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The Business of Governing Business in China: Institutions and Norms of the Emerging Regulatory State

Published online by Cambridge University Press:  13 June 2011

Margaret M. Pearson
Margaret M. Pearson
Affiliation:
University of Maryland
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Abstract

China began to establish markets a quarter century ago, but only in the last decade has its government made a concerted effort to design new institutions to govern them. Hence, a “regulatory state” is emerging. The prevailing literature focuses on a seeming convergence of Chinas institutions with the dominant global model of the “independent regulator,” including the establishment of new regulatory commissions. Yet research on China's strategic industries—those in the infrastructure and financial services sectors—suggests that assumptions of convergence obscure key elements of a regulatory design characterized by continued state ownership (as opposed to privatization), maximization of the value of these assets, and active government structuring of these industries. Moreover, regulators in the existing party-state bureaucracy have relatively weak authority. This research cautions us to rethink dominant models of Chinese political economy so that we retain a place for the central state in directing market reform at the “commanding heights” of the economy.

Type
Research Article
Information
World Politics , Volume 57 , Issue 2 , January 2005 , pp. 296 - 322
Copyright
Copyright © Trustees of Princeton University 2005

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References

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6 Rodrik, “Institutions for High-Quality Growth: What They Are and How to Acquire Them” (Paper presented at the IMF Conference on Second Generation Reforms, Washington, D.C., November 1999), http://www.imf.org/extemal/pubs/ft/seminar/1999/reforms/rooMk.htrn (accessed June 26,2004).

7 The point here is not that the independent regulator model is normatively or practically best, but that it currently stands as the global standard for regulation. Hence, a major World Bank publication states that “by now it is well accepted that a country should have independent regulatory bodies.. ..” See World Bank, Building Institutions for Markets: World Development Report 2002 (New York: Oxford University Press, 2002), 158Google Scholar. Establishment of independent regulators is frequently a condition for funding from or certification by international organizations. For example, the EBRD strongly advocates the establishment of an independent regulator as a condition for investing in telecommunications and utilities industries in Central Europe and Central Asia. The 1997 agreement on basic telecommunications services under the World Trade Organization identifies the creation of an independent regulator as one of six regulatory principles. The Asian Development Bank provided a $500,000 technical assistance grant to the PRC government to create an independent regulator for the electric power industry. Sohail Hasnie, Technical Assistance to the People's Republic of China for Establishing the National Electricity Regulatory Commission, Asian Development Bank (September 2002), http://www.adb.org/Documents/TARs/PRC/ R200_02.pdf (accessed June 8,2005).

8 Majone, Giandomenico, Regulating Europe (London: Routledge Press, 1996), 48CrossRefGoogle Scholar. Such independence also depends upon the possession of sufficient resources to implement mandates, a requirement that poses a problem in China, as elsewhere.

9 Governments commonly mandate, for example, the provision of universal services in telephony and electricity, and charge their regulators with enforcing these “universal service obligations.”

10 One major critique of the view that independent regulators correct market failures (the “economic theory of regulation”) argues that regulators are captured by and pursue the interests of the businesses they regulate. Stigler, George, “The Theory of Economic Regulation,” Bell Journal of Economics and Management Science 6, no. 2 (1971)Google Scholar. A third vein in regulatory scholarship is the institutionalist approach. See Moe, Terry, “Interests, Institutions, and Positive Theory: The Politics of the NLRB,” Studies in American Political Development 2 (1987)Google Scholar.

11 The classic statement is Johnson, Chalmers, MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925–1975 (Stanford, Calif: Stanford University Press, 1982)Google Scholar.

12 Vbgel (fn. 2), 54–60,207–213. Other descriptions of Japan's more activist state include Organisation for Economic Co-operation and Development (hereafter cited as OECD), China in the World Economy: Domestic Policy Challenges (Paris: OECD, 2002), 365–66Google Scholar; and Pempel, T.J., “Regime Shift: Japanese Politics in a Changing World Economy,” Journal of Japanese Studies 23, no. 2 (1997)CrossRefGoogle Scholar.

13 Vbgel (fn. 2), 208. In China, the government's promotion of its WTO accession, especially after 1999, can be seen as serving this same preparatory function; the government warned businesses that they would need to become competitive, either immediately upon accession (December 2001) or a few years later as phase-ins became operative. China's efforts to merge weak firms into stronger ones began several years ago.

14 Since the late 1980s, further reform has cost comprehensive ministries some of their power. Pempel (fn. 12), 349–57. On the limits to recent regulatory reforms, see OECD, Regulatory Reform in Japan (Paris: OECD, 1999)Google Scholar; and Croix, Sumner La and Mak, James, “Regulatory Reform in Japan: The Road Ahead,” in Blomstrom, Magnus, Gangnes, Byron, and Croix, La, eds., Japan's New Economy: Continuity and Change in the Twenty-First Century (Oxford: Oxford University Press, 2001)Google Scholar.

15 There is an active discourse among influential scholars in central government think tanks, including the Chinese Academy of Social Sciences, the Development Research Council, and the (defunct, as of 2003) State Committee on Restructuring the Economic System. See, for example, the State Council-commissioned volume, Zhongguo Jichu Sheshi Chanye Zhengfu Jianguan Tizhi Gaige Ketizu (China Infrastructure Industries Government Regulatory System Reform Task Force), Yanjiu Baogao (Research report) (hereafter cited as Yanjiu Baogao) (Beijing: Zhongguo Caizheng Jingji Chubanshe June 2002)Google Scholar.

16 China committed that in many services, including financial services and telecommunications services, “relevant regulatory authorities would be separate from, and not accountable to, any service suppliers they regulated. . . .” World Trade Organization, Report of the Working Party on the Accession of China, Document WT/MIN (01)/3 (Geneva: World Trade Organization, November 10, 2001)Google Scholar. In the late 1990s, China's government successfully sought to have its telecommunications regulator certified by the International Telecommunications Union as China's “independent regulator.”

17 Calls for reform of corporate governance were made at the Third Plenum of the 16th Party Congress in October 2003. See Xinhua, “Decision on Perfecting the Socialist Market Economic System” (hereafter cited as “CPC Decision”), Beijing Xinhua Domestic Service in Chinese, FBIS CPP20031021000187 (October 21, 2003). The relationship between corporatization and regulatory reform is discussed in “Zhengfu Jianguan zai Zhengfu Jingji Zhinengzhong de Diwei,” in Yanjiu Baogao (fh. 15), 56–69.

18 The securities regulator, CSRC, does have functional responsibility for some aspects of privatization. Still, most securities firms themselves are state-owned.

19 See, for example, World Bank (fn. 7).

20 Clarke, Donald, “Corporatisation, Not Privatisation,” China Economic Quarterly 7, no. 3 (2003), 27Google Scholar.

21 On the reassertion of central authority over key functions of the economy, see Lin, Kun-Chin, “Corporatizing China: Reinventing State Control for the Market” (Ph.D. diss., University of California, Berkeley, 2003)Google Scholar.

22 For example, central agencies have been crucial to the effort to break down local protectionism, thereby helping to create an integrated national market. Mertha, Andrew, “China's ‘Soft Centralization’: Reasserting State Control over Regional Economies to Combat Local Protectionism, 1998–2002” (Manuscript, Department of Political Science, Washington University, 2003)Google Scholar. This trend was predicted in Shue, Vivienne, The Reach of the State (Stanford, Calif: Stanford University Press, 1988)Google Scholar.

23 The planning commission's authority increased in 1998 with the elimination of many line ministries and the shedding of many of its responsibilities for routine oversight. In March 2003, the SDPC was strengthened and renamed the NDRC. Miller, Lyman, “The 10th NPC and China's Leadership Transition,” China Leadership Monitor 7 (Winter 2003), 7Google Scholar. (In this article, “SDPC” refers to the institution prior to March 2003, whereas “NDRC” refers to the commission's actions after that time.)

24 Financial institutions are not on the SASAC list so as to avoid pressure to loan to other state enterprises.

25 SASAC (Guoyu Zichan Jiandu Guanli Weiyuanhui) centralizes a number of functions previously spread among its weaker predecessor, the State Assets Commission, the Ministry of Finance, and the now-defunct State Economic and Trade Commission (SETC). Two of the few analyses of SASAC are Naughton, Barry, “The State Asset Commission: A Powerful New Government Body,” China Leadership Monitor 8 (Fall 2003)Google Scholar; and Yang (fn. 4), 49–54.

26 Green, Stephen, China's Stockmarket (London: Profile Books, 2003), 192Google Scholar.

27 MFC Insight, State Informatization Leading Group (Beijing: MFC Insight, March 2002)Google Scholar. Until the March 2003 leadership change, Premier Zhu Rongji led the SILSG; members included now-President Hu Jintao plus the highest-ranking officials in charge of science, education, research, and the economy.

28 SCIO, formed in 2001, is run by three vice ministers under the SILSG's direction.

29 The 1998 restructuring reduced the party's nomenklatura power to appoint key industry leaders, with much of the authority to appoint management placed with the State Council's Large Firm Work Committee (dagongwei). The party wrested back some of this power by creating the powerful (but little- known) Central Enterprise Work Commission (Zhongyang Daxing Qiye Gongzuo Weiyuanhui). SASAC is the most recent iteration of the party-state power of appointment. Naughton (fn. 25); and author interview with Development Research Center of the State Council scholar, November 26, 2002.

30 Walter, Carl E. and Howie, Fraser J. T., Privatizing China: The Stock Markets and Their Role in Corporate Reform (Singapore: John Wiley 6c Sons, 2003), 48Google Scholar.

31 Mil was an exception to the 1998 downsizing trend. Simultaneously, part of the impetus for the formation of Mil was to further separate the controlling ministry, previously the MPT, from the incumbent firm, China Telecommunications. See DeWoskin, Kenneth J., “The WTO and the Telecommunications Sector in China,” China Quarterly 167 (September 2001)CrossRefGoogle Scholar; and Xinzhu, Zhang, “Universal Service Obligations in China's Telecom Sector: Situations, Reforms, and Implementations” (Manuscript, Research Center for Regulation and Competition, Chinese Academy of Social Sciences, Beijing, May 2002), 12–13Google Scholar.

32 Following the 1997 spin-off of the monopoly incumbent, State Power Corporation, MEP was abolished in 1998. Its oversight functions were transferred first to SDPC, then to SETC before the power regulator was launched in March 2003. Chi, Zhang, Reform of Chinese Electric Power Market: Economics and Institutions (Stanford, Calif.: Stanford University Program on Energy and Sustainable Development, January 31,2003)Google Scholar, http://iis-db.stanford.edu/evnts/1565/China.pdf (accessed June 1,2005).

33 See Chung, Jae Ho, “The Political Economy of Industrial Restructuring in China: The Case of Civil Aviation,” The China Journal 50 (July 2003)CrossRefGoogle Scholar; and Rothman, Andy, China Aviation Reform: Industry Overview (Hong Kong: CLSA, 2002), 7Google Scholar.

34 Author interview, Washington, D.C., November 18,2003. Zhang Chunjiang was reportedly unhappy with this transfer to the business side, and only learned about the transfer upon return from an overseas trip.

35 Eisner, Marc Allen, Regulatory Politics in Transition, 2d ed. (Baltimore: Johns Hopkins University Press, 2000), 7Google Scholar. Rather than tampering with existing agencies, new agencies (e.g., the U.S. Department of Homeland Security) are commonly created to administer new policies.

36 This is a theme in the writings of China's foremost scholars of regulation in Yanjiu Baogao (fn. 15).

37 Author interview, Chinese Academy of Social Sciences scholar, Beijing, September 13, 2002. Such “regulatory grabs” also characterized Japan's regulatory reforms in the 1980s. Vogel (fn. 2), 210.

38 Xinzhu (fn. 31) suggests that the role of the TAB vis-a-vis other parts of the Mil, especially at the provincial level, is far from clear.

39 On comparative cases, see Kraemer, Kenneth L., Dedrick, Jason, Jeong, Kuk-Hwan, King, John Leslie, Vedel, Thierry, West, Joel, and Wong, Poh-Kam, “National Information Infrastructure: A Cross- Country Comparison,” Information Infrastructure and Policy 5, no. 2 (1996)Google Scholar.

40 On the competing government offices with a claim on telecommunications matters, see Zhang Xinzhu (fn. 31); Colin Lixin Xu, Christine Zhen-Wei Qiang, and Ying Liang, “The Unfinished Agenda of Telecom Reforms in China” (Manuscript, World Bank, Washington, D.C., October 2000); and DeWoskin (fn. 31).

41 Government agencies with authority over the Internet include the State Administration of Radio, Film, and TV (SARFT); the State Secrets Bureau; the Ministry of Public Security; and the State Administration for Industry and Commerce.

42 DeWoskin (fn. 31), 640.

43 The Department of Power Industry, the bureau-level successor (as a result of the 1998 reorganization) to the Ministry of Electric Power, was first located in the SETC, and then in 2003 was moved to the new Ministry of Commerce.

44 Rothman (fn. 33); and Chung (fn. 33), fn. 79.

45 Traditionally, shiye danwei institutions perform nonprofit functions under government direction. Shiye danwei are distinguished from governmental “administrative agencies” (xingzhengjiguan) such as ministries (e.g., Mil) and governmental “organizations” (jigou —e.g., CAAC), on the one hand, and profit-making enterprises (qiye danwei), on the other hand. Some of these institutions, such as the Chinese Academy of Sciences, have long been under the “direct leadership” (zhijie lingdao) of the State Council, but most are located at lower levels of government. Historically, they have been of lower status in the State Council hierarchy than “administrative agencies” and “organizations”; in particular, they are seldom headed by ministers. See Tao-Chiu, Lam and Perry, James L., “Service Organizations in China: Reform and Its Limits,” in Lee, Peter Nan-shong and Lo, Carlos Wing-Hung, eds., Remaking China's Public Management (Westport, Conn.: Quorum Books, 2001)Google Scholar.

46 Author interview with CIRC official, Beijing, November 27,2002.

47 Walter and Howie (fn. 30), 62. These authors also detail the centralization of regulatory power over securities under CSRC in Beijing and its branches, and away from provincial governments. See also Green (fn. 26), 159–60.

48 A major policy of state-owned enterprises in the last five years has been zhuada, fangxiao, or, “grasp the big and let go of the small.” The policy calls for closing down or selling off small- and medium-sized state assets, while taking better control of the large ones—including most of those governed by the new regulators and/or on the SASAC list. Clarke (fn. 20).

49 Telecommunications's role as a “pillar industry” is stated in the Tenth Five-Year Plan for Telecommunications (2001–2005). Mil's summary of the plan declares the “information industry as a pillar industry in the national economy” and “a strategic industry fundamental to national security.” See Telecommunications Research Project of Hong Kong University (hereafter cited as “TRP”), “China: Summary of the Tenth Five-Year Plan (2001—2005)—Information Industry,” http://www.trp.hku.hk/infofile/china/2002/10–5-yr-plan.pdf (accessed January 25,2004). On electric power as a “pillar” industry, subject to extensive planning by the NDRC, see Zhang Chi (fn. 32). On renewed emphasis on “national champions,” see Thun, Eric, “Industrial Policy, Chinese- Style: FDI, Regulation, and Dreams of National Champions,” Journal of East Asian Studies (Fall 2004)CrossRefGoogle Scholar. As a rule, industrial policy is not WTO-incompatible, although certain tools commonly used in industrial policy are. The belief that the Asian Financial Crisis would snuff out industrial policy in China is expressed in Lardy, Nicholas, Integrating China into the Global Economy (Washington, D.C.: Brookings Press, 2002), 152Google Scholar.

50 On the social/political goals of telecommunications, see Zhang Xinzhu (fn. 31) and TRP (fn. 49).

51 See OECD (fn. 12), 414; Zhang Chi (fn. 32); and Zhu, Songbin and Li, Xiaolin, “China Powers Up,” China Business Review 30, no. 3 (May-June 2003)Google Scholar.

52 See “CPC Decision” (fn. 17). Concern for market stability in insurance was voiced by former CIRC head Ma Yongwei. See “China to Tighten Insurance Regulation,” People's Daily (online), February 9, 2002, http://english.people.com.cn/200202/09/eng20020209_90184.shmtl (accessed June 13, 2005). The Tenth Five-Year Plan in telecommunications encourages “orderly competition.” TRP (fn. 49). On limits on competition in China during the entire reform period, see Nolan, Peter, China and the Global Business Revolution (Hampshire, UK: Palgrave, 2001)CrossRefGoogle Scholar; and Solinger, Dorothy J., From Lathes to Looms: China's Industrial Policy in Comparative Perspective (Stanford, Calif: Stanford University Press, 1991)Google Scholar.

53 Waters, Peter and Lai, Bernadine, “The Importance of Being Well-Connected,” MFC Insight (February 28,2003)Google Scholar.

54 Chung (fn. 33), 77.

55 The NDRC allows electricity prices to fluctuate within a 10-percent band. By international standards, the state-set price of electric power in China is high.

56 Nolan (fh. 52) discusses the balance between increasing competition and state industry consolidation.

57 See Shy, Oz, The Economics of Network Industries (Cambridge: Cambridge University Press, 2001)CrossRefGoogle Scholar.

58 This discussion applies to basic service providers in telecommunications. The market structures of equipment providers and value-added services are more diverse.

59 On market concentration as well as the serial restructurings in telecommunications, see Xu et al. (fn. 40), 4, 7; and Zhou Qiren, “Building Up a More Competitive Telecommunication System in China” (Paper presented at the University of Maryland, College Park, November 18,2003).

60 Kan Kaili, “Bu Paichu Youren Zao Shi” (Don't rule out that some create the force), http://it.sohu.com/2004/06/15/22/article220542253.shtml (accessed June 20,2004).

61 This hike reportedly had been approved by Mil and the State Council in 1999, but it was not implemented until it was needed to support the IPO. Premier Zhu Rongji was sharply critical of these events. Tony Munroe and Vicki Kwang, “China Telecom Delays IPO because of Weak Demand,” Reuters, October 31,2002. Mil also acted on behalf of China Telecom in its 1998 dismantling of Sinoforeign joint ventures involving Unicom. DeWoskin (fn. 31). Xu et al. (fn. 40) argue that “Mil still acts protectively for Telecom on all regulatory decisions” (p. 9).

62 The number of registered airlines expanded from just one (CAAC) to thirty-four. By the late 1990s, China had two-thirds the number of airlines as the U.S. did, and had less than 20 percent of the market size. Rothman (fn. 33), 3.

63 The three groups are Air China (China National Aviation), China Eastern Airlines, and China Southern Airlines. Two other companies were formed in related businesses. Chung (fh. 33), 76—78; and Tang Min, “Restructuring Puts Air China in Advantageous Position,” China Daily, November 29, 2002, l.The 1999 restructuring involved raising prices and reducing the number of domestic nights.

64 Lardy (fn. 49), 128–130; Green (fh. 26), 22. The four commercial banks are: Industrial and Commercial Bank of China, Agricultural Bank of China, Construction Bank of China, and Bank of China.

65 The firms are primarily state-owned (13 percent of assets were private at the end of 2002), mostly by local governments. Green (fn. 26), 78—84, 96.

66 The 1996 restructuring created three groups under one PICC holding company. On the market structure of the Chinese insurance industry, see OECD (fn. 12), 274–75.

67 The National Bureau of Asian Research, “China: Insurance Industry and WTO Liberalisation,” http://www.nbr.org/wtoforum/MaYongwei.html (accessed November 23,1999).

68 Only five companies have been granted licenses to operate nationwide. OECD (fn. 12), 276,280.

69 OECD (fn. 12), 399. Chinas use of licensing to determine market entry is reminiscent of Japan's strategy for protecting industry. Sohn, Yul, “The Rise and Development of the Japanese Licensing System,” in Carlile, Lonny E. and Tilton, Mark C., eds., Is Japan Really Changing Its Ways? (Washington, D.C.: Brookings Press, 1998)Google Scholar. Chinas 1993 Unfair Competition Law and 1999 Price Law do not ban many exclusionary practices, though they do prohibit overt, anticompetitive protectionist actions by local governments. OECD (fn. 12), 38,397,421.

70 This has been a major goal of China's regulatory development. On international efforts at capacity building, see Grindle, Merilee S., “Ready or Not: The Developing World and Globalization,” and Elaine Ciulla Kamarck, “Globalization and Public Administration Reform,” both in Nye, Joseph S. and Donahue, John D., eds., Governance in a Globalizing World (Washington, D.C.: Brookings Press, 2002)Google Scholar.

71 Regulatory risk is risk to firms for which regulatory changes will harm business. Risk is higher in natural monopoly industries, where sunk costs are high. Governments may try to reduce risk by monitoring changes in rules and processes to encourage transparency. Shleifer, Andrei and Vishny, Robert W., The Grabbing Hand: Government Pathologies and Their Cures (Cambridge, Mass.: Harvard University Press, 1998)Google Scholar.

72 This view of China's political economy is well illustrated by Woo, Wing Thye, “The Real Reasons for China's Growth,” The China Journal 41 (January 1999), 115–137CrossRefGoogle Scholar; and Yang (fn. 4). Woo does note in passing (136) that nonconverging elements are evident in some places in the economy due to reformers' compromises with conservatives. On increasing competitiveness in the PRC economy, see Lardy (fn. 49).

73 Pictures of a substantially decentralized system are found in, for instance, Rawski, Thomas G., “Reforming China's Economy: What Have We Learned?” The China Journal 41 (January 1999), 139–56CrossRefGoogle Scholar; and Oi, Jean C., Rural China Takes Off: Institutional Foundations of Economic Reform (Berkeley: University of California Press, 1999)Google Scholar.

74 This latter picture emerges clearly in recent studies by younger scholars, including Lin (fn. 21), Mertha (fn. 22), and Thun (fn. 49). See also Nolan (fn. 52).