal computer market in China and is currently growing at a rate of 70 percent per

quarter. Legend sells computers in more than 2000 cities all around China, compared to its main foreign

competitors, who are selling in approximately eight cities.

20 Conversation with Mr. Rinji Takeoka, Beijing Bureau Chief, Nikkei. 27 March 2000.21 “Toyota Enters Joint Venture with Tianjin S.O.E.”, www.asahi.com, 27 February 2000.

12

The WTO agreement, which includes a liberalization of China’s banking system within two to five

years, will accelerate the development of the private sector as funding will be more accessible. The issuance

of SOE equity, and the development of the Stock Exchanges in Shanghai and Guangzhou are other

promising factors for the development of the Chinese private sector. This development should have a strong

positive impact on the country’s GDP within the five coming years, as it will boost both investments and

consumption.

Corruption

According to all available estimates, corruption is very high in China. In fact, corrupt activity is

estimated to amount to 0.5 to 4 percent of the total GDP of the country. In 1999, the national auditor general

declared that $US14.2 billion in tax revenues (over 20 percent of the budget) had been misappropriated by

government officials. Corruption has a long history in China. Common forms of corruption today include:

smuggling rings, bribe-taking by government officials, foreign exchange fraud, abuse of police power,

interference by local authorities in the courts, and the misuse of public construction funds.

The prevalence of corruption in the Chinese economy often leads to outcomes that are not

economically efficient. It also leads to an unstable business environment for many foreign investors. In

these ways, corruption has a negative effect on economic growth. The Chinese government has declared that

one of its priorities is to end corruption. While, corruption in China is unlikely to end altogether, it will

decrease. This decrease in corruption will have a positive impact on economic growth as it speeds

investment and limits problems for foreign investors.

First, corruption often results in business decisions that are made based on criteria other than

economic efficiency. For example, the West Railway Station of Beijing, built in 1998, is already falling

apart, with necessary repairs evaluated to $2.5 million. The high level of corruption involved in the project

resulted in the poor quality of construction and the use of fake materials.

Corruption also has negative impacts on foreign investment. Some potential foreign investors refuse

to deal with it or are not allowed to by their national laws. According to our interviewees, corruption is very

difficult to deal with not only because it costs money, but also because it makes the business environment

unstable. Nonetheless, foreign investors seem to find ways to deal with corruption. One of the corporations

we visited concludes all of their transactions with Chinese officials through Japanese intermediaries, so that

risks and responsibilities concerning corruption are taken by the intermediary, not the firm. While firms find

ways to get around corruption, its existence makes business in China less attractive and therefore negatively

affects foreign investment.

Because the history of corruption in China is so long and its forms are so diverse, it is very difficult

to fight. However, all our interviewees agreed that the Chinese government is serious about its intention to

stop corruption. Since the 15th Chinese Communist Party (CCP) Congress, held in 1997, the CCP Central

Committee has implemented an intensive anti-corruption campaign. Jiang Zemin has even made the fight

against corruption his personal priority during his office. A Chinese expression says: “Mao made the Chinese

people stand up, Deng made them rich, and Jiang made them clean.”

13

This campaign has resulted in an impressive number of arrests. In the last 12 months over 130,000

cases of official corruption have been investigated and more than 132,000 government and Communist party

officials punished, including 17 ministers. The largest number of arrests took place in Xiamen, where

$9.5billion of goods was smuggled. The vice-mayor, most of the local Communist Party leaders, the deputy

chief of the police, the head of the customs, and many other officials have been arrested and some

condemned to death.

Fighting corruption also means strengthening the independence and authority of the courts, so they

can more effectively enforce the law. This process also seems to have begun. Finally, the progressive

deregulation of the economy, which will minimize palm-greasing opportunities and the accession to China to

the WTO, should also help.

In conclusion, in the upcoming one to three years, corruption will slow down. However, it is so

deeply rooted and exists on such a large scale that it will not disappear. The decrease in corruption will have

a positive but limited effect on the country’s GDP growth. Its effect on the economy will come mainly

through an increase in the pace and number of investments as organizations do not have to deal with

corruption in the process.

V. THE FUTURE OF HIGH TECHNOLOGY IN CHINA

Increasing globalization, huge inflows of venture capital money and the recent listing of several

Chinese companies on the US stock exchange have generated a great deal of interest in the future of high

technology in China. Our research and interviews make us cautiously optimistic about the prospects of the

global IT revolution within China. There are several industries or sectors within high technology that are

likely to create real value within the next 12 to 18 months. Two such sectors are hardware and

telecommunication. With an extremely low PC penetration rate, the mainland PC market is forecast to

deliver a five-year compound annual growth rate of 27 percent. China will likely cut the current import

tariffs of 9-15 percent for PC components in half, which will help lower production costs. Companies with

strong brand names, distribution networks and service centers like Legend are anticipated to register strong

growth. The other sector likely to grow substantially in China is telecommunications. This sector already

contributes about one-seventh of the GDP and is expected to grow significantly as China liberalizes its

telecom market. A telling statistic is that China accounts for 52 percent of all fixed lines in all countries with

a per capita income of less than $20,000. While this is impressive, it pales in comparison to the fact that the

country accounts for 79 percent of the mobile phones in this group of developing countries22. China is now

the third largest cellular market in the world after the US and Japan with 40 million subscribers. Our

research indicated that both fixed and marginal costs are lower for cellular infrastructure as compared with

fixed copper line in China. This will help the growth of the wireless market further.

While hardware and telecommunications are real value creators in China, e-commerce there does not

yet offer any true value. Our visit to China helped us better understand why the future of both business-to-

business (B2B) and business-to-consumer (B2C) e-commerce is not so bright in China. Our discussions with

several dotcoms revealed that the average online Chinese customer prefers to peruse the web for content, but

22 Counterpoint – Techno Frenzy; SG Emerging Market Equity Research, March 2000.

14

is extremely reluctant when it comes to making purchases on the web. Thus, while dotcoms are registering

traffic on their sites, hardly anyone is making or expects to make much revenue. In addition, credit card

penetration is low and the country has four mutually exclusive point-of-sale systems (POSs) for the four

major banks. Thus, secure order-taking and efficient order fulfillment are still almost impossible. On the

B2B side, the major impediment to growth is the lack of transparency in China’s business system. China’s

business environment is not ruled by the judiciary system. Business transactions are based on the strength of

personal agreements not on legal contracts. This fact has been brought out in several publications23 and was

echoed by MBA students from a prominent business school in Shanghai. This system puts serious doubt on

validity of the B2B e-commerce models, which are based on the premise of partnering with unknown third

parties in order to minimize transaction costs.

In conclusion, the high-tech industry in China will continue to contribute to economic growth. The potential

of the hardware and telecommunications industries is very positive. The growth potential of the e-

commerce, sector, however, is much more limited.

VI. OVERALL CONCLUSIONS

The officially reported GDP growth rate in China has been around seven percent for the last few

years. We believe that China’s economy will continue to grow at about the same rate in the next two to three

years. Our team predicts that the economic growth will accelerate a little to around 7.5% in the next 12

months due to resumption in investment and export growth. The fixed-asset investment growth, which

slowed significantly in 1999 is expected to pick-up again in 2000 owing to the official launch of the Western

Area Development Program and increase in foreign direct investment. Also, net exports are most likely to

increase with China’s entry into the WTO. In addition, political stability will be maintained, allowing for

economic growth to continue at its current pace. SOE reform will also contribute positively to short-term

economic growth, but its impact will be tempered slightly by the decline in consumption caused by massive

layoffs required for restructuring. The positive impact of banking reform is likely to be felt more strongly in

the longer term (7-10 years) as reforms are completed.

In the longer-term beyond 2-3 years, we believe that the economic growth might moderate if the

central government’s direct investment capacity weakens. The debt-to-equity swap program run by AMCs

may not be successful as government expects, while the program may engender some new bad loans.

Finally, the long-term difficulties in resolving the unemployment problem during the economic transition

period as well as the ensuing social instability in rural regions may also contribute to the slow-down.

We also believe that investment in China is still quite risky for foreigners. The government is

aiming to use foreign investments and partnerships to increase exports, improve human capital, gain access

to up-to-date technology, and develop the western regions. These goals are not always compatible with the

investor’s possibly leading to complications. For instance, MNCs attempting to gain domestic market share

in China seem to have more trouble with the government than do firms aiming to export their products. In

addition, the rule of law in the business sector is weak making it difficult, if not impossible, for investors to

recoup money lost through corruption. While the risks involved in making illiquid investments can be high,

23 The Economist, April 8th 2000.

15

the returns to investing in China can also be high. Many MNCs have established extremely successful

business ventures in China. The Chinese economy will continue to grow and over the long term market

reforms will be largely successful. In conclusion, investment in China is risky, but if it is for the long-term,

the payoffs are likely to be very high.

16

Exhibit A - Itinerary

Beijing (3/22 – 2/27)Journalists [AsiaWeek, Nikkeo, LeMonde, NYT]; French Embassy; Lucent; HR Manager Ericsson, Boeing, United Airlines

Shanghai (3/19 – 3/21)Etang.com; IBM; Representative from Pudong Government; Case Corporation; Reporter [VirtualChina.com]

Hong Kong (3/14-3/16)President - American Chamber of Commerce; Bank for International Settlement; Indian High Commission

Xiamen (3/17 – 3/18)Dell factory tour; Xiamen University; Linde; Xiamen Municipal Economic Dev Committee

17

EXHIBIT B: CHINA CONTACT LIST

Contact Surname

Contact Given Names

Title Organization

1 Batallan Emmanuel Conseiller Commercial Ambassade de France2 Biliang Hu Chief Representative, Senior Economist SG Global Equities3 Erik Eckholm Beijing Bureau Chief New York Times4 Gassman

nPhilippe Conseiller commercial Ambassade de France

5 Gay Patrick Conseiller financier Ambassade de France6 Goecke Heinz Head of Controlling Department Linde-Xiamen7 Griffin Buddy Vice President, China Customer Center Dell Computer (China) Co.8 Ho Winnie Assistant Vice President, Human Resources

Greater China and the PhilippinesChase

9 Hsieh David Staff Correspondent Asiaweek10 Hwang Lisa Manager, Treasury & Credit IBM China Company Limited11 Jacobson David M. Managing Director (co-founder, co-owner) Sinofile Information Services Ltd.12 Jarrett Kenneth First Secretary Embassy of the United States of America13 Johnson Gale Professor University of Chicago14 Levinson Daniel J. Development Manager Sinofile Information Services Ltd.15 Ling Daniel Director, Business Unit etang.com16 Liu Louis MBA student CEIBS17 Martin Frank President American Chamber of Commerce18 Mclean Thomas Director, Public Relations Boeing19 Mo Yik-ko Senior Economist Bank for International Settlements,

Representative Office for Asia and the Pacific20 Nolan Paul S. Chief Executive Officer VCChina.com21 Ng Marina College Recruiting Manager Chase22 Sweigert Bruce United Airlines, Inc.23 Shi David MBA Student China European International Business School24 Shihong Mu Interpreter Shanghai Pudong New Area International

Exchange Center25 Shoukang Lin Executive Associate Director China Cinda Asset Management Corporation26 Takeoka Rinji Chief, China Headquarters Nihon Keizia Shimbun, Inc. (Nikkei)27 Tu Roger MBA student CEIBS28 Wang Xin Manager, Strategic Planning Ericsson29 Wu Henry T. General Manager, China Operations Case Corporation, Shanghai Representative

Office30 Yang Dali Professor University of Chicago31 Yang Dali Associate Professor Associate Professor of Political Science and

International Relations32 Zarit William Deputy senior Commercial Officer Embassy of the United States of America33 Zhao Zheng Yu Vice Director, Senior Economist Economic Research Centre of Xiamen Municipal

Government34 Zhou Maggie Investment Officer International Finance Corporation

18

EXHIBIT C: Year-to-Year Change in China’s GDP

19

Exhibit D: Profitability of State-owned enterprises

Profitability of state-owned industrial enterprises is increasing in terms of

Absolute amounts:

But Return on Assets (ROA, %) is declining:

20

Exhibit E: Estimate of the Bank Restructuring Costs(*)

Unrecoverable loans (%)50% 70%

Non-Performing Loans (%) 20% 800 1,12030% 1,200 1,680

(*) The table shows the total cost of bank restructuring under two different scenarios: A. Bad loans form :

(i) 20% of all loans or(ii) 30% of all loans

B. If the % of unrecoverable loans is(i) 50% or(ii) 70%

21

Exhibit F1: Aggregate Balance Sheet of the State-Owned Banks as of June 1998

Before recapitalisation

Assets (RMB Billion) Liabilities (RMB Billion)Foreign Assets 481 Foreign liabilities 377Reserve Assets 1,189 Liabilities vis-à-vis non-

financial sectors5,447

Central Bank claims

69 Liabilities vis-à-vis central bank

1,308

Domestic claimsOn other sectors

5,800 Paid-in capital 208

Other 199Total Assets 7,539 Total Liabilities 7,539

Exhibit F2: Aggregate Balance Sheet of the State-Owned Banks as of June 1998

After recapitalisation

Assets (RMB Billion) Liabilities (RMB Billion)Foreign Assets 481 Foreign liabilities 377Reserve Assets 919 Liabilities vis-à-vis non-

financial sectors5,447

Central Bank claims

69 Liabilities vis-à-vis central bank (1,308 – 270)

1,038

New government bonds

270

Domestic claimsOn other sectors

5,800 Paid-in capital(208+270)

478

Other 199Total Assets 7,539 Total Liabilities 7,539

22

EXHIBIT G

TRENDS IN FDI IN CHINA

# of Projects*

Promised Value of Projects*

Implemented Project Value***

YEAR number % change total project value % change total project value % change1979-90 29,525 $

39,840,000,000 $

20,680,000,000 1991 12,978 78% $

11,980,000,000 82% $

4,370,000,000 25%

1992 48,764 275% $ 58,120,000,000

385% $ 11,010,000,000

152%

1993 83,437 71% $ 111,440,000,000

92% $ 27,510,000,000

150%

1994 47549 -43% $ 82,600,000,000

-26% $ 33,770,000,000

23%

1995 37011 -21% $ 91,280,000,000

10% $ 37,500,000,000

11%

1996 24556 -34% $ 73,280,000,000

-20% $ 41,730,000,000

11%

1997 21046 -14% $ 51,780,000,000

-29% $ 45,280,000,000

9%

1998 19846 -6% $ 52,130,000,000

2% $ 45,590,000,000

3%

1999** 8052 -16% $ 19,390,000,000

-20% $ 18,570,000,000

-9%

*- Reported values are for agreed, but not yet implemented, projects.** - Data for 1999 are through June, 1999.***- Projects actually brought to fruition during the year.

DATA COURTESY OF NIHON KEIZAI SHIMBUN.Translated by Anthony J Haro.

23

EXHIBIT H

GEOGRAPHIC CONCENTRATION OF FDI IN CHINAAll figures are millions of US Dollars.

Province 1993 1994 1995 1996 1997Guangdong $

7,556 $

9,463 $

10,260 $

11,754 $

12,634 Jiangsu $

2,844 $

3,763 $

5,191 $

5,210 $

5,435 Shanghai $

3,160 $

2,473 $

2,892 $

3,940 $

4,225 Fujian $

2,874 $

3,713 $

4,043 $

4,084 $

4,197 Shandong $

1,874 $

2,552 $

2,689 $

2,633 $

2,775 Tianjin $

614 $

1,015 $

1,520 $

2,152 $

2,511 Liaoning $

1,279 $

1,440 $

1,424 $

1,737 $

2,366 Beijing $

667 $

1,371 $

1,080 $

1,552 $

1,592 NAT'L TOTAL $ 27,771 $ 33,946 $ 37,805 $ 42,135 $ 52,387

Source: Economist Intelligence Unit.

24

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Survey China, The Economist, April 8th 2000.

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Strengthening the Banking System in China: Issues and Experience, a joint conference held by - - Bank for International Settlements (BIS) and the People’s Bank of China (PBC), Beijing, China, 1-2 March 1999.

“China to Focus on Western Development, Minister” and “China Opens Up the West”, www.chinaonline.com, 8 March 2000.

“China to Open Up Region”:www.ft.com, 13 April 2000

China Country Profile 1999-2000. The Economist Intelligence Unit (EIU), London, 2000.

China Country Page. www.worldbank.org

“Toyota Enters Joint Venture with Tianjin S.O.E.”, www.asahi.com, 27 February 2000.

Counterpoint – Techno Frenzy; SG Emerging Market Equity Research, March 2000.

Governing China: from Revolution through Reform, Lieberthal, Kenneth. New York: W.W. Norton, 1995.

Review by Minxin Pei: “provides one of the best introductions to the problems of Chinese history, national

governance, economic reform, and the aging party-state.”

“Why China Will Not Collapse,” Huang, Yasheng. Foreign Policy, Summer 1995.

China’s Transition, Nathan, Andrew. New York: Columbia University Press, 1997.

“Is China Democratizing?” Pei, Minxin. Foreign Affairs, January/February 1998.

The Politics of Lawmaking in Post-Mao China: Institutions, Processes, and Democratic Prospects, Tanner, Murray

Scot. Oxford: Clarendon Press, 1999. Review by Minxin Pei: “gives the most detailed description and analysis of

the rise of China’s National People’s Congress over the last two decades.”

In Search of Civil Society: Market Reform and Social Change in Contemporary China, White, Gordon, Jude

Howell, and Shang Xiaoyuan. Oxford: Clarendon Press, 1996.

Political Participation in Beijing, Shi Tianjian. Cambridge: Harvard University Press, 1997.

25

Centre and Provinces: China 1978-93: Power As Non-Zero-Sum (Studies in Contemporary China), Li, Linda Chelan. Clarendon Press.

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26