286o12 (:10.1001 RESEARCH ARTICLE Growth,Institutions,and Entrepreneurial Finance in China:A Survey Carlo milana Birkbeck College,University of London,UK Harry X.Wu Institute of Economic Research,Hitotsubashi University,Japan China's economy is at a Rptoopgwgoe ve gr in China and for a rebalanced global economy. han three decades,during which the sta ate has played an Some people regard private ente rprise s a predatory tiger to be shot.Others o important role.A crucial on it as a cow they can milk.Not enough people see it as a bealthy horse. question is what reforms and pulling a sturd内agon. strategic changes in economi -Winston Churchill and social policy can make When prosperity comes,do not use all of it. China quickly and successfully shift to intensive growth -Confucius through innovation. The truth is rarely pure and never simple.Modern life would be very tedious if it were either,and modern literature a complete impossibility! Free enterprises and entrepreneuship are essentia -Oscar Wilde for a sustained ec Introduction where the culture The editorial in the previous issue of this Journal,dedicated to the themeMea innovative private firms needs sures and Instruments to Sustain Entrepreneurial Performance,'stressed how to be fostered and national economic systems have changed over time and vary so widely across the encouraged through a healthy world.Their differences account for uneven geographic distributions of wealth development of efficacious income,and production activities.Persistent imbalances in trade and financial institutions. accounts between the have accumulated over the years into huge stocks Continuous innovation can be of credit and debit giving rise to 'fault lines'in the international financial system achieved and sustained with that caused recurrent financial earthquakes of enduring consequences. new financial institutions. Economic Rese what is written in this article. rial Finance D0:10.102C1397
RESEARCH ARTICLE Copyright © 2012 John Wiley & Sons, Ltd. Strategic Change: Briefi ngs in Entrepreneurial Finance Strategic Change DOI: 10.1002/jsc.1897 Strat. Change 21: 83–106 (2012) Published online in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/jsc.1897 Growth, Institutions, and Entrepreneurial Finance in China: A Survey1 Carlo Milana Birkbeck College, University of London, UK Harry X. Wu Institute of Economic Research, Hitotsubashi University, Japan Some people regard private enterprise as a predatory tiger to be shot. Others look on it as a cow they can milk. Not enough people see it as a healthy horse, pulling a sturdy wagon. —Winston Churchill When prosperity comes, do not use all of it. —Confucius Th e truth is rarely pure and never simple. Modern life would be very tedious if it were either, and modern literature a complete impossibility! —Oscar Wilde Introduction Th e editorial in the previous issue of this Journal, dedicated to the theme ‘Measures and Instruments to Sustain Entrepreneurial Performance,’ stressed how national economic systems have changed over time and vary so widely across the world. Th eir diff erences account for uneven geographic distributions of wealth, income, and production activities. Persistent imbalances in trade and fi nancial accounts between the countries have accumulated over the years into huge stocks of credit and debit giving rise to ‘fault lines’ in the international fi nancial system that caused recurrent fi nancial earthquakes of enduring consequences. China’s economy is at a turning point after a fast and extensive growth for more than three decades, during which the state has played an important role. A crucial question is what reforms and strategic changes in economic and social policy can make China quickly and successfully shift to intensive growth through innovation. Free enterprises and entrepreneuship are essential for a sustained economic growth, particularly in China, where the culture of innovative private firms needs to be fostered and encouraged through a healthy development of efficacious institutions. Continuous innovation can be achieved and sustained with new financial institutions. Recent studies confirm that financial support for innovative entrepreneurial firms is important for sustainable productivity growth in China and for a rebalanced global economy. 1 J.E.L. classifi cation codes: E44, F21, F32, F43, O16. Th is article is part of the research “Reassessing China’s Economic Performance” that both authors are carrying out under the fi nancial support IERPK1211 of the 2012FY Joint Research Fund of Institute of Economic Research, Hitotsubashi University. Th e authors take sole responsibility for what is written in this article
84 Carlo Milana and Harry X.Wu Rebalancing the global economy seems to be essential obtained in the economic literature on china's entrepre for solving the curent problems.The countries neurial firms and institutional problems that affect the with persistent surpluses in the current accounts of their development of entrepreneurial finance. balance of payments (primarily the oil-exporting coun- The literature on the Chinese economy and finance is tries,China,Japan,Germany,and Russia)should aim at vast and fast-growing.No other country has such a higher sustaining their domestic demand and restructuring the number of academic journals and papers dedicated to its economic and financial issues.An impressively large and In order to achieve the needed profound transforma fast-growing number of studies appear every year contri tions,the adiustment of nominal exchange rates is clearly buting to the knowledge of a reality that continues to not the panacea,as other conditions should be satisfied. greatly affect the global This review is designed A generalized growth in real personal incomes must also as a briefing on the debate on China's economic trends be attained.At the macro level,this result can be achieved and policy issues. through productivity growth and an efficient distribution The second section reviews the debate on Chinas of gains in national incomes.In turn,a sustainable pro economic growth.The third section describes the strategic ductivity growth should result from genuine technologica changes that are required in China's economic policy.The advances,together with improved efficiency,rather than fourth section presents the evolution of the national finan mere scale economies. cial system.The fifth section examines the so-calledfinan- How can technological progress be assured in the cial repression of the Chinese economy in transition.The medium and long run?This is the crucial question that sixth section considers the emergence of Chinese entre- lies at the heart of today's economic problems.Techno preneurial finance as a necessary instrument to foster logical progress is,in fact,mainly due to constant innova- innovation and productivity in fast-growing private firms tion and can be enhanced through entrepreneurial projects The last section concludes the article. Fine-tuning of the financial system convey the needed financial resources from savers to Economic policy at a crossroads between governments of various areas of the world is The high speed of economic growth in the emerging essential to rebalance the world economy through the economies of Eastem Asia,and in particular in China, ha international financial system surpassed the most optimistic predictions even if the The case of China is emblematic as it is one of the actual growth speed is debatable.China's economy has most important drivers of global imbalances and,given undertaken profound transformationsOne could easily its,it is of primary importance that itran reach the conclusion that the engine power of the global forms itself from the 'factory'of the advanced economies economy is being shifted towards China at the cost of an into one of the primary 'engines of global economic inexorable decadence of the Western developed countries growth.In view of the circular chain between growth in Business futurists glimpse an even brighter trend in the domestic consumption,real personal incomes,productiv- next few decades (see.for example,Feather [2009].who ity through innovation,sustained entrepreneurial firm forecast that China will quadruple the present-day level through efficient finance,this article focuses on the results 2008) The name China'refers to the People's Republic of China Naughton (2008).On the actual growth rate of the Chines throughout this article. economy,see Maddison and Wu (2008). Copyright 2012 John Wiley Sons,Ltd
84 Carlo Milana and Harry X. Wu Copyright © 2012 John Wiley & Sons, Ltd. Strategic Change DOI: 10.1002/jsc Rebalancing the global economy seems to be essential for solving the current economic problems. Th e countries with persistent surpluses in the current accounts of their balance of payments (primarily the oil-exporting countries, China,2 Japan, Germany, and Russia) should aim at sustaining their domestic demand and restructuring the international integration of their economies. In order to achieve the needed profound transformations, the adjustment of nominal exchange rates is clearly not the panacea, as other conditions should be satisfi ed. A generalized growth in real personal incomes must also be attained. At the macro level, this result can be achieved through productivity growth and an effi cient distribution of gains in national incomes. In turn, a sustainable productivity growth should result from genuine technological advances, together with improved effi ciency, rather than mere scale economies. How can technological progress be assured in the medium and long run? Th is is the crucial question that lies at the heart of today’s economic problems. Technological progress is, in fact, mainly due to constant innovation and can be enhanced through entrepreneurial projects. Fine-tuning of the fi nancial system is required in order to convey the needed fi nancial resources from savers to growth-oriented entrepreneurial fi rms. Cooperation between governments of various areas of the world is essential to rebalance the world economy through the international fi nancial system. Th e case of China is emblematic as it is one of the most important drivers of global imbalances and, given its relative size, it is of primary importance that it transforms itself from the ‘factory’ of the advanced economies into one of the primary ‘engines’ of global economic growth. In view of the circular chain between growth in domestic consumption, real personal incomes, productivity through innovation, sustained entrepreneurial fi rms through effi cient fi nance, this article focuses on the results obtained in the economic literature on China’s entrepreneurial fi rms and institutional problems that aff ect the development of entrepreneurial fi nance. Th e literature on the Chinese economy and fi nance is vast and fast-growing. No other country has such a higher number of academic journals and papers dedicated to its economic and fi nancial issues. An impressively large and fast-growing number of studies appear every year contributing to the knowledge of a reality that continues to greatly aff ect the global economy. Th is review is designed as a briefi ng on the debate on China’s economic trends and policy issues. Th e second section reviews the debate on China’s economic growth. Th e third section describes the strategic changes that are required in China’s economic policy. Th e fourth section presents the evolution of the national fi nancial system. Th e fi fth section examines the so-called ‘fi nancial repression’ of the Chinese economy in transition. Th e sixth section considers the emergence of Chinese entrepreneurial fi nance as a necessary instrument to foster innovation and productivity in fast-growing private fi rms. Th e last section concludes the article. Economic policy at a crossroads Th e high speed of economic growth in the emerging economies of Eastern Asia, and in particular in China, has surpassed the most optimistic predictions even if the actual growth speed is debatable. China’s economy has undertaken profound transformations.3 One could easily reach the conclusion that the engine power of the global economy is being shifted towards China at the cost of an inexorable decadence of the Western developed countries. Business futurists glimpse an even brighter trend in the next few decades (see, for example, Feather [2009], who forecast that China will quadruple the present-day level 2 Th e name ‘China’ refers to the People’s Republic of China throughout this article. 3 On China’s economic transformation, see, for example, Brandt, Hsieh, and Zhu (2008); Brandt and Rawski (2008); Naughton (2008). On the actual growth rate of the Chinese economy, see Maddison and Wu (2008)
Entrepreneurial Finance in China 85 of national production and will overtake that of the USA have been faced by the population with migration to new in the 2020-2040 timeframe,although per capita income activities or new working areas.Maior sectoral shifts of will remain relatively low for a while) production have also taken place through the accelerated However,looking at things a little more closely,the urbanization of rural areas.The reallocation of labor and follwing posed by Sir Arthur Lewis()a capital in favor of manufacturing and construction indus the start of his Nobel Price Lecture,appears still valid tries has challenged the sustainability of the unbalanced today,even in the case of China: growth.New individual and social needs have emerged, providing not only good opportunities for economic pro Let me begin by stating my problem.For the past motion,but also new needs in infrastructure,housing. hundred years the rate of growth of ouput in the health care,and human capital formation.The need to developing world bas depended on the rate of growth of ouput in the developed world.When the deve organize such changes in an orderly fashion in a vastly loped populated country has been met starting from a centrally grow fast,the developing grow fast,and when the planned system that was itself changing towards developed slow down,the developing slow down.Is this a gradual but still revolutionary opening to relatively free- linkage inevitable?(Lewis,1979) market regime. The crucial point is whether and how we can break A number of insights into the Chinese economic per such a persisting linkage.During the first two years of the formance have emerged in the recent economic literature, current financial crisis,a common view was that China which are useful to dispel the major myths that still sur had been relatively untouched by the severe economic round the economic miracle of this country.A first issue slowdown of the developed world.Eventually,the news regards the degree of accuracy of the official statistics.Do became much more focused on the evidence of the rather onomic measures based on the government's data reflec the real dynamics of the economy?Secondly,how far does trivial consequences of the nature of the linkage between the Eastern Asian economies and the global supply chain the current stage of economic growth differ in breadth that links together the national industrial systems across and duration from the experience of other fast-growing the world.Indeed,China's economy was severely struck economies that sooner or later encounter limits to growth? by the global financial crisis.Many small-and medium Can the Chinese political and institutional system chang further in order to guarantee a stable economic and social sized enterprises(SMEs)were led to bankruptcy.During development of the country? the great recession of 2008-2009,more than 50,000 SMEs were shut down in Guangdong province,with the The association of high returns to capital resulting from the fast-growing economy with a growing foreign net exports contribution to economic growth becoming negative.In the overall was a sudden co 1 cconomists..号 lapse in demand and about 20 million migrant labor jobs High investment rates would bring about falling returns to capital.Moreover,high returns to capital would encour- were lost (Eichengreen etal.,2011;The Economist,2012d). The rapid has inevitably posed new age foreign capital inflows rather than domestic capital problems and exposed the country to new challenges and dilemmas (Prasad,2009.Lin,2011).Profound changes In the case of China,see,for example,Huang and Tao (2010,2011. er may eiatisuical See Maddison(2007)and also Perkins and Rawski (2008): das discu (. shown that China has been experiencing a faster-than-normal- decline in return to capital
Entrepreneurial Finance in China 85 Copyright © 2012 John Wiley & Sons, Ltd. Strategic Change DOI: 10.1002/jsc of national production and will overtake that of the USA in the 2020–2040 timeframe, although per capita income will remain relatively low for a while4 ). However, looking at things a little more closely, the following question, posed by Sir Arthur Lewis (1979) at the start of his Nobel Price Lecture, appears still valid today, even in the case of China: Let me begin by stating my problem. For the past hundred years the rate of growth of output in the developing world has depended on the rate of growth of output in the developed world. When the developed grow fast, the developing grow fast, and when the developed slow down, the developing slow down. Is this linkage inevitable? (Lewis, 1979). Th e crucial point is whether and how we can break such a persisting linkage. During the fi rst two years of the current fi nancial crisis, a common view was that China had been relatively untouched by the severe economic slowdown of the developed world. Eventually, the news became much more focused on the evidence of the rather trivial consequences of the nature of the linkage between the Eastern Asian economies and the global supply chain that links together the national industrial systems across the world. Indeed, China’s economy was severely struck by the global fi nancial crisis. Many small- and mediumsized enterprises (SMEs) were led to bankruptcy. During the great recession of 2008–2009, more than 50,000 SMEs were shut down in Guangdong province, with the net exports’ contribution to economic growth becoming negative.5 In the overall economy, there was a sudden collapse in demand and about 20 million migrant labor jobs were lost (Eichengreen et al., 2011; Th e Economist, 2012d). Th e rapid economic growth has inevitably posed new problems and exposed the country to new challenges and dilemmas (Prasad, 2009a, Lin, 2011). Profound changes have been faced by the population with migration to new activities or new working areas. Major sectoral shifts of production have also taken place through the accelerated urbanization of rural areas. Th e reallocation of labor and capital in favor of manufacturing and construction industries has challenged the sustainability of the unbalanced growth. New individual and social needs have emerged, providing not only good opportunities for economic promotion, but also new needs in infrastructure, housing, health care, and human capital formation. Th e need to organize such changes in an orderly fashion in a vastly populated country has been met starting from a centrally planned economic system that was itself changing towards a gradual but still revolutionary opening to relatively freemarket regime. A number of insights into the Chinese economic performance have emerged in the recent economic literature, which are useful to dispel the major myths that still surround the economic miracle of this country. A fi rst issue regards the degree of accuracy of the offi cial statistics. Do economic measures based on the government’s data refl ect the real dynamics of the economy? Secondly, how far does the current stage of economic growth diff er in breadth and duration from the experience of other fast-growing economies that sooner or later encounter limits to growth? Can the Chinese political and institutional system change further in order to guarantee a stable economic and social development of the country? Th e association of high returns to capital resulting from the fast-growing economy with a growing foreign surplus has always puzzled the mainstream economists.6 High investment rates would bring about falling returns to capital. Moreover, high returns to capital would encourage foreign capital infl ows rather than domestic capital 4 See Maddison (2007) and also Perkins and Rawski (2008); Jacques (2012). 5 See, for example, Wang et al. (2011, p. 17). 6 In the case of China, see, for example, Huang and Tao (2010, 2011). However, this puzzle may just be a statistical artifact given that the growth of output could have been exaggerated as discussed below. Indeed, Wu (2011a) has shown that China has been experiencing a faster-than-normaldecline in return to capital
86 Carlo Milana and Harry X.Wu outflows.Recent attempts to explain this paradox appeal (Branstetter and Lardy,2008).The nature of export-led tofinancial frictions and reallocation of resources across growth has been confirmed:exports have been more sig the firms that reflect the current Chinese economic trans- nificant for growth in China than in other countries,even formation.The reallocation of resources is occurring from in comparison with other transition economies(Akyuz, less productive externally financed firms to fast-growing 2011;Tingvall and Ljungwall,2012).However,some entrepreneurial firms that have less access to external observers worry that China is investing too little,not too financing.As this process goes on,an increasing propor- much,as it is usually believed.Even if the investment tion of domestic savings has been made available for flows are relatively high with respect to those undertaken investments in foreign assets. by other countries in the same stage of development,the The debate on Chinas economic growth has not Chinese economy still remains undercapitalized.It would reached a consensus.Even the data have been called into need to continue to invest efficiently in order to modern question.A number of authors have re-estimated the many aspects and sectors and achieve the status of a national economic accounts.The dynamics of the main developed economy by 2030. eappear rather fer that statistics.The offcia estimates growth in the real value added both in industry and the Strategic change in economic policy so-called 'non-material services'were found to be exagger At the time of writing,the Chinese Premier,Wen Jiabao ated because of methodological problems and politica at the annual opening ceremony of Parliament,declared incentives inherited in the reporting system.After adjust- to reduce the target for economic growth in 2012 to ing for the exaggeration of industrial performance and 7.5%,dropping it below 8%for the first time since 2004 growth,China's annual GDP growth has been corrected thus signaling the cnd of the era of double-digit growth downwards almost 2 percentage points for the transition He also indicated that the government's intention is to period 1978-2003.After these corrections,it seems tha reorient aggregate demand towards consumption,away China's post-reform performance is in line with the expe- from investments and exports.In particular,he said: rience of other newly industrialized economies in Eastern Asia between the 1950s and the 1970s. The key to solving the problems of imbalanced. The critical reappraisal of Chinese economic growth uncoordinated,unsustainable development is to accelerate the transformation of the pattern of economi is not limired to readdressing the issues of measu development.This is both a long-term task and ou Also,the type of analytical model of the path undertaken by the Chinese economy is called into question most pressing task.at present [..I We will move faster to set up a permanent mecbanism for boosting consumption.We will vigorously adjust income distribution,increase the incomes of low-and middle- on and Wu (20 (Premier Wen liabaos speech to the Chinese (2012):Iin (2012)Wan Parliament,as reported by Anderlini,2012). The global ecc nomie downturn is also affectine china's trade. The fall in exports combined w e in Although many commentators have pointed to the the v n ore)hav level of consumption in China as unusually low,it should 2012 (ses,for example,Hook,2012 and 20120 See,for example,Fan etal (2011):Jacob (2012). Copyright 2012 John Wiley Sons,Ltd
86 Carlo Milana and Harry X. Wu Copyright © 2012 John Wiley & Sons, Ltd. Strategic Change DOI: 10.1002/jsc outfl ows. Recent attempts to explain this paradox appeal to fi nancial frictions and reallocation of resources across the fi rms that refl ect the current Chinese economic transformation. Th e reallocation of resources is occurring from less productive externally fi nanced fi rms to fast-growing entrepreneurial fi rms that have less access to external fi nancing. As this process goes on, an increasing proportion of domestic savings has been made available for investments in foreign assets.7 Th e debate on China’s economic growth has not reached a consensus. Even the data have been called into question. A number of authors have re-estimated the national economic accounts.8 Th e dynamics of the main economic aggregates appear rather diff erent from that suggested by the offi cial statistics. Th e offi cial estimates of growth in the real value added both in industry and the so-called ‘non-material services’ were found to be exaggerated because of methodological problems and political incentives inherited in the reporting system. After adjusting for the exaggeration of industrial performance and growth, China’s annual GDP growth has been corrected downwards almost 2 percentage points for the transition period 1978–2003. After these corrections, it seems that China’s post-reform performance is in line with the experience of other newly industrialized economies in Eastern Asia between the 1950s and the 1970s.9 Th e critical reappraisal of Chinese economic growth is not limited to readdressing the issues of measurement. Also, the type of analytical model of the path undertaken by the Chinese economy is called into question (Branstetter and Lardy, 2008). Th e nature of export-led growth has been confi rmed: exports have been more signifi cant for growth in China than in other countries, even in comparison with other transition economies (Akyuz, 2011; Tingvall and Ljungwall, 2012). However, some observers worry that China is investing too little, not too much, as it is usually believed. Even if the investment fl ows are relatively high with respect to those undertaken by other countries in the same stage of development, the Chinese economy still remains undercapitalized. It would need to continue to invest effi ciently in order to modernize many aspects and sectors and achieve the status of a developed economy by 2030.10 Strategic change in economic policy At the time of writing, the Chinese Premier, Wen Jiabao, at the annual opening ceremony of Parliament, declared to reduce the target for economic growth in 2012 to 7.5%, dropping it below 8% for the fi rst time since 2004, thus signaling the end of the era of double-digit growth. He also indicated that the government’s intention is to reorient aggregate demand towards consumption, away from investments and exports. In particular, he said: Th e key to solving the problems of imbalanced, uncoordinated, unsustainable development is to accelerate the transformation of the pattern of economic development. Th is is both a long-term task and our most pressing task, at present [. . .] We will move faster to set up a permanent mechanism for boosting consumption. We will vigorously adjust income distribution, increase the incomes of low- and middleincome groups and enhance people’s ability to consume (Premier Wen Jiabao’s speech to the Chinese Parliament, as reported by Anderlini, 2012). Although many commentators have pointed to the level of consumption in China as unusually low, it should 7 Th is theoretical explanation is proposed, for example, by Song et al. (2011). 8 See, for example, Maddison (1998, 2007); Maddison and Wu (2008); Wu (2002, 2011a); Bai and Qian (2010); Feenstra (2012); Lin (2012); Wang and Szirmai (2012). 9 Th e global economic downturn is also aff ecting China’s trade. Th e fall in exports combined with a strong increase in the value of imports (particularly crude oil and iron ore) have brought about a defi cit that hit $31.5 billion in February 2012 (see, for example, Hook, 2012 and Th e Economist, 2012f). 10 See, for example, Fan et al. (2011); Jacob (2012)
Entrepreneurial Finance in China 87 be stressed that the economic literature has nonetheless enterprises (SOEs)were reformed and some meritocracy described this behavior as being consistent with the was introduced.However,the intervening financial crisis theoretical expectations for a country at this stage of has unveiled the weakness of the extensive growth that ha development.This does not exclude.however.differences taken place so far.As The Economist (2012a:9)recently in local preferences.In China,urban residents,for observed: example,exhibit a special consumption pattern under the influence of both traditional culture and dynamic The paradox L is that for China to succeed it mus change of the national cconomic system (Jin,2011).In move away from the formula that bas served it so well. recent years,the saving ratio in China has,indeed,reached In order to sustain national income with lower shares the eepional level f,but this fact smtobe related to the particular phase of growth experienced by of savings and investments while shifting away from exports,productivity growth has to be fostered,particu the country (Ma and Yi,2010).Looking back to the 1950s,one can see that the saving ratio in China larly in its enduring innovation component.This is the direction recommended in a voluminous document pub at that time,as low as 5%!This change towards a thrifty lished jointly by the World Bank (WB)and Development society seems to be better explained under the life-cycle Research Center for the State Council(People's Republic hypothesis (LCH)The national saving ratio may,in of China)(2012).It is claimed that,in the present stage fact,depend on the long-term rate of income growth of development,China has to foster competitiveness and (rather than on per-capita income)and demographic structure.Given the evolution of these two important nn omeet the challenges thatthe of the global economy is posing.Public infrastructures factors,the Chinese saving rate has progressively soared should become more uniformly modernized.Factors of under the economic reforms that started in 1978 production should become more efficiently allocated (Modigliani and Cao,2004).As the growth rates tend across industries and firms.Certain imbalances that arise to reduce and the demographic structure stabilizes,the national share dedicated to savings and investments will from the dualistic nature of the economy should be smoothed out with the diffusion of modern housing. tend to progressively decline. health care,and education to a much wider extent than ship,was common also to developed countries like Japan is the case today.As the president of the WB has clarificd. and Italy,but also to newly industrialized countries like this is more of an issue of stress points that will expand over time,rather than a crisis. Korea and Singapore.In addition,thethrifty behavior of the population has been accompanied by proactive According to the WB report,strategic change should be undertaken in China in six directions(transition to a growth-oriented policies.Deng's reforms were based on the prospect that,without economic growth,the market-led economy,acceleration of innovation,easing environmental stress,improving social security and healt Communist Party would be history.The state-owned care,strengthening the fiscal system and better funding of local authorities,improving relations with the rest of the The LCH was proposed by Modigliani and Brumberg world). (1954)for the dev The first direction indicated by the WB report,par- cture.He ticularly the reform of SOEs,has grabbed the attention former centrally planned sconomies including China tended to overcome the constraints,but paid a high cost that eventually toppled the communist bloc. Reported by Moody(2012:1). DO:10.100
Entrepreneurial Finance in China 87 Copyright © 2012 John Wiley & Sons, Ltd. Strategic Change DOI: 10.1002/jsc be stressed that the economic literature has nonetheless described this behavior as being consistent with the theoretical expectations for a country at this stage of development. Th is does not exclude, however, diff erences in local preferences. In China, urban residents, for example, exhibit a special consumption pattern under the infl uence of both traditional culture and dynamic change of the national economic system (Jin, 2011). In recent years, the saving ratio in China has, indeed, reached the exceptional level of 40%, but this fact seems to be related to the particular phase of growth experienced by the country (Ma and Yi, 2010). Looking back to the 1950s, one can see that the saving ratio in China was, at that time, as low as 5%! Th is change towards a thrifty society seems to be better explained under the life-cycle hypothesis (LCH).11 Th e national saving ratio may, in fact, depend on the long-term rate of income growth (rather than on per-capita income) and demographic structure.12 Given the evolution of these two important factors, the Chinese saving rate has progressively soared under the economic reforms that started in 1978 (Modigliani and Cao, 2004). As the growth rates tend to reduce and the demographic structure stabilizes, the national share dedicated to savings and investments will tend to progressively decline. Th is tendency, obeying a certain structural relationship, was common also to developed countries like Japan and Italy, but also to newly industrialized countries like Korea and Singapore. In addition, the ‘thrifty’ behavior of the population has been accompanied by proactive growth-oriented policies. Deng’s reforms were based on the prospect that, without economic growth, the Communist Party would be history. Th e state-owned enterprises (SOEs) were reformed and some meritocracy was introduced. However, the intervening fi nancial crisis has unveiled the weakness of the extensive growth that has taken place so far. As Th e Economist (2012a: 9) recently observed: Th e paradox [. . .] is that for China to succeed it must move away from the formula that has served it so well. In order to sustain national income with lower shares of savings and investments while shifting away from exports, productivity growth has to be fostered, particularly in its enduring innovation component. Th is is the direction recommended in a voluminous document published jointly by the World Bank (WB) and Development Research Center for the State Council (People’s Republic of China) (2012). It is claimed that, in the present stage of development, China has to foster competitiveness and innovation in order to meet the challenges that the state of the global economy is posing. Public infrastructures should become more uniformly modernized. Factors of production should become more effi ciently allocated across industries and fi rms. Certain imbalances that arise from the dualistic nature of the economy should be smoothed out with the diff usion of modern housing, health care, and education to a much wider extent than is the case today. As the president of the WB has clarifi ed, ‘this is more of an issue of stress points that will expand over time, rather than a crisis.’13 According to the WB report, strategic change should be undertaken in China in six directions (transition to a market-led economy, acceleration of innovation, easing environmental stress, improving social security and health care, strengthening the fi scal system and better funding of local authorities, improving relations with the rest of the world). Th e fi rst direction indicated by the WB report, particularly the reform of SOEs, has grabbed the attention 11 Th e LCH was proposed by Modigliani and Brumberg (1954) for the developed market economies. 12 See Modigliani’s (1985) Nobel Prize lecture. However, forced saving to achieve a fast heavy industrialization in the former centrally planned economies including China tended to overcome the constraints, but paid a high cost that eventually toppled the communist bloc. 13 Reported by Moody (2012: 1)