485
Does China Follow "the East Asian
Development Model"?
Seung-Wook Baek*
[Abstract: The Chinese way of development shares many characteristics with the East Asian
developmental state model. Key elements of this shared development model include state
control over fmance, direct support for state owned enterprises by the government, import
substitution industrialisation in heavy industry, a high dependence on export markets and a
high rate of domestic savings. Even the reform of corporate governance is not likely to change
the basic features of the East Asian model in China. Among East Asian countries, China shares
more similar characteristics with Taiwan rather than with Japan or Korea since China, like
Taiwan, also has an economy of dual structure that divides the public and non-public sectors.]
As China has been pursuing capitalist-oriented reforms since the 1980s, she becomes
one of the most rapidly changing states in the East Asian economy. Few analyses,
however, compare the Chinese development strategy with the "East Asian development
model" even though China shares many characteristics with it and becomes an important
growth centre in this region. Some critics of "China shocK" (an argument that China
will rise as a new world economic centre) only focus on China's potentiality, not on the
comparative analysis of China's development strategy within this region.
China shares similar characteristics of international trade with other East Asian
countries. The US became China's largest export market and China has become highly
dependent on imports of advanced technological equipment firom Japan.' In addition,
like other East Asian countries, the ratio of China's intra-regional trade within Asia is
very high (52.3% of exports and 64.5% of imports in 2002) {ZGTN, 2003).
However, one interesting point is that China was least affected by the Asian financial
cri.sis in 1997 and 1998 though she shared many of the economic vulnerabilities that
led to the financial crisis in other East Asian countries: a bank dominated by a financial
system with a high level of government intervention, weak norms of regulation and
supervision over commercial banks, and a large accumulation of non-performing loans
(Haggard, 2000). There are several reasons why China was able to avert the crisis: strict
capital control by the government, the absence of capital convertibility, manageable
*Dept. of Sociology, Chung-Ang University. Seoul. Acknowledgement: This research was supported by the
Hanshin University Grant in 2001.
Jnurnal of Contemporary Asiu. Vol. 35 No. 4(2005)
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short-term external debt, a large trade surplus, large amount of foreign exchange reserves,
and high infiows of FDI (Lardy, 2000; Fernald and Babson, 2000). Many factors are
involved in the characteristics of the "developmental state."
The need to analyse China's experiences from a comparative perspective is raised
by two contradictory aspects of Chinese development. On the one hand, China pursues
a wide open door policy in the age of globalisation that makes the state capacity of
economic intervention vulnerable. On the other hand, China still shares many
characteristics of developmental state model in East Asia.
East Asian Development Model and China
Since the 1990s, China has been included in the intemationai division of labour within
East Asia at the same time as Southeast Asian countries (especially ASEAN-4). The
extension of the intemationai division of labour to wider East Asia was partly the result of
Japan's industrial relocation when Japan was facing high appreciation of the Yen after the
Plaza Accord in 1985. This was also a consequence of the economic re-adjustment in
Asian NIEs (Arrighi, 1994; Palat, 1993; Burkett and Hart-Landsberg, 2000; Brenner, 2002).
Compared with earlier stages of East Asian development, however, this stage, that
has incorporated the Southeast Asian region, shows few characteristics of precedent
Japanese, Korean or Taiwanese models of development since these Southeast Asian
countries are wholly exposed to the "globalised" world of free trade, free movement of
finance capital, strong protectionism of core countries, least role of govemment intervention,
and decreasing importance of Cold War geopolitics (Clark and Jung, 2002; Burkett and
Hart-Landsberg, 2000). Since these Southeast Asian countries do not have enough capacity
to control financial markets and to establish autonomous industrial policies, they are in
fact at the mercy of foreign capital. Their economic growth only means their subordination
to the Japanese economic hierarchy and to the extemal expansion of the Japanese financial
system and industrial policy (Burkett and Hart-Landsberg, 2000).
Howeyer, the internal conditions and historical legacies of China are very different
from those of Southeast Asian countries, and these differences result in a different path
of development. Though China shares some characteristics of open-door and
liberalisation policies underpinned by export-oriented FDI with Southeast Asian
countries, she displays many different characteristics stemmed from her own historical
background. These are: the public owned enterprises still have the lion's share of the
economy; the open-door policy has been mainly restricted to eastern coastal areas; the
underdeveloped financial market has been keeping transnational finance capital fiowing
freely; medium and small sized capital of overseas Chinese have brought massive FDI;
township and village enterprises (TVEs) in rural areas are the backbone for the growth
of labour intensive industries; and the high rate of domestic savings develops the reserves
to supply financial funds to state-owned enterprises (SOEs) (So and Chiu, 1995; Solinger,
1993; Walder, 1996; Chai, Kueh and Tisdell, 1997).
As China shows two different sets of characteristics in development, the polemical
oppositions in the debates on the East Asian development model may also be repeated in
the discussion about the factors of China's rapid economic growth. On one hand, China's
China
487
rapid economic growth may be ascribed to the market-oriented structure of the Chinese
economy as emphasised by neo-classical economists (Balassa, 1988; World Bank, 1993).
For example, non-state sectors like private enterprises, foreign invested enterprises (FIEs)
and TVEs, which are out of financial support by the govemment, have led the economy
since the mid-1980s. Among them, as shown in Table 1, the fastest growing sector is
FIEs.^ The decreasing weight of state-owned enterprises (SOEs) in the economy is observed
through indicators like gross output value or the number of employees (28.9% of the total
number of employees in urban areas in 2002 whereas 69.7% in 1992). New forms of
ownership, such as limited liability corporation and shareholding enterprises, have been
developing quickly and have surpassed the importance of the state-owned sector.
Furthermore, FIEs account for half of China's intemationai trade (50.85% in 2001), investing
mainly in labour-intensive industries which are emphasised by the comparative advantage
theory. With this growing role of REs, the degree of dependence upon foreign trade in
China has doubled in the last two decades from 23.1% in 1985 to 44% in 2001. Since
China joined the WTO, these trends have been accelerating.
Table 1: Share of Gross Industrial Output Value by Registration Status
1985
2002
State-owned
Industry
Collective
-owned
Industry
Limited
Liability
Corporations
and Shareholding
Enterprise
Private
Enterprise
Enterprise
Foreign
Invested
64.9
15.6
32.1
n.a
1.8
8.7
30.9
11.7
1.2*
29.3
Note: Gross industrial output value is the industrial output value of all State-owned enterprises plus non
state-owned industrial enterprises with an annual sales income over 5 million yuan.
•This figure includes FIEs as well as joint ownership enterprises.
Source: Zhongguo tongji nianjian (China Statistical Yearbook) 1992 and 2003.
Conversely, however, China can also be interpreted as the latest heir of the
"developmental state." Chinese aspects of this developmental state include: the high
rate of domestic savings, the huge infrastructure of heavy industry, the promotion of
industrial policy, the legacy of central planning, labour-intensiveyndustry acconipanied
by import substitutive capital-intensive industry; a strong central government with a
huge bureaucracy; and corporatist control over the society.'Although SOEs are decreasing
in their importance, they are still a major part of the economy and occupy 60.9% of the
total assets of large industrial enterprises in 2002 (all industrial SOEs plus large nonSOE industrial enterprises with over 5 million yuan output value) (ZGTN 2003). These
characteristics seem to fit intb Wade's ten policy advice for "govemed market" to promote
government-guided deiyfelopment (Wade, 1990: 350-77).
Of these two faces of development, the latter characteristics of developmental state
may be interpreted as lessening characteristics during this transitional period. However, as
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JCA 35;4
the Chinese government has not chosen the "big bang" or "shock therapy" as an appropriate
policy and fears social instability caused by rapid privatisation, many former characteristics
of the government-centred development will continue to be sustained for the time being.
Furthermore, these two faces of development reveal a dual structure of the Chinese economy
that divides the public and non-public sectors as will be discussed below.
Elements of the East Asian Development Model in China
The slogan for the Chinese development strategy in the 1980s was "crossing the river
by groping for the stones." In the 1990s it was changed to and theorized as "the Socialist
Market Economy." Passing through this reform process, the Chinese economy has been
transformed into an economy of dual structure. On one hand, ever-expanding non-state
sectors have been playing major roles for China's wider opening to and incorporation
into the world economy. These sectors, mainly composed of FIEs and private enterprises,
are least dependent on financial support and control by the state. On the other hand,
inspite of its decreasing weight in the whole economy, the state sector still plays a major
part in heavy industry and makes up a high percentage of gross domestic fixed capital
formation, gross output value and the number of employees. Furthermore, SOEs are
major beneficiaries of lending by state banks. This dual structure of public and nonpublic sectors has important implications on China's development strategy.
Dual structure results in contradictory viewpoints on China's development strategy.
When comparing the Chinese development model with those of East Asian countries, we
need to investigate two key issues of China's economic reforms in the 1990s. First, how to
transform SOEs, and second, how and where to distribute the economic resources (Wu,
2001). The first issue is more about corporate governance and the weight of SOEs while
the latter is about macroeconomic roles of the government. These issues are also concerned
with the future path of Chinese development, that is, whether it will follow the AngloSaxon neo-liberal path or retain many characteristics of developmental states in East Asia.
There are three different aspects that need to be examined on these issues.
Corporate Governance of SOEs: In terms of SOE reform, two issues are important:
what sector will remain state-owned and be supported by the government, and how the
corporate governance of SOEs will be changed.
Since the early 1990s, the role of the government has changed from mandatory
planning of the economy to guideline plan setting or macro level regulation. The future
agenda for SOE reform centres on which sectors to select as core industries among very
diverse and overlapped SOEs (Wu, 2001; Wu 1999; Nolan, 2001). At the Fourth Plenum
of the Fifteenth Central Committee of the CCP in 1999, the medium and large-scale
high-technology industry as well as the security-related sector were selected among
SOEs as strategic sectors of vital importance. This was a consequence of the policy of
"grasp the large and release the small" (zhudafangxiao) which was put into place at the
Fifth Plenum of the Fourteenth Central Committee of the CCP in 1995.
This policy does not fit the advice of the comparative advantage theorists. In this
context, Wang Yungui, a researcher of Chinese institute that belongs to tbe State
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489
Development and Planning Commission,'' suggests that the government should
intensively develop firms with intermediate-level technology because promoting a
labour-intensive industry based on the comparative advantage theory is a great obstacle
to economic development (Wang, 2002). Many other economists of government thinktanks also suggest economic policies that will encourage the industrial upgrading of the
high technology sector and support a small number of key SOEs (Zhang, 2000).
Industrial re-adjustment policy is selected as one of the most important policies to
promote strategic industries with intermediate-level technology. Its aim is to establish
the oligopolistic dominance of large-sized SOEs that can compete in the world market
and to prevent the random burgeoning of scattered small-sized enterprises in leading
sectors (Smyth, 2000; Nolan, 2001). As a result, five hundred and twelve large SOEs
were designated as priority companies by government industrial policy in the mid-1990s.
Five hundred and twelve large SOEs undertake 59.2% of the gross industrial output
value and 49.4% of the realized profit of industrial enterprises in 2001 even though their
share in the total number of industrial enterprises is as low as 0.3% (Li, 2002).
To readjust the big SOEs, a policy has been introduced to develop business groups
into competitive conglomerates. The experiences of the Japanese keiretsu system and the
Korean chaebols have been used as a model, of which the latter have more implications
for China (Harvie and Naughton, 2000: 57). Although there have been disputes on the
function of these conglomerates since the Asian Financial Crisis (Wu, 2002; Lardy,
2002:152), senior officials still feel that the experiences of South Korean and Japanese
conglomerates are viable during the initial development phase (Saich, 2001: 234-5).
Since 1998, the Central government has promoted "bureaucratic-led restructuring"
and has been developing major business groups. PetroChina and Sinopec were targets
of massive restructuring and international notation. China Telecom acquired and merged
many telecommunication companies. Many telecommunication companies were
reorganised and Chinese airlines were reorganised into three big groups. Huaneng Power
International was merged with Shandong Huaneng Power Development Company
(Nolan, 2001: 229-23U]. The Chinese government set-up a new organisation. Stateo^wned Assets Supervision and Administration Commission of State Council This
Commission is expected to address and realize the property rights of SOHs and to replace
the role of State Economic and Trade Commission to manage SOEs. Large SOEs will
be entrusted with the rights of autonomous management of their companies {shouquan
jingying). This policy will change the relationship between the government and big
conglomerates and strengthen the power of big state enterprises.
In terms of corporate governance, the most outstanding reform policy is the
institutionalisation of modem corporate system (or corporatisation) for SOEs, which means
that there will be separation of ownership and management rights. With this reform, the
role of the state changes into large stockholders but not direct managers. Since 1993,
corporate governance (gonsizhili) began to be emphasized by influential think-tank
economists and for the first time, the term "corporate governance" was inserted into the
original draft for the Third Plenum of the Fourteenth Central Committee of the CCP in
1993 and the Fifteenth Congress of the CCP in 1997.' At last, the term was officially
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suggested at the Fourth Plenum of the Fifteenth Central Committee of the CCP in 1999 as
an important checking mechanism between ownership and management (Wu, 2002:130140). Th? triad of a general meeting of stockholders, a board of directors and a board of
inspection has been introduced as the main framework for modem corporate system."
The most pressing issue on the future of corporate governance in China is whether
the corporatisation of SOEs would facilitate the growth of M & A market through the
development of American style stock market or not. There is a divergence of arguments
between the academic circle and government officials regarding this issue. Many
academic scholars want to accelerate the stock market system to develop a massive M
& A market while govemment officials consider the stock market a tool for corporate
financing (Lin et al. 2001; Wu, 2002).
Although the Chinese stock market has developed very fast and is ranked as the
second largest market in Asia (next to Tokyo), the ratio of aggregate value of listed
stock to GDP is still very low compared to those of other countries. Furthermore, since
the listing on the stock market is strictly controlled by the govemment, the rights of
ownership and management are not easily transferred on the Chinese stock market. Even
in cases of listed companies, non-circulating stocks (such as stocks owned by the state or
by other SOEs) are as high as 60% of the total stock issued (Wu, 1999). Therefore, the
Chinese stock exchange has not served as a market for corporate control (Naughton,
2000:160). Wu Jinglian also has a negative attitude towards the rapid opening or expansion
of the stock market without the establishment of economic norms in that market (Wu,
2002). If the stock market is not a main mediator to transform Chinese corporate
govemance, it is less likely for the structure of Chinese SOEs to develop into AngloSaxon style corporations based on stock market, at least for the time being.
Financial System: The issue of corporate govemance reform in SOEs is also closely
involved with the transformation of the fmahcial system. The question is whether SOEs
with modem corporation systems should be encouraged to depend on indirect financing
by bank loans or on direct financing-through capitalisation in the stock market.
It is unlikely that direct financing will expand very fast because the govemment
shows a discrete and gradual attitude towards promoting the rapid growth of the stock
market. Furthermore, the govemment is not very active in attracting foreign capital into
the stock market. It may be anticipated that the Chinese financial system in the near
future will favor direct financing through the stock market since the ratio of aggregate
value of listed stock to GDP has increased quickly to as high as 25%'and the rate of
financing through the stock market is very high in listed companies. However, as said
above, the listing in the stock market is strictly controlled by the central govemment
and the high rate of direct financing in listed companies is a result of the low costs of
direct financing, underdeveloped performance control on listed companies, and the small
burden of dividends since a high percentage of stocks is owned by the state and other
SOEs. Even Lin Yifu, a proponent of the comparative advantage theory, calls for the
postponement of the opening of the capital market since its quick opening may deteriorate
systemic instability of the capital market (Lin et al, 2001). The fast-growing Chinese
China
491
Stock market with a high turnover ratio reveals its volatility rather than stability (Hovey
and Naughton, 2000; Naughton, 2000).
Therefore, in the near future it is unlikely that the stock market will replace state
banks as the main financing channel. The A share stock market, which has only been
opened to native Chinese, will gradually be opened to foreign institutional investors after
China's accession to the WTO. However, the inconvertibility of capital account is still a
barrier that will keep speculative finance capital from flowing freely into the country.
As directfinancingis not well developed,* corporate financing in China still depends
highly on indirect financing, mostly bank loans. Most banks in China are still owned by
the state, although since 1993 the commercialisation of banks has been under process.
With the commercialisation of state banks (since that time), four different state
commercial banks have emerged and the differentiation of tasks is witnessed between
commercial banks and policy banks.'The central bank has become independent and
this changes the way it controls other banks from direct control by loan planning to
indirect control by the regulation of the liability rate of banks (Tong, 2000).
Despite the commercialisation of banks, the development of non-state banks is so
slow that state banks still account for 80% of total loans and 75% of total savings
{ZGTN, 2003). Most non-state commercial banks are also founded by other SOEs or
local govemments for the purpose of local investment. Non-bank financial institutions
are small in size and account for only 1/5 of the total financial assets of financial
institutions.'"State banks still command a majority share of the financial sector, and the
government can control financial resources through its control over state banks. This
situation has not changed much since the policy of "loans for direct expenditure"
{bogaidai) was introduced that altered the method of capital supply for SOEs from
direct govemment expenditure to indirect bank loans (Wang, 2000).
Over the last decade, the volume of savings and loans by Chinese financial
institutions has increased greatly, refiecting the high rate of savings. The total savings
in 2001 amounted to 14 trillion 361 billion yuan (1 trillion 723 billion dollars), of which
35.9% was corporate savings and 51.4%'was personal savings. Total bank loans in
2001 amounted to 11 trillion and 232 billion yuan (1 trillion and 348 billion dollars).
These savings and loans are not small whpn compared with Japanese total savings of 3
trillion 932 billion dollars and total loans of 3 trillion 660 billion dollars, and compared
with Korean total savings of 372 billion dollars and total loans of 292 billion dollars in
2000. Its size of savings amounts to 44% of that of the Japanese and 4.6 times as large
as that of Korea." The huge size of China'sfinancialresources also makes China different
from Southeast Asian countries in terms of govemment capacity. It is important not to
ignore that among these huge bank savings and loans, almost nothing is lent to nonSOEs. In 2002, among the total bank loans, only 2.1% was lent to FIEs and 0.8% lent to
private enterprises and the self-employed {ZGTN, 2003).
Two situations are anticipated in terms of the future of the Chinese financial system.
First, it is least likely that the state control over the financial sector will be weakened
significantly. The central bank, the People's Bank of China, is likely to continue to be
controlled by the State Council and to be allowed little autonomous discretion. In terms
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of monetary policy, the government still prefers direct control rather than indirect control
through the central bank. The government needs to control financial resources more'
than ever since four Asset Management Companies were established to solve the
problems of non-performing loans of four commercial state banks by way of the debtfor-equity swaps (Saich, 2001: 239).'^
Secondly, state control over the free movement of speculative capital is likely to be
retained. When the Chinese govemment promulgated The Commercial Bank Law in 1995,
it created a clause banning commercial banks from advancing into non-bank transactions.
This resembles the main characteristics of the Glass-Stegall Act of the USA. It is also
related to the deliberate attitude of the Chinese govemment about the stock market. The
Chinese govemment emphasises control over inflows of speculative capital and the control
of financial resources through its control over state banks (Langlois, 2001).
With China's accession to the WTO and the opening of local bank transactions to
foreign investors, foreign banks were able to begin transactions on renminbi savings
and loans with local enterprises and individuals. However, it is unlikely for savings to
become concentrated in foreign banks in China since foreign banks may have difficulty
in finding appropriate clients for lending because of the problem of getting appropriate
information about clients (Langlois, 2(X)1).
Industrial Policy: In terms of the East Asian development model, another important
aspect for development strategy is the industrial policy. As the weight of SOEs within
the whole economy decreased and the government's direct support for SOEs halted
since the early 1990s, state intervention in the economy began to change to attain the
goals of readjustment and re-arrangement.
After years of preparation by the State Planning Commission, China's industrial
policies began to take shape with TTie Decision on the Main Points of Immediate Industrial
Policy in 1989 and The Outline of Industrial Policy in the 1990s in 1994. Subsequently
in the 1990s, Industrial Policy for Auto Industry (1994) and Industrial Policy for Water
Industry(1997) were promulgated based on the Outline of Industrial Policy.
Chinese industrial policies are classified into two: the industrial organisation policy
and the industrial readjustment policy, of which the latter is emphasised. This is because
China has a long legacy of planned economy and heavy industry. East Asian developmental
states have proceeded from import substitution industrialisation to the promotion of labourintensive industries to capital-intensive industries that are accompanied by industrialisation
focusing on heavy industry (Wade, 1990). However, China already has a well-developed
heavy industry, of which readjustment became an important agenda.
In The Outline of Industrial Policy in the 1990s, the Chinese govemment decided to
select five industries as core prop industries: machinery, electronics, petrochemical,
construction and auto industries. The strategy of developing a new competitive sector
was chosen for electronics and especially for information technology. On the contrary, as
for petrochemical and auto industries, a different strategy was chosen to make oligopolistic
dominance of big conglomerates (State Economic and Trade Commission, 2000).
As of now, however, Chinese industrial policies have not been consolidated fully.
China
493
Except for the auto industry, concrete designs and supporting plans for other core
industries have not taken shape yet. A wide selection of core industries has also been
criticized for its lack of efficiency. Even the main organisation of the government that is
responsible for industrial policy has changed several times. Local governments are also
obstacles for carrying out industrial policies. Conflicts among different ministries also
do great harm to the realisation of industrial policies.
Furthermore, with the accession to the WTO, China is forced to change her industrial
policies. For example, many measures to protect the auto industry are in conflict with
the commitments for China's WTO accession (Lardy, 2002: 152).
However, this inefficient Chinese industrial policy does not mean that the
government does not have any important role in the support of specific industries. In
Japan or Korea, the importance of industrial policy was reflected in the growth of targeted
industries through government control over financial resources (Amsden, 1989; Wade,
1990; Chang, 1994). In China, the state's strong voice over financial resources and the
nomination of high level managers in SOEs continues to give the state a lot of leverage
in SOEs even without industrial policies. Some unofficial but important organisations
like "the Central Economic Workshops" arranged by the Central Committee of the CCP
play important roles to manage the economy as well. Furthermore, at present, for the
govemment, industrial readjustment rather than developing new industry or pursuing a
selective and sector-targeted industrial policy is a more important task. Controls of the
financial sector may supplement the weakness of industrial policy.
A dispute among economic advisers for the govemment is a good indicator of the
future of industrial policy in China. One of China's leading economists, Lin Yifu(Justin
Y. Lin) at Peking University considers comparative advantage the most desirable strategy
under the present Chinese situation. From his viewpoint, the support for capital-intensive
industry under present conditions would deepen the problem of capital shortage, which
in tum might cause inefficient govemment investment and high dependence on foreign
capital inflows. Lin even fmds that the reason for the East Asian financial crisis was an
inaccurate development strategy that ignored the comparative advantages (Lin et al., 2001).
On the contrary, Wu Jinglian'^ at the Development Study Centre of the State Council,
does not accept Lin Yifu's argument about comparative advantages and proposes that
the government develop leading SOEs through an active readjustment policy (Wu,
2001a). HuAngang, another influential adviser for govemment economic policies, does
not accept the comparative advantage theory at face value either (Hu, 2000; Hu, 2002).
Comparison with the East Asian Development Model
Characteristics of Chinese development display similarities as well as differences with
"the East Asian development model." Like other "developmental states" in East Asia, the
Chinese govemment also has guided the economy by controlling the financial system
and channeling financial resources into specific targets. China is also incorporated into a
triangular structure of intemationai trade and division of labour among the USA, Japan
and East Asia as a bottom to middle level participant. Planned economy has undertaken
the role of industrial policy to promote heavy industry. Owing to the^underdevelopment
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of direct financing, the state could continue to dominate flows of financial resources.
However, in Japan or Korea, the government has intensively supported big private
enterprises through policy loans and inclined industrial policy. These big business like
keiretsu or chaebol have led export-oriented industrialisation in which FDI had little
importance. Compared with these countries, policy loans in China are only limited to
SOEs that produce mainly for domestic markets. However, exports have been mainly
led by small and medium-sized non-SOEs that are the main beneficiaries of FDI and are
indirectly supported by functional industrial policy not by the inclined industrial policy
of the government. This structure gives rise to a dual system of public ownership and
non-public ownership. In the field of finance, China is different from Japan where main
banks have superintended subordinate enterprises. Though the formation of big enterprise
groups have been pursued by China, they are also different from those in Korea or
Japan where business groups display hetero-combination by diversification while Chinese
groups are oriented towards dominance by horizontal merger of similar enterprises.
Therefore, because of the dual system, it is more useful to compare the Chinese
experience with that of Taiwan during the 1970s and the 1980s.
The Taiwanese development model has- also been based on the dual economic
structure of public and non-public sectors. On one hand, small and medium-scale
companies have propped up the export-oriented economy and investment in these
companies has been supplied from the curb market rather than banks. Industrial policy
for these private companies has been functional rather than sectorial. On the other hand,
since the late 1960s companies in the public sector have specialized in upstream sectors
that had been developed by the second import substitution industrialisation. The financing
of those companies has absolutely depended on state banks and accomplished economy
of scale by monopolies. They grew quickly with the support of the government (Wade,
1990; Haggard, 1990; Cheng, 1993). As Robert Wade says, in Taiwan "[p]ublic ownership
might be seen here... in a trade-off with protection" (Wade, 1990: 179).
The public sector in China has also been playing a role of replacing the need of
active and inclined industrial policy by the government. This may protect the market
since most banks are owned by the state and their loans are restricted to SOEs. China
also displays a similarity with Taiwan in that the public sector specializes in capitalintensive and import-substitution industrialisation whereas the non-public sector
specializes in export-oriented industrialisation. In terms of corporate financing, besides
internal reserves, primary supply of funds in public sector absolutely depends on bank
loans while non-public sector depends more on FDI or informal borrowings. This dual
system in China lessens the need for inclined industrial policy and makes the Chinese
industrial policy more like the "soft industrial policy" of Taiwan.'''
There are also other similarities. The strong control over the stock market in both
countries prevents free inflow of speculative capital. The stock market is so under-developed
that it cannot become an important organisational tool for M&A or enterprise restructuring.
So long as China maintains this dual structure, she will retain many characteristics
of the Taiwanese style developmental state.
However, the size of Taiwan is not comparable to China, and it is impossible for
Ctiimi
495
China to pursue a Taiwanese style export-oriented industrialisation that aims at a niche
market. In China, SOEs maintain the majority share of the economy and range from
upstream to downstream sectors. However, in Taiwan, small and medium sized firms
that occupy downstream sectors are the key dynamic agencies. In the field of finance,
the Chinese curb market is so underdeveloped that small and medium enterprises have
great difficulty in getting financial funds such that SOEs still have the advantage to
become key actors. In addition, compared with Taiwan's conservative fiscal policy,
China has pursued an expansive fiscal policy with low interest rate since the late 1990s.
Some Difficulties of the Orientation for a Developmental State
With China's accession to the WTO, China's strategy of development faces serious
challenges. China's further opening seems to have two aims. First, forcing the acceleration
of SOE reforms by inviting exogenous factors into the economy to quell internal opposition
against radical economic readjustment (Zeng, 2001). Second, China needs to attract more
foreign investment because non-SOEs are influenced by the shortage of capital inflows
owing to the changes in the direction of international investment favoring cross-border M
& A in core countries especially since the Asian financial crisis (UNCTAD, 2001)."
With the increase of TNC's investment in China during the 1990s, new features of
investment are also found that have different traits from the period of investment by
overseas Chinese in the late i98Os..First, as joint ventures with Chinese companies
decrease, subsidiaries of TNCs with whole management rights increase. Existing joint
ventures are also facing the challenges of the foreign partners trying to take over the
management rights of the companies (Bei, 2001; Li, 2001). Second, the domestic market
share of foreign cpnipanies is growing especially in the core industries (Liu, 2000): with
100% in mobile telephone components and more than two-thirds in color Braun tubes,
elevators, passenger cars (Yue, 2001) and 95% of cellular phones (Lardy, 2002: 2).
As for capital control, though the Chinese government restrains the convertibility
of capital account anxl blocks the inflows of speculative capital, China has difficulty in
preventing the indirect inflow of specuhtive capital through diverse routes even under
the fixed exchange iite system. Indirect inflows of Speculative capital is witnessed
through various phenomena such as false investment by FIEs, the overheated real estate,
future and stock markets;;etc. The autonomy of monetary policy is limited since the
governnient has to make a lajge purchase of inflows of foreign exchanges to maintain
foreign reserves even under the austerity policy started in 1994. Like other countries
with opened capital markets, China is also facing the dilemma between the stability of
the exchange rate and the stiniulation of economic growth (J. Wang, 2000). Because of
this fragility of the capital market; various "capital flights" have become serious social
problems in the late 1990s (Langlbis, 200.1) and in late 1998 an extensive inspection on
foreign exchange transactions was carried out (J. Wang, 2000).
The problem of Overlapping investment, accelerated during the "investment fever" in
the 1980s and 1990s, has not been easily resolved and it has restricted the effects of the
expansive policy of domestic demands in the late 1990s (Wang, 1999; Li, 2000; Wu, 2000). "•
A more serious problem is the deteriorating social equality. There is a large income
496
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gap between the coastal areas and the inland areas, rural areas and urban areas, and
corporate managers and rank-and-file workers. This inequality has caused many social
problems that threaten social stability. Some influential economists of government thinktanks consider the social instability one of the most serious problems facing China.
They ask for the establishment of a social security system and for active fiscal investment
to guarantee social stability (Hu, 2000, 2002; Wu, 2001a; S. Wang, 2000; Wang et al.,
2002). The high rate of real unemployment is a serious threat to social stability. The
reform of the employment system has increased employment instability and produced
many irregular workers, which has blurred the distinction between lay-offs {xiagang)
within companies and the unemployed (Wang, 2000; Lee, 1999; Solinger, 2002). Recently
the real unemployment rate is estimated to be above 8% in urban areas (Hu, 2002). The
corporatist control with Chinese characteristics (so-called "work unit" system) established
during the socialist period is being undermined (Lu and Perry, 1997). With increasing
social instability, the social base for the developmental state is being undermined.
Conclusion
As we observed above, the Chinese development model seems to retain some key
characteristics of the East Asian development model rather than following the AngloSaxon type of full economic liberalisation. Key elements here are state control over
finance, direct support for SOEs by the govemment, a dual system of public and nonpublic ownership, high dependence on the export market, and a high rate of savings.
Even the reform of corporate governance is not likely to change these basic features.
Of course, the timing of Chinese development is very different from those of other
East Asian countries because it is affected by the current neo-liberal globalisation. As
mentioned above, as non-SOEs are heavily dependent on FDI and foreign markets, the
pressure for a wider opening of the capital market is very high. The large amount of
accumulated govemment deficit may become pressure for the opening ofthe govemment
bond market for foreign investors."The mass unemployment that resulted from SOE
readjustment is also an undermining factor of the ideology of economic reforms. The
former base ofthe socialist corporatism has been weakened during this period of readjustment. A developmental state with Chinese characteristics faces the double challenge
of unfriendly international circumstances and of a weakening social base.
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