This explains our current manufacturing / trade deficit completely.
I encourage everyone here to read the complete testimony and then get angry as you look at your shrinking bottom line
I encourage everyone here to read the complete testimony and then get angry as you look at your shrinking bottom line
Dr. Usha C. V. Haley
Director, Global Business Center, University of New Haven
Statement before the U.S.-China Economic and Security Review Commission
Hearing on China’s World Trade Compliance: Industrial Subsidies and the Impact on U.S. and World Markets ]/b]
Subsidies exist in all industries that the Chinese state and provincial governments considered economically or militarily strategic, including Resource Extraction, Steel, Computing, Software, R & D, Environmental Services and Conservation, and Autos.
The subsidies exist in various forms, including:
Free to Low-cost Loans. The government exercises a vice-like grip on banks, stock markets and bond issuance and these translate to the ability to make grandiose loans. The most extreme statistics in the financial sector deal with loans outstanding. In three years from 2002 to 2004, loans increased by 58 per cent, or $785 billion. In 2003, new lending equaled almost one quarter of gross domestic product (GDP). A credit binge fueled this latest boom. Half of all bank loans go to SOEs. Most of these loans will never be repaid. Huawei for example, has a $10 billion credit line from China Development Bank.
Asset Injections: The SOEs’ parent companies, usually municipal governments or ministries, provide their protégés with opportunities to acquire state-run businesses, such as toll bridges, at highly preferential terms.
No Break-even: Poor bookkeeping practices, and lax bottom-line considerations, grant SOEs freedom from the need to make profits, or to break even.
Subsidized Purchases: SOEs can purchase their components and raw materials below cost and directly from each other, affecting the competitiveness of certain sectors in the global economy. This tradition propelled the Chinese motorcycle industry’s ability to buy control of virtually all Indian motorcycle companies short of Bajaj and turn them into assemblers of Chinese components.
International Bargaining Power: Beijing has used its enormous buying power to intercede for its SOEs with foreign suppliers and to reduce acquisition costs for raw materials. A recent example includes the Chinese government’s aborted attempt to bully down the cost of iron ore for the Chinese steel industry below internationally-negotiated price levels. The Chinese government has also secured contracts and exploration rights abroad for its SOEs.
Labor Controls: The government exercises various methods to control employees including the dang’an or employment dossier; and to reduce labor costs through injection of part-time and migrant workers and the use of prison labor.
Tax Breaks: Many SOEs avoid taxation or reduce it through tax breaks (although this can backfire if a company’s management loses favor).
Energy and Land Subsidies: The state subsidizes gasoline and electricity. Currently, Beijing tightly controls the price of both gasoline and electricity at well below their true economic levels. The state also offers free land and utilities to SOEs and companies in key strategic sectors.
Sectoral Credit Allocation: The Chinese economy speeds up or slows down on a sector-by-sector basis on credit allocations by Beijing. Some sectors such as automotive, steel, ethylene and metals’ smelting have come off the boil. Others sectors such as coal, railways and utilities are still getting huge infusions of policy-mandated credit. Very high levels of bureaucratic interference characterize credit allocations and industrial-project approvals in China and the state banking system does not allow the market to price capital.
Stock Listings: SOEs and Collectives form over 93 percent of the listing of approximately 1300 companies on China’s Shanghai and Shenzhen Stock Exchanges. Provincial governments pressure government regulators to discriminate against private companies and give the precious slots to their ailing state dinosaurs. Indeed, private companies without state connections cannot obtain a listing on any Chinese stock exchange
Cheap Technology: China runs a deficit on its technology trade with the rest of the world and foreign multinational companies control 80 percent of technological imports and exports in China. The Chinese have made little progress in either basic research or advanced design in vital industries. Despite this institutional flaw, SOEs such as Huawei owe much of their success to lax laws governing the theft of intellectual property.
Control over Distribution Channels: Provincial and municipal governments control distribution channels to allocate and to manage market share, to protect favored industries from competition and to shape investment patterns. Regulations on distribution incorporate considerable ambiguities leading to both legitimate differences in interpretation and considerable legal efforts to find loopholes. Central and provincial governments routinely use this ambiguity to confer privileges on favored companies or industries, and to withhold normal rights from companies or industries as a form of protectionism. Administrative guidance from various and competing sources can override the basic laws or regulations either explicitly or unofficially. Provincial or municipal governments may interfere with the national limits on distribution by their generosity (to lure investment or to meet local goals) or restrictions (to protect local interests). Guanxi with local army officials assumes particular importance for distribution. Some estimates suggest that the Peoples’ Liberation Army (PLA) controls distribution of goods for up to about 80 percent of the Chinese population. Its control over manufacturing facilities also makes the PLA China’s largest and most diversified manufacturer of industrial and consumer goods.
Special Market Information: Relevant information for strategic decisions comes at a premium price in China and often includes what we in the USA would consider Insider Information. In China, the central government deliberately controls and disseminates information that it considers of strategic importance. When restrictions on distribution insulate foreign or Chinese companies from their customers, they also cannot undertake direct market research and have to rely on less-sophisticated surrogates. For example, General Motors’ (GMs’) interns in Beijing have scoured the capital’s streets to find out who is buying their cars after the intermediaries get them, so that GM can build guanxi with the buyers.
United States-China Economic and Security Review Commission Hearing April 4, 2006 - Testimony of Dr. Usha C. V. Haley
