Vertical Structure of State-OwnedEnterprise Reform
The globalfinancialcrisis in 2008dampened external demand for products of China’s downstream industriesdominated private enterprises. Consequently, demand for products and servicesof the country’s upstream industries, dominated by monopolistic SOEs, alsoplunged, leading to sharp declines in those State firms’ profitability. As aresult, many firms had becomezombieenterprises and the proportion of zombiefirms in upstream industries is higher than that in downstream sectors. Givensuch a vertical structure, upstream SOEs must be reformed as soon as possible;otherwise they would eventually choke off growth of downstream private firms ascosts of labor and land keep rising. Stagnation of downstream private sectorswould in turn hurt upstream SOEs and would slow overall growth. Policymakersshould be fully aware of the difference between the current SOE reform and thatcarried out in late 1990s. In the current reform, the key is to put a competition-orientedmechanism in place, break the administrative monopoly of SOEs, and lower thebarriers for entry into upstream industries.
China’s Two-Stage Land Reform
Land tenure system constitutes China’sbasic political andeconomicinstitution. Over the past 40 years, the evolutionof China’s unique institutional arrangement of land has propelled
China’s rapid economic growth andstructural transformation. But the ensuing land-dependent growth model has alsobecome an important institutional impediment to the country’s further economictransformation. As China’s economic growth slows, its economic structuraltransformation will increasingly hinge on interaction between the rural andurban areas. The current land system must be reformed to eliminate thecountry’s dependence on land for economic growth. In Particular, China needs tocatalyze economic structural transformation through improving its land usestructure. It also needs to push forward rural land reform centered oncollectively-owned land and homestead.
China’s Financial Reform: Experience,Dilemma and Future Development
Zhong Zhengsheng and Zhang Lu
Based on the economic background of China’sreform and opening up, this article summarizes the country’s historical processof financial reform. Against the backdrop of the global financial crisis in2008, China’s economic reform has fared slowly as the country tried tostabilize economic growth, but much headway has been made in its financial reformthanks to the marketization of interest rates. However, the robust financialreform has gradually brewed somefinancial risksand the current financialchaos is aconstraintfor further financial reform. Therefore, to promote"financial deleveraging" and solve the problem of financial chaos,China must focus on economic reform, transform its economic growth pattern,break SOE’s soft budgetconstraintand foster growth of privateinvestment.Based on China’s experiences in dealing with the problem of external imbalancesince 1978 and its legacy from the Asian financial crisis in the 1990s, webelieve that reform should be carried out gradually in the sequence of economicreform - financial reform - financial openness. Such a reform sequence is amore rational option for China to carry out its reform.
China’s Prevention of Systemic FinancialRisks
In recent years, financial risks have beenapparent in such fields as stock market, real estate sector, bond market,internet finance and foreign exchange market, indicating that China has becomevulnerable to rising financial risks. Meanwhile, its slower growth has led todeclining return on investment of the real economy, produced large numbers of"zombie enterprises", and accumulated more financial risks. Whilerising leverages, ample liquidity and lack of investment opportunities havebrought risks, some financial innovation activities, such as internet financeand shadow banking, have creatednewfinancial risks, although they have alsobenefited the real economy. Worse, it has become increasingly difficult for thegovernment to continue to provide guarantee for such risky financialinnovations. As a result, prevention of systemic financial risks has becomeChina’s major economic priority. We suggest that the government should attachutmost importance tofinancial riskswhen it carried out its macroeconomicpolicies, especially monetary policies. It should also make it clear that itwould not provide any guarantee for risk takers so that "zombieenterprises" can go bankrupt to resolve potential risks. It should also reformits financial regulatory framework, improve policy coordination, strengthenindependence, professionalism and authority of regulatory bodies, and adopt amixed regulatory mode.
Estimation of China’s Capital Flight
Yu Yongding and Xiao Lisheng
Since 2014, China’s capital flight hasaccelerated, but there have been no official statistics of capital flightavailable. By analyzing China’s Balance of Payments (BoP) and InternationalInvestment Position (IIP) tables, this article tries to gauge the scale ofChina’s capital flight. In literature, the difference between current accountsurplus and the increase in net overseas assets over the same period of time isused as a proxy for capital flight. In reality, statistical errors andomissions also contribute to the difference. The difference between currentaccount surplus and increase in net foreign assets (NFA), which, in theory,represents total capital flight, can be divided into two parts. One is thedifference between current account surplus and net capital outflow (NCO), representedby Errors and Omissions (E&O) account in the balance of payments table. Theother is difference betweenNCOand the changes in NFA. The article argues thaterrors and omissions in the BoP table are mainly caused by capital flightrather than statistical inaccuracies. Compared with advanced economies, China’sE&O is not only large but also closely related to exchange rateexpectations. This implies that the errors and omissions are not white noise,but that they are mainly a result of capital flight. Besides, although thereare capitals that flow out of China legally and are not captured by errors andomissions account in the balance of payments table, they are capital flight innature and hence have failed to translate into overseas assets owned by Chineseresidents in the IIP table. The article discusses the “errors and omissions” inIIP table that are attributable to either statistical failures or capitalflight.
Now the Chinese government has taken aseries of actions to curb capital flight, which is certainly correct andhelpful. However, the fundamental solution lies in the deepening of reforms ofChina’s economic system, financial system and exchange rate regime.
CurrentSituation，Opportunities，Challenges and Solutions
He Fan, Zhu He and Zhang Qian
The 21st Century Maritime Silk Road is animportant part of China’s Belt and Road Initiative to build anewpattern ofall-round opening-up; it caters to the common appeals of China and countries inSoutheast Asia, South Asia, and Africa. This article analyzes the economicstatus quo of countries involved in the maritime initiative, opportunities forcooperation among China and those countries, and challenges that could affecttheir cooperation. It finds that China and those countries can carry outdeeper-level cooperation in five areas: industrial investment, infrastructureinvestment, resource development and cooperation, overseas economic and tradeparks, and ocean economy. But it also finds that such cooperation faces somemajor challenges, such as lack of coordination, inadequate financial support,and lack of high-caliber personnel. It puts forward some suggestions for betterimplementing the initiative.
Investment and Financing Mechanism for theBelt and Road Initiative: China’s Role
Xu Qiyuan, Yang Panpan and XiaoLisheng
The Belt and Road Initiative has enteredthe stage of implementation. In the process, the financing needs of countriesinvolved in the initiative are very large. Meanwhile, attention must be paid tothe potential risks in carrying out the initiative. This article provides threedimensions for rethinking how China can play a more effective role in theinvestment and financing mechanism of the initiative. First, Chinese banks cantake advantage of the competition among existing international financialcenters to expand their foothold in Africa or other regions. Second, interestsof investors and partners should be bundled together to facilitate bilateraland trilateral cooperation. Third, investee countries must obey certaindisciplines. They must tighten their fiscal discipline, improve theirbusiness-doing environment and foster internationally competitive industries.
Strategic Targets and Business Innovationof the AIIB
Liu Dongmin, Li Yuanfang, Xiong Aizong andGao Bei
This article analyses the strategictargets, business focuses, successful experiences and existing problems of the world’smajor multilateral development banks before suggesting four strategic targetsfor the AIIB: respecting needs of developing countries, maintaining soundfinancialsustainability, sticking to international high standards, andattaching importance to international cooperation. The article also put forwardsix suggestions for the business model of the AIIB. First, it should makeurbanization a priority in its infrastructure investment; second, it shouldadopt the international infrastructure investment company model to facilitateits project construction; third, it should set up offshore RMB overseasinvestmentfund; fourth, it should adopt the special economic zone model topromote urbanization and construction of cross-bordereconomicand trade park projects;last but not least, it should set up an Asian finance corporation to pursuemarket-oriented operation.