The Future of State-Owned Financial Institutions

5. State-Owned Banks in China

 State-Owned Banks in China 5 C’   a market economy has proceeded gradually over the past twenty-five years. Perhaps it is not surprising that progress across product, labor, and capital markets has been highly differentiated. As outlined in this chapter, in sharp contrast to the situation twenty-five years ago, when only a tiny fraction of farm output was sold at market prices outside of state procurement channels, transactions in product markets are now almost entirely at market-determined prices. This is true not only for agricultural output and consumer goods but even for steel, machinery, and other investment goods. The system of lifetime employment—in which jobs in the modern sector were assigned to individuals when they completed their schooling (whether primary, secondary, or tertiary), the wage structure was determined by government bureaucrats, and job turnover and geographic mobility of workers were rare—largely has given way to a labor market characterized by voluntary contracting between workers and employers, wage flexibility, significant geographic mobility of labor, and substantial labor turnover. Despite these changes, the role of the market in the allocation of capital has expanded at a painfully slow pace. Whether through banks, equity markets, or bond markets, the role of the government remains in many ways pervasive. This chapter begins by outlining the relatively rapid progress toward the market allocation of resources in product and labor markets and then turns to a more detailed analysis of the market for capital, where progress has been much slower.  .  05-1335-5-CH 05 12/9/04 9:51 AM Page 93 It then analyzes the economic implications of the dominant role of government in the allocation of capital. The Expanding Role of Markets At the outset of economic reform in the late 1970s the role of markets in resource allocation in Chinese agriculture was limited to a small number of rural free markets where peasants were able to sell output they produced on their small private plots. About 95 percent of the output that was not directly consumed by members of the rural collective units responsible for farm production was sold to state procurement agencies at prices fixed by the government. Starting in the late 1970s this system began to break down, as the government abandoned collective organization of farm production and eased restrictions on rural markets. For example, the number of rural free markets expanded from 33,302 in 1978 to 44,775 in 1982. More important, the volume of transactions on these markets almost tripled to reach RMB 32.8 billion.1 The system of government procurement of grains and other crops at fixed prices, however, remained in place; the government shifted the responsibility for delivery requirements from farm collectives to individual producers . As a result, even after a decade of rural reform, 46 percent of farm-gate transactions still occurred at prices fixed or “guided” by the government. But in the 1990s the government further reduced the scope of state procurement, and a growing share of farm sales to government procurement agencies occurred at market , rather than state-fixed, prices. By 2001 the share of farm-gate transactions occurring at market-determined prices reached 94 percent.2 The liberalization of the market for farm products was central to the rapid growth of output and productivity in the farm sector in the first decade of reform. Without the opportunity to market, farmers would have remained locked into the pattern of self-sufficiency that had developed during the decade of the Cultural Revolution, when the watchword in agricultural development policy was grain self-sufficiency, not just at the provincial level but also all the way down to the local level. With the rise of marketing, comparative-advantage cropping patterns reemerged in the first half of the 1980s, making possible a period of record growth of farm productivity and output. The expansion of the role of the market in the allocation of consumer goods followed a path similar to that in agriculture. At the outset of reform, virtually all retail sales occurred in state-owned retail establishments at prices fixed by state price   1. China State Statistical Bureau (1983, p. 386). 2. Beijing Normal University, Economics and Resource Management Research Institute (2003, p. 118); Lardy (2002, p. 25). 05-1335-5-CH 05 12/9/04 9:51 AM Page 94 agencies. Liberalization proceeded gradually, with the share of retail transactions at market prices rising steadily to...