China Research

These days we observe the transition to a new government in China, which will be endorsed by the National People’s Congress. The renewal of the government follows the election of a new Party leadership last November. Since then, all kinds of speculations and discussions have emerged concerning the expected ideas and potential political targets of the new Party leadership. Obviously some emphasis will be put on fighting corruption. But will their also be changes in economic policies? Will new ideas regarding the appropriate economic governance emerge? How will the new government handle state-owned enterprises? How much influence will the central government excise on large enterprises? How will it treat the tendency of local governments to intervene in and interlock with local business?

We do not know the answers yet. So let me look into a specific sector to highlight the questions at hand… and the degree of obscurity we still have to face.

Just a few days before the opening of the NPC meeting, the State Grid Corporation published a document called ‘Opinions regarding our services to smoothen grid integration of decentralized electricity generation’. What may appear to be a minor document is just the latest step in a wave of support initiatives for an ailing industry: the solar energy sector.

There are some interesting things that can be learned from reading these ‘Opinions’ in the context of the politics of the last months:

– The ‘Opinions’ confirm – just a few days before the new government steps in – a policy direction that was prepared over the last year. The 12^th FYP for the solar energy manufacturing sector endorsed in February 2012 as well as the 12^th FYP for solar energy electricity generation propagated in July 2012 both already announced support for decentralized solar PV use and grid integration. Hence, whatever the changes are at the leadership level, at the more concrete policy level, we can observe continuity at least over the last twelve months. The idea to support the ailing solar industry by pushing for decentralized installations was a highly contentious issue before 2012, but has survived the political struggles of the last year. So, either the new leadership already had considerable influence at that time, or the differences between the new and former leaders are not that big at all.

– The ‘Opinions’ substitute a document called ‘Preliminary opinions regarding our services to smoothen grid integration of decentralized solar energy electricity generation’ published in October 2012. Between October and late February the wind energy and other renewable energy sectors have managed to enter the ‘Opinions’ and therefore to secure the favourable service conditions originally promised by State Grid Corporation only to solar-based electricity generation. At the same time the promised speed of services was somewhat reduced. This demonstrates several characteristics of policy making in China today: First, rules and regulations are often initially published in a preliminary version in order to allow for experiments and later corrections. Second, changes to the preliminary versions actually happen. Third, a considerable degree of lobbying seems to occur in this process. Again, this hints more to continuation than change in Chinese economic policy making.

– The ‘Opinions’, published by the State Grid Corporation, document better coordination between different ministries and actors in energy policies. Past policies and instruments to support the national solar industry are said to have suffered from the absence of support by the State Grid Corporation. As the ‘Opinions’ follow the ideas advanced in the sectoral 12^th FYPs of the Ministry of Industry and Information Technology and the Energy Department of the NDRC respectively, it seems that this time the State Grid Corporation was better integrated into the policy making process than before. Allegedly State Grid was not consulted for the design of the ‘Golden Sun’ policy, which was initiated in 2009 to bolster PV deployment in China, and therefore did not support implementation actively. So, the ‘Opinions’ may indicate a better handling of a big power player like the State Grid. However, it also confirms the powerful position of State Grid with regard to energy policies.

– The ‘Opinions’ promise that State Grid will cover most of the grid integration costs for renewable energy projects apart from the investment in the renewable energy technology as such. It will also allow for separate measurement of the electricity used and the electricity fed into the grid by the installer. While the former will obviously lessen the overall investment costs and the latter will provide a service needed to calculate decentralized electricity generation, so far the electricity prices or, more accurate, the level of subsidies paid for solar PV electricity generated by decentralized projects have not yet been defined. Therefore, as in the past, it is unclear whether the new policies will trigger a substantial investment wave in the national market.

There seems to be more continuation than change to be discerned from this example. There is support for local solar energy deployment, but it still is half-hearted. And, alas, the impression of continuation is confirmed by Chinese media reports complaining that these and other initiatives to support the local industry are designed in a way that favours state-owned and state-backed companies in the solar manufacturing sector. In the past the Chinese solar manufacturing industry excelled in international markets mainly due to the success of private enterprises. In contrast, the low level of regulatory transparency, like the lack of a clear rule on subsidies, in the promotion of the solar energy at home, implies a policy bias toward state-backed companies. These can take higher risks and receive investment support from local banks even in situations where the investment environment is volatile and the expected return on investment is questionable.

In sum, for the time being we should expect major changes and reshuffles in the Chinese solar sector as a result of a high level of continuation in the general course of economic policies.

 

 

 

 

 

 

Doris Fischer
Professor, University of Würzburg, China Business and Economics

 

 

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The main content of this blog article is not really new. I have been pointing several times before at the insufficiencies of Chinese economic statistics, both in this blog and in published articles – despite obvious statistical improvements in recent years.

We should not, however, judge the shortcomings of Chinese statistics from a position of Western arrogance. In the 1980s, the U.S. had a marked downsizing of statistical quality – a downsizing process that then, fortunately, was successfully combated with all thinkable energy, for example, by NABE’s (National Association for Business Economics, Washington D.C.) statistical front woman Maureen Haver. Furthermore, it is still not very unusual that major statistical revisions happen even in developed countries considerable time after the first publication date. Not to talk about the poor quality of Greek statistics before the eruption of the crisis!

We should understand that China in a statistical sense rather can be described as a whole continent than a single country. The gigantic size of China makes it certainly difficult to make necessary surveys really representative and to single out the appropriate methods for different calculations. That’s the side of the coin that should make us humble. On the other hand: China could do much more about statistical transparency and the quality of statistical publications.

For foreign analysts who are not able to read Chinese characters, the “Statistical Communiqué of the People’s Republic of China on the 2012 National and Economic Development” should be the most interesting source to find a summary for the previous year (without in this context considering the quality of the quoted different statistical indicators). But there are obviously statistical weaknesses that quite easily could be eroded.

For example, distinctions between nominal and real numbers are not always clear (which goes back to the old system with its references to nominal changes). Average numbers and year-on-year comparisons are not singled out sufficiently. GDP calculations do not show systematically the usual components from the expenditure side. Different price deflators in the national account cannot be found in the above-mentioned statistical summary (which I would be very keen to know more about, likewise a split into private and public consumption). Further shortcomings could be mentioned.

But we get informed on other issues which may be quite interesting. Some examples for 2012 are given below according to the latest official statistics (without real knowledge from my side about the size of underestimations or overestimations):

– total population: 1 354 million (male share 51.3 percent)
– urban population: 52.6 percent (=share in 2012; +1.3 percentage points      compared to 2011!)
– employment: 767 million (of which 152 million in unemployment insurance     programs)
– total number of migrant workers within China: 263 million
– annual per capita income, rural : 7 917 yuan (RMB, about 1250 USD)
– total GDP: 51 932 million yuan (+ 7.8%; value shares agriculture 10.1,    industry 45.3, services 44.6)
– R&D: 2 percent of GDP
– Chinese direct investment abroad: 77.2 billion USD (+ 28.6 percent;    FDI into China: 111.7 billion USD)
– increase of savings (+14.1 percent) and increase of credits (+15.6 percent)
– CPI: +2.6 (for food +4. 8 percent)
– kindergartens (number of attending children): 37 million

To summarize: it should be an important commitment to the new Chinese leaders to strongly support increased statistical transparency and qualitative improvements. Both China itself and the whole (analytical) world would benefit from such a development in the second largest economy in the world.

 

Hubert Fromlet
Professor of International Economics
Editorial board

 

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Introduction and Testable Hypotheses
Globalization of information technology products (IT) relates to economic growth through three channels:

(1) Terms of trade. The fall in quality-adjusted prices of IT products favors use of IT in the domestic economy and yields TFP gains.

(2) Economies of scale. Total factor productivity is positively associated with the scale of production of IT products.

(3) Variety. Greater variety means that more domestic users find good matches between products and needs, which increases productivity and growth. Greater variety and uniqueness of exports is associated with increased prices and profits.
Figure 7.2 reproduced from the Chapter sets out these three factors in terms of an integrated hypothesis relating TFP and trade in IT products.

Empirial analysis using a sample of 36 countries for 2000-2007 finds:

(1) With regard to terms of trade, importers of IT gain relatively more than exporters, on average, from the declining prices of IT coming through international trade.

(2) With regard to economies of scale, despite falling IT prices, most exporters enjoy positive economy-wide benefits of trading in IT because of economies of scale in production.

(3) With regard to variety, countries with greater variety tend to experience greater TFP gains relative to those with less variety. Against this backdrop and empirical validation, where does China fit in?

 

China’s gains from IT trade
China’s participation in global trade in IT products exploded over the 1990s and 2000s. From 2% of global exports in 1990, China+ (China plus Hong Kong SAR) rose to 15% of global exports (ranked 1st) in 2004. On the import side, China+ moved from 9th ranked at 4% of global imports to top ranked with 20% of global imports. In terms of importance in global expenditure on IT, however, China+ both grew less and is less important. China+’s share of global expenditure, although it rose four times over and ranks sixth in global expenditure at 3%, remains quite small in comparison to the country’s importance in global trade.

Putting the data on trade prices, and production and expenditure into the framework reveals a pattern similar to what was hypothesized (Figure 7.4 from the Chapter replicated below). Increased imports of IT products (left panel) is associated with greater economic gains as measured by the social surplus concept, a concept that is isomorphic to TFP. This is consistent with other findings on the relationship between IT use and TFP in the domestic context.

For IT exporters (right panel), the relationship could be positive (if economies of scale gains outweigh terms of trade losses) or negative. Since the trend line cuts the y-axis at around 0.76%, it appears that a country does gain from being a producer and exporter; but the simple correlation coefficient of 0.016 suggests that there is not a strong relationship between the magnitude of exports and economic gain.

 

China, as an exporter, lies above the regression line, suggesting that it gains relatively more from its pattern of trade, production, and expenditure compared to other net exporters. The story for these relatively greater gains for China, despite being an exporter, pretains to the variety of China’s products in trade.

Variety can be measured in several ways; this paper uses the Herfindahl (H) index calculated across 178 different varieties of IT exports and imports allocated into broader product categories, including Computers, Components, and Other ICT (embedded ICT such as medical devices). Within a category, a Herfindahl close to 0 implies a high variety in product trade, and Herfindahl close to 1 implies highly concentrated product trade.
Figure 7.5 from the Chapter shows Herfindahl indexes for three countries and three product categories. Returning to Figure 7.4, Indonesia is an exporter with lower than average social surplus for exporters (lies below the trend line for exporters). It has a very high concentration of trade in Computer exports. With a highly concentrated export pattern, but lower than average social surplus, this suggests that economies of scale in production does not outweigh the terms of trade effect, and, with high concentration, there are no gains from variety.

 

China is also a exporter, but with higher than average social surplus (lies above the trend line in Figure 7.4) for exporters. Although China’s exports of Computers are somewhat concentrated, it has an even greater concentration in imports of Components. Therefore, China may achieve higher than average economic gain by importing and getting the benefits of the terms of trade on Components. And, with high variety (low H) in exports of Other ICT, China may gain from market power in trade, with attendent benefits of higher prices and profits.

 

This short paper draws on Chapter 7, “Information Technology, Globalization, and Growth: Role for Scale Economies, Terms of Trade, and Variety”, in Otaviano Canuto and Danny Leipziger, eds 2012. Ascent after Decline : Regrowing Global Economies after the Great Recession. © World Bank . https://openknowledge.worldbank.org/handle/10986/2233

 

 

 

 

 

 

Catherine L. Mann
Barbara ’54 and Richard M. Rosenberg Professor of Global Finance
International Business School, Brandeis University
Visiting Scholar, Federal Reserve Bank of Boston

 

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