Slowing growth is inevitable; China should prepare for the coming reform

The Unirule Institute of Economics released its Macroeconomic Analysis Report for the 4th Quarter of 2011 at a conference held on Jan. 31st, 2012. Prof. Zhuang Shuguang introduced the report.

According to the report, China’s GDP increased by 9.2% for the year 2011, showing a falling trend quarter-by-quarter, which is both the result of the declining growth potential and the effects of government policy. Since the global economy experiences the “new normal state” of long-term weakness and stagnation and no breakthrough has been made in China’s domestic economic adjustment, China’s economic growth will continue to recede. We should face this fact calmly. China might have come to the eleventh hour of its reform. The correct direction of reform is to restrain the government, to strengthen our society and to return to the market. Breakthroughs might be made in strengthening our society. Although no big moves could be made this year, it’s necessary for us to get well prepared.

Zhang Shuguang
Head of Academic Committee, Unirule Institute of Economics

Highlights

Putting an End to Nuclear Darwinism
By Prof. Sheng Hong

Iran’s nuclear issue which creates a great sensation recently is actually a rather small part of the big historical picture, that is, the whole modern history. In the past two or three hundred years, weapons which mankind relies on for killing with each other have made rapid “progress,” upgrading from lances, bows and arrows to nuclear weapons. The rapid progress of weapons was driven by an incentive mechanism, that is, whoever owns more advanced weapons will gain advantage in international competitions. This mechanism exists widely in the military, political, economic and culture fields.

Such a judgment could be easily demonstrated. In the international political arena, five permanent members of the U.N.—the U.S., Britain, France, Russian Federation, and China, are five largest nuclear powers, the total of whose GDP account for around 44% of the aggregate of over 200 countries and regions in the world. Special attention should be paid to the U.S. who possesses absolute nuclear advantage. With its GDP taking up 28.5% of that of the world (in 2004), the U.S. could ignore the U.N. and take unilateral actions when it considers necessary to do so. Various factors, ranging from CNN to the Hollywood, all help American culture to gain advantage around the globe.

Therefore, rules of the game which are practically accepted in modern times strongly inspire all countries to develop and possess nuclear weapons. Due to being interactive , weapons may increase fear of the enemies while enhance safety of the owners. As a result, competitions in weapons become even fiercer. Among weapons of different levels, more advanced weapons have higher relative value not only because of their manufacturing costs and techniques but also because they turn all the less advanced weapons into garbage. As the top-level weapon in the world today and with advantages prior to all the other weapons, nuclear weapons own supreme value. In the current world which describes itself as “modern civilization” while actually accepts Jungle Rules (or called Social Darwinism), countries with superior violence are rewarded while those with inferior violence are punished. Naturally, weapon competitions will definitely lead to nuclear weapons because non-nuclear-weapon states will lose the game while nuclear powers will become hegemonies.

Sheng Hong
Director, Unirule Institute of Economics

Current Events

Forum on New Year's Expectations

The Unirule held the Forum on New Year’s Expectations in Beijing Ziyu Hotel on January 10th, 2012. Prof. Mao Yushi delivered the opening remarks. Mr. Bao Yujun, Mr. Chen Zhishi, Prof. Dang Guoying, Prof. Deng Zhenglai, Prof. Feng Xingyuan, Mr. Guan Weili, Mr. Hui Xuan, Prof. Hu Xingdou, Prof. Kang Xiaoguang, Mr. Lu Yuegang, Prof. Mao Shoulong, Prof. Sheng Hong, Prof. Wu Zuolai, Associate Professor Wang Jianxun, Prof. Wang Xuetai, Dr. Wang Jun, Prof. Xu Zhangrun, Mr. Xin Wang, Dr. Yang Junfeng, Prof. Zhang Weiying and Prof. Zhao Nong attended the forum. Prof. Zhang Shuguang, Mr. Qiu Feng, Prof. Zhang Qianfan, Prof. He Huaihong, Prof. Liang Zhiping, Prof. Wei Seng and Prof. Fan Gang also sent their written speeches to the forum.

Experts attending the forum pointed out that stagnation and even partial reverse have occurred to some extent in reforms of economy and society in China with frequent scandals and accidents and the continuous increase of social tension and confrontation. They predicted that the tepidly maintained social framework might collapse without warning. The present situation has forced people to urge the authorities not to miss the opportunity of reform again. Experts summarized the pressing issues in current Chinese society as follows: the administrative departments abused public power for their own benefits without constitutional restraints; state-owned enterprises obtained monopoly position and preferential policies through public power; macro administrative departments did not handle their responsibilities of formulation and implementation of policies well and simply shirked their own responsibilities to other organizations or individuals; local governments seize land from rural collectives in low prices or even without any payment by making use of forceful public power, resulting a large number of rural land-expropriation cases; the insufficient restraint on public violence has guven cover for certain officials to abuse public violence to deal with farmers unwilling to lose their land, reporters criticizing these local governments and even lawyers whose job is to defend people’s legal rights; basic values and standards in China’s constitutional reform and treatment of international affairs. They hoped that Chinese society will be able to get cast off these institutional flaws which might lead to a social collapse in a peaceful and gradual way in this New Year.

Unirule 2011 Year-End Working Summary Meeting

Unirule 2011 Year-End Working Summary Meeting was held in Longshan Holiday Resort on Jan. 14th and 15th, 2012. Firstly, Prof. Zhang Shuguang, Chairman of the Academic Committee of Unirule, gave the opening remarks. He hoped that all colleagues of the Unirule could rethink and review China’s market economy construction and work harder to promote economic reforms along with him. Then, Prof. Sheng Hong, Director of Unirule, summarized the Unirule’s work and financial situation as well as drawbacks in all activities throughout the year 2011. He hoped that the Unirule could do more and better work this year so as to provide more and better intellectual public goods. Leading members of all departments summarized the specific work they were responsible for and made certain plans for improvement. Finally, Prof. Mao Yushi, President of Unirule, made a summary of the year-end working summary meeting. He also expressed his worries and expectations for the future of our society, hoping that the Unirule could do whatever it could to promote social advancement and enhance the well-being of the people.

At the evening party, Mr. Gao Yan announced the list of individuals of the Unirule who were to be singled out for achievement in the 2011: Ms. Jiao Lingyuan won “Best Unirule Person Award;” Mr. Zhang Liang won “Best Cooperation Award;” Mr. Zhao Xing won the “Unirule Dark-horse Award;” Ms. Qian Pu won the “Outstanding Contribution Award.” The Unirule members gave various performances and played many games on the evening get-together party, including magic tricks, chorus, solos, dances, riddles, Ping-Pong, Bearpang, etc.

The Seminar on Financial Order and Judicial Justice

The Unirule held the Seminar on Financial Order and Judicial Justice in Beijing Qingzhu Hotel on Feb. 7th, 2012. Prof. Mao Yushi, Prof. Feng Xingyuan, Prof. Hu Biliang, Prof. He Bing, Prof. Li Dun, Associate Professor Liu Yejin, Prof. Liu Xiaoxuan, Mr. Ma Guangyuan, Prof. Mao Shoulong, Mr. Qiu Feng, Prof. Sheng Hong, Associate Professor Wang Jianxun, Mr. Wang Zhenyu, Prof. Xu Xin, Dr. Xu Zhiyong, Dr. Yang Junfeng, Prof. Zhang Qianfan, Prof. Zhang Shuguang, Prof. Zhao Nong, Mr. Zhao Xu, Mr. Chen Youxi, Mr. Zhang Xingshu and Mr. Zhang Yanfeng attended the seminar.

Starting from the rationality of China’s current financial monopoly system and the impartiality of the judicial procedures in Wu Ying’s Case of “illegal fund-raising,” experts attending the seminar discussed the drawbacks of the current financial system and judicial system reflected by the Wu Ying Case. It was agreed among the experts that the state monopoly and control is the most prominant feature of China’s financial system. The government directly stipulates the unfair interest margin against market rules and restricts citizens from entering the banking industry so as to maintain the state monopoly by the state-owned banks. By relying on their monopoly position, state-owned banks attain large amounts of deposits and enjoy high profits with little impetus to lend to small and medium-sized enterprises, thus greatly encouraging corruption. In addition, interest rates in the financial market of the private sector continued to climb, leaving small and medium-sized enterprises trapped in capital bottlenecks and or otherwise having their survival threatened. The Wu Ying Case occurred exactly under such a background. The order of financial management “harmed” by Wu Ying is both inefficient and unfair. Wu Ying was sacrificed by this extremely irrational system of financial monopoly and control. The government ignored the public’s demand to liberalize private lending and interest rates and sentenced Wu Ying to death. This is against judicial fairness. In addition, there are lots of flaws in the application of laws and regulations as well as procedure justice, and the death sentence in the second trial could not stand deliberation at all.

The Second Meeting of the Second Standing Committee of the Unirule CCPPP

The second meeting of the second standing committee of the Unirule CCPPP (China Center for Public-Private Partnership) was held on Feb. 14th, 2012 in Tinghuaxuan Teahouse. Mr. Cao Yuanzheng, chief economist of BOC International Holdings Limited & president of the Unirule CCPPP, Prof. Zhou Hanhua, research fellow of the Institute of Law, CASS, Prof. Zhu Wuxiang, the Department of Finance of Tsinghua University, Prof. Sheng Hong, head of the Unirule & director of the Unirule CCPPP, and Mr. Zhao Xu, vice director of the Unirule CCPPP attended the meeting. At the meeting, the work of the Unirule CCPPP in 2011 was summarized, and the work in 2012 was discussed. Mr. Cao Yuanzheng and other standing directors made many pertinent suggestions on the development of the Unirule CCPPP. Other relevant issues were also discussed, and a resolution was adopted.

The Seminar on Curbing Department Legislation and Protecting Fairness and Justice

The Unirule held the Seminar on Curbing Department Legislation and Protecting Fairness and Justice in Beijing on March 1st, 2012. Prof. Feng Xingyuan, Prof. Mao Yushi, Prof. Mao Shoulong, Mr. Qiu Feng, Prof. Sheng Hong, Associate Professor Song Hualin, Dr. Tian Feilong, Prof. Xu Zhangrun, Associate Professor Yang Junfeng, Prof. Zhang Qianfan, Prof. Zhang Shuguang, Mr. Zhang Yujun and Ms. Zheng Yafang attended the seminar.

Experts attending the seminar agreed that serious institutional drawbacks widely existed in China at present. One of the root causes lies in the fact that administrative departments dominated legislation and “legalized and institutionalized” departmental privilege and interests so that the shadow of departmental interests stands behind many of the current laws. The recent re-amendment of the Criminal Procedure Law which draws much attention serves as a typical example. Suggestions on enhancing protection of human rights which people have called for many years were not adopted. Instead, protection of human rights in the re-amendment retrogressed and the power of public security organs and procuratorial organs was even strengthened. The root cause lies in the fact that public security organs and procuratorial organs both have tried to exert influence on the re-amendment process. From the perspective of laws, administrative monopoly in the oil, financial and telecommunication fields which has been criticized by the public is also the result of department legislation. Experts suggested that China’s basic constitutional system should be improved, the NPC’s function of legislation and supervision should be implemented, current legislation process should be revised and that democratic institution should be fully carried out so as to solve the present problem department legislation which becomes increasingly intense.

News

Prof. Feng Xingyuan attended the workshop on "How Does the Local Governmental Debt Affect the Economic Growth of China"
Prof. Feng Xingyuan attended the workshop on "How Does the Local Governmental Debt Affect the Economic Growth of China" on March 13, 2012 at the University of Chicago Beijing Center. He made a speech on "Government and private investment in local state of China" from a political economy viewpoint. He stressed the necessity of the introduction of local democracy and tax cuts in many fields before the introduction of the property tax. Also he warned of the danger of the unsustainability of local government debt burdens in some cities and countries.

Current Researches/Consultings

Research on China's Strategy of Breaking Administrative Monopoly
State-owned enterprises have been severely criticized in recent years for their tendency to gradually expand in an existing field rather than to retreat. State-owned enterprises not only solidly occupy the non-competitive fields, but also continue to exist in the field of private goods. China's state-owned enterprise reform has now reached a new turning point after thirty years. More importantly, the problem of administrative monopoly is rather severe in China and requires urgent reform. Until this problem is fixed, there can be no fair competition between state-owned enterprises and the private sector. Unfortunately, China's administrative monopoly reform still has a long way to go. This research aims to provide a feasible plan for administrative monopoly reform and to help create a fair market environment with deepening economic reform. This research lasts for roughly half a year and has been completed by now. The initial research result will be released in early 2012.

The Special Planning of Industrial Development in Qianhai Cooperation Zone
Commissioned by the Authority of Qianhai Shenzhen-Hongkong Modern Service Industry Cooperation Zone of Shenzhen, Unirule conducted research aiming to make a full analysis of the current development status and trend of modern service industry in Guangdong-Hong Kong region, to propose a general framework and development goal of industrial development planning in Qianhai Cooperation zone, to make a detailed analysis of four major industries, to propose the major missions and key projects of the development of the four major industries and the construction plan of the supporting service system from the perspective of international cooperation, Guangdong-Hong Kong cooperation and Shenzhen-Hong Kong cooperation, and to propose relevant measures to guarantee the implementation of the industrial development planning in Qianhai Cooperation Zone.

Research on Large Enterprises in the Marketization Reform
During the process of China’s transformation from a planned economy to a market economy, the interaction of various economic subjects exerted a significant impact on China’s economic and political system and policies. As one of the major economic subjects of huge scale, large enterprises possess a strategic industrial position, large state-owned enterprises, in particular, have a historical relationship with the government and have exerted much influence on China’s social structure and development direction. This research aims at making a thorough investigation on various kinds of large enterprises, sorting out their position and influence on China’s economic operation and political activities, exploring the mechanism of this process and giving suggestions on better institutional plans and policy suggestions so that the government could work out better systems and policies which will benefit the adjustment and growth of large enterprises in the future.

Research on the Development of Social Organizations in Zhongguancun from the Perspective of Constructing World-class Scientific Innovation Centers
The State Council approved the construction of the Zhongguancun National Innovation Demonstration Zone and requested that Zhongguancun should be built into a world-class scientific innovation center. Zhongguancun has the opportunity of a new round of leapfrog development. As an organic part of the innovation activities in Zhongguancun, social organizations play a positive role in promoting the formation of innovation clusters and the supply of public services. Under the new historical circumstances, it’s of great significance to make a thorough analysis of the current development status and direction of social organizations in Zhongguancun by learning from the development experiences of social organizations in Silicon Valley so as to make suggestions on the direction and relevant measures of governmental control. Entrusted by the Administrative Committee of Zhongguancun National Innovation Demonstration Zone, this research will analyze the current status of and existing problems with social organizations in Zhongguancun, propose certain targeted, prospective and operative ideas, institutions and procedures, and give answers to a series of questions.

Research on Urban Water Supply Performance Assessment and Administration System
Entrusted by the Urban Water System Planning and Design Institute, China Academy of Urban Planning and Design, Unirule conducted research to analyze the current status of, and problems with, the assessment and administration of performance of China’s urban water supply enterprises, to introduce international experience in assessment and administration of performance of urban water supply enterprises, to propose guidelines, goals and basic principles of assessment and administration of the performance of urban water supply enterprises, to clarify the participants of assessment and administration of the performance of urban water supply enterprises and their responsibilities, and to make certain policy suggestions.

An Electricity Group's Business Planning in Water Industry
This electricity group has strong comprehensive strength in funds, investment, and project operation and management. In order to expand its investment fields, the group has decided to seize the opportunity to enter the water market and has planned for long-term cooperation with local provincial water resources department. However, due to its long history in the power industry, the group is lacking in deep understanding of the water industry. In addition, the water industry requires enormous prophase financing and sunk capital, and is weak in short-term return ability though it has consistent long-term returns. This lack of understanding makes it hard for the group to make long-term goals with regards to the water industry.

Based on a thorough analysis of the current status of the water market in local area and the advantages of this electricity group, Unirule worked out an integrated plan for this group to enter the water market, including their strategic position in the water market, the short-, medium-and long-term goals of development of their water business, segmented market strategy, entry mode and breakthrough point, selection of cooperation partners and strategic coordination, etc. This electricity group has approved this plan and is putting it into practice.

Research on Promoting Governmental Information Disclosure
In this research, a scorecard was designed to comprehensively evaluate the information disclosure status of city and county local governments. Different from the ambiguous governmental information disclosure rules and regulations, the scorecard will pay more attention to the respect and protection of the people’s right to know and right to participate. This research was launched in October 2011 and will be completed by July 2012.

Upcoming Events

Unirule Biweekly Symposiums
Unirule’s Biweekly Symposiums are known in China and throughout the world for their long history of open and in-depth discussions and exchanges of ideas in economics and other social sciences. Over 380 sessions have been held and over 15,000 scholars, policy makers, and students, as well as countless readers on the web, have directly and indirectly, and participated in the Biweekly Symposium for close to 20 years.

Biweekly Symposiums begin at 2 p.m. every other Friday and are free and open to the public.

Schedule
Biweekly Symposium No.450 : March 30th, 2012
Biweekly Symposium No.451 : April 13th, 2012
Biweekly Symposium No.452 : April 27th, 2012

Previous Biweekly Symposiums

Biweekly Symposium No. 445
Time: January 16th, 2012
Topic: Promotion of Financial Marketization
Lecturer: Prof. Liu Xiaoxuan

Prof. Liu Xiaoxuan mainly introduced a research on promotion of financial marketization which they carried out in the past two years. She pointed out the major problem with China’s financial market at present, that is, information asymmetry caused by financial monopoly is being intensified and it’s very hard to narrow the credit gap. Judging from the research results, in terms of financial subjects, the phenomenon of state-owned monopoly is very serious, with extremely low proportion of non-state-owned leadings; the four major banks, namely, ICBC, Agricultuarl Bank of China, Bank of China, China Construction Bank, mainly serve big cities, large projects and large and medium-sized SOEs, with private micro, small and medium-sized enterprises and SOHOs having little access to service of financial organizations.

In terms of the root causes, Prof. Liu said that high borrowing costs due to information asymmetry, insufficient mortgage and guarantee capacity of enterprises, and complicated procedures all make it hard for financing demand of enterprises to be transformed into effective demand. After introducing four levels of the financial market, she argued that different methods should be used in different levels of the financial market instead of using the same standard in all levels of the financial market.

She also introduced the newly emerging financial market, such as micro credit companies, village banks, and guarantee companies. She pointed out that lowering financial market entry barriers will break the monopoly and reduce costs of obtaining information. This sort of financial market liberation will both promote the optimization of the administration mechanism of grass-root banks and help to transform the ineffective demand of enterprises into effective demand.

Editor: Jiang Hong
Revisor: Jude Blanchette