an overview of chinese industry in the 1980s

RESEARCH PAPER SERIES

ENTERPRISE BEHAVIOR AND EcoNOMIC REFORMS:A COMPARATIVE STUDY IN CENTRAL AND EASTERN EUROPE

ANDINDUSTRIAL REFORM AND PRODUCTIVITY IN CHINESE ENTERPRISES

RESEARCH PROJECTS OF THE WORLD BANK

CHINA

NUMBER CH-RPS #18FEBRUARY 1993

AN OVERVIEW OF CHINESE INDUSTRY IN THE 1980s

by

Thomas G. RawskiDepartment of EconomicsUniversity of Pittsburgh

Transition and Macro Adjustment DivisionPolicy Research DepartmentWorld BankWashington, D.C.

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CONTENTS

ACKNOWLEDGEMENT ........................................... i

AB STRA CT ............................................................. R

I. INTRODUCTI( ....................................................... 1

II. A NOTE ON CHINESESTATISTICS ............................... 2

III. THE STRUCTURE OF CHINESE INDUSTRY IN 87: A SNAPSHOT .................. 4

IV. GROWTH, 1980-1990 ....................................... 6

V . FACTOR PROPORTORNS ................................................ 10

VI. PRODUCTivITY CHANGE .............................................. 14

VII. OUTPUT STRUCTURE ................................................. 16

V III. COM PETITION ....................................................... 17

IX . PROFITABLITY ...................................................... 23

X . CONCLUSlON ....................................................... 25

REFERENCES ............................................................ 30

TA BLES ............................................................ 35

ACKNOWLEDGEMENT

The research projects on "Enterprise Behavior and Economic Reforms: A Comparative Studyin Central and Eastern Europe", and "Industrial Reforms and Productivity in Chinese Enterprises" areresearch initiatives of the Transition and Macro Adjustment Division (PRDTM) of the World Bank'sPolicy Research Department and managed by I.J. Singh, Lead Economist.

These projects are being undertaken in collaboration with the following institutions: for the projectin China, The Institute of Economics of the Chinese Academy of Social Sciences (IE of CASS), TheResearch Center for Rural Development of the State Council (RCRD), and The Economic SystemsReform Institute (ESRI), all in Beijing; and for the projects in Central and Eastern Europe The LondonBusiness School (LBS); Rdforme et Ouvertures des Systhmes Economiques (post) Socialistes (ROSES)at the University of Paris; Centro de Estudos Aplicados da Universidade Cat6lica Portuguesa (UCP) inLisbon; The Czech Management Center (CMC) at teldkovice, Czech Republic; The Research Instituteof Industrial Economics of the Janus Pannonius University, Peds (RIIE) in Budapest, Hungary; and theDepartment of Economics at the University of L6di, in Poland.

The research projects are supported with funds generously provided by: The World BankResearch Committee; The Japanese Grant Facility; The Portuguese Ministry of Industry and Energy; TheMinistry of Research and Space; The Ministry of Industry and Foreign Trade, and General Office ofPlanning in France; and the United States Agency for International Development.

The Research Paper Series disseminates preliminary findings of work in progress and promotesthe exchange of ideas among researchers and others interested in the area. The papers contain the views,conclusions, and interpretations of the author(s) and should not be attributed to the World Bank, its Boardof Directors, its management or any of its member countries, or the sponsoring institutions or theiraffiliated agencies. Due to the informality of this series and to make the publication available with theleast possible delay, the papers have not been fully edited, and the World Bank accepts no responsibilityfor errors.

The authors welcome any comments and suggestions. Request for permission to quote theircontents should be addressed directly to the author(s). For additional copies, please contact the Transitionand Macro Adjustment Division, room N-11065, World Bank, 1818 H Street, N.W., Washington, D.C.20043, telephone (202) 473-1442, fax (202) 676-0083 or 676-0439.

The series is also possible thanks to the contributions of Donna Schaller, Vesna Petrovic, CeciliaGuido-Spano and the leadership of Alan Gelb.

i*

ABSTRACT

This study of developments in Chinese industry during the 1980s focuses on quantitativemeasures of growth, factor proportions, productivity, composition of output, the transition fromplan to market, competition, and profitability. This review shows that Chinese industryexperienced incomplete, but nonetheless rapid and extensive reform process during the 1980s.Key features of this reform include the growth of markets and competition, the emergence ofa variety of convergence phenomena, and the importance of specific features of China's economyinherited from the decades prior to reform.

ii

I. INTRODUCTION'

This paper reviews the growth, structure, and performance of China's industrial sectorduring the 1980s. Its chief objective is to summarize and describe important trends duringthis decade in three major segments of industry: the "state" sector, urban collectives, andtownship and village industry. It is essential to note that all enterprises in these categorieshave formal ownership links to some level of government; none are privately owned.Despite a decade of enormous expansion, firms owned privately, including those with part orfull foreign ownership, contributed less than one-tenth of overall industrial output in 1990(see Table 2).2 For this reason, and because of data limitations, this essay focuses onindustrial activity in what might usefully be called China's "public sector" - firms identifiedas state-owned (chuanmin suoyouzhi) and collectively owned (ili suoyouzhi), with thecollective group subdivided into urban (chengzhen) and rural (xiangzhen) categories.

The state sector, identified in Chinese as including firms that are "owned by all thepeople," originated with the transfer to China's communist government of enterprisesconfiscated from the defeated Japanese occupation armies, China's former Nationalist orKuomintang government, and private business interests. Statistically, the concept of "statesector firms" (SOEs) is virtually identical with the concept of "firms operating within thestate budget," which encompasses firms that received their initial capital funds from the statebudgetary appropriations (interview material).

The state sector dominated industrial activity prior to the commencement of reform,contributing 78 percent of industrial production in 1978 (Industry 1991, p. 35). Stateindustrial firms, which enjoyed privileged access to investment funds, foreign exchange, newequipment, and university graduates, were viewed as the cutting edge of China's economy.Accordingly, urban reform efforts have focused on the reorientation and restructuring of stateindustries, especially the larger firms. Chinese economics journals are filled with discussionsof the need to "enliven" large-scale enterprises. The issue of how reform has affected statefirms also figures largely in the work of external researchers, including Tidrick and Chen1987; K. Chen et al 1988a, 1988b; Granick 1990 and Byrd 1992.

1 This essay benefited from the editors' comments on a preliminary draft. Inderjit Singh and Geng Xiao generouslyallowed me to draw on their unpublished compilation of Chinese industrial statistics. Research for this paper wassupported by the American Council of Learned Societies, the Henry Luce Foundation, the Woodrow WilsonInternational Center for Scholars and the World Bank.

2. Since some private firms masquerade as collective enterprises to obtain protection from local governments and othersunderreport their scale of activity to avoid taxation, the figures shown in Table 2 understate the actual dimensions ofprivate industrial production by an unknown amount. Young 1991 provides a qualitative account of these matters.

1

2 N Overview of Chinese Industry in the 1980's

Urban collectives (UCOEs), the second major group of firms reviewed in this essay,are an important but little-known segment of Chinese industry. They originated in the 1950swith the amalgamation of small private enterprises into cooperatives and the spurt ofenterprise creation associated with the mass industrialization campaigns of the "Great LeapForward." Further growth of urban collectives during the 1960s and 1970s consisted mainlyof ancillary firms associated with larger state enterprises. Development of collectives thatemployed many dependents of state enterprise employees provided a means of raising theincomes of workers' families in the face of a long-term wage freeze affecting moststate-sector employees. Urban collectives.

Township and village industry, known as TVE (xiangzhen) industry, consists ofcollectives based in rural townships (xiang) and villages (cun). This sector has its origins indecentralization plans introduced at the beginning of China's second Five-Year Plan(1958-62), and then swept away in the industrialization frenzy associated with the "GreatLeap Forward" of 1958-60. Many of these units disappeared in the aftermath of the Leap,but some survived, and developed into the "five small industries" of the late 1960s and 1970s- energy (hydroelectricity and coal), fertilizer, machinery, cement, and iron-steel. Ruralindustry received considerable scholarly attention during the 1970s (Riskin 1971; Perkins etal 1977; Sigurdson 1977) and 1980s (Byrd and Lin 1990). These enterprises, along withsmaller units attached to brigades and production teams within the former "people'scommunes, " which were formally recognized as industrial rather than agricultural unitsbeginning in 1984 (Field 1988:584-585), have enjoyed explosive growth during the reformperiod.

I. A NOTE ON CHINESE STATISTICS

Any quantitative analysis of Chinese industry must confront two important features ofChina's economic statistics: (1) data problems attributable to China's status as a low-incomenation in the midst of significant system reform and (2) issues arising from the legacy ofSoviet-inspired accounting conventions.

In China, as in other low-income nations, the information industry is as yet not highlydeveloped. It is therefore not surprising that Chinese industrial data are often problematic.Difficulties arise in several areas, notably: (i) data are based on reports passed up throughthe hierarchy of statistical agencies (county or municipality, province, national) from theenterprise level; conditions under which the enterprise-level data are created are far fromuniform. (ii) Many key concepts - fixed assets, depreciation, etc. - do not conform withstandard international accounting conventions. (iii) measures of inflation are limited in bothscope and accuracy.

The presence of non-trivial shortcomings in China's industrial statistics does not meanthat economic data emanating from Chinese government agencies cannot provide useful

An Overview of Chinese Industry in the 1980s 3

material for economic analysis. On the contrary, several decades of experience, andparticularly the past fifteen years of increasing openness about many dimensions of economicperformance, support the view that the consistency and accuracy of Chinese economic datacompare favorably with figures routinely used in the discussion of India, Pakistan, Egypt,Indonesia, Brazil, and other contemporary low-income societies as well as data related to theeconomic history of today's advanced nations.

For China, as for other nations, we find a hierarchy of data quality. During thepre-reform period of specialist planning, data for physical quantities (output, employment,power consumption) are typically more reliable than value totals, especially when the valuesrefer to complex analytical constructs (national income, output at constant prices,depreciation) rather than simple totals (sales value, wage payments). Figures pertaining tolarge enterprises staffed by carefully trained and closely supervised accounting departmentsare more reliable than data relating to smaller units.

The reform period has brought new willingness to publish detailed information as wellas a new generation of statistical problems. Small enterprises have vastly expanded innumbers and importance, creating difficult problems of monitoring and data collection;many TVE firms, for example, compile output totals only in current prices. The task ofadjusting for price change is undertaken at the provincial level (interview material), and ishampered by the generally limited scope and quality of China's price statistics. Inflation hascontributed to distortions involving estimates of industrial growth and capital stock. Thenovel (for China) combination of enterprise profit-seeking and profit-based taxation hasencouraged widespread efforts to conceal profits. The complexity of financial regulationscreates so many opportunities for deceptive record-keeping that fiscal audits reportedly ignoreenterprise financial accounts and focus exclusively on bargaining over how much tax the firmwill be required to pay (interview material).

Despite the benefits of computerization and rapid improvements in the knowledge andsophistication of China's statistical personnel, it is not certain that institutional changes haveallowed the measurement of economic activity to keep pace with the swift increase in the roleof market transactions in the production and distribution of industrial goods.' Even themeasurement of quantities (of output, of workers etc.), the traditional strength of statisticalagencies in the plan environment, are subject to new questions. Do present methods provideadequate coverage, via sampling or enumeration, of rural manufacture of cement, fabrics, orclothing or of temporary and contract employment within collective (or even state-sector)industrial enterprises? Long-standing issues concerning, for example, the measurement ofchanges in the real level of industrial output or fixed capital, remain unresolved. The sheer

3. One prominent Chinese economist suggests 20 percent as an appropriate share for the volume of transactions subjectto official price controls, and indicates that the current scope of official controls is somewhat larger (Zhang 1992).World Bank specialists place the share of market transactions at around two-thirds (interview material). The share

of uncontrolled transactions involving industrial inputs and outputs was very small, almost certainly below ten percent,prior to 1978.


pace of industrial growth, as well as the need to collect new types of data, such asinformation on industrial innovation, technology transfer, and R&D, adds to the difficulty ofmobilizing personnel to confront old and new issues of measurement related to China'sindustrial sector.

III. TiHE STRUCTURE OF CHINESE INDUSTRYIN 1987: A SNAPSHOT

I begin with an overview of Chinese industry in the year 1987, which is selectedbecause of the availability for that year of extensive data pertaining to large-scale industrialenterprises. Table 1 presents basic data for 1987 on several groups of industrial firms. Thiscompilation shows the great diversity of Chinese industry, which ranges from the 1,243largest firms, each employing over 5,000 workers (and in some cases more than 100,000) to6.1 million private rural enterprises employing an average of only three workers. Althoughthis diversity comes as no surprise, the rough equality, measured in terms of overall outputvalue, of several very different groups of enterprises is unexpected:

Category 1987 Gross Output Workers Fixed Assets

Y Billion per firm (yuan per worker)current prices original netcost value

Firms employing over 5,000 261 9851 30,080 19,750Other large and medium firms 304 1492 17,620 12,310Small state enterprises 263 256 11,760 8,470Urban collectives 167 110 4,670 3,380TVE enterprises 324 7 2,220* 1,736**

Source: Table 1; total for TVE firms is the sum of output from township (xiang),village (cun), andprivate enterprises;

*TVE 1988, p. 23.** At the end of 1987, the ratio of net fixed assets to fixed assetsat original cost for TVE industrial firms

at the district (xiang) and village (cun) level was 0.78 (XZ 1989, pp. 641-642). 2,220*0.78 = 1,736.

Instead of a unimodal structure dominated by large firms, or a bi-modal distribution,with very large and very small firms accounting for the bulk of economic activity, Chineseindustry presents an unusual picture in which five distinct types of enterprises, three in thestate sector (giant, other large-medium, and small) and two in the collective category (urbanand TVE) each account for large proportions of gross and net output, fixed assets, and


employment. The division across these segments is not equal: employment in the TVEsector is much larger and fixed assets much smaller, for example, than for the largest firms(employing over 5,000 workers).

The outcome of this snapshot is the surprising conclusion that in China, unlike othersocialist economies, forty years of "central planning," including the past decade of gradualand incomplete reform, has produced a balanced array of industrial enterprises covering abroad range of characteristics in terms of scale, capital intensity, and historic dependence onallocations from the central planning bureaucracy (as opposed to market or semi-marketoperations and allocations mediated through provincial or local governments). The industriallegacy of Chinese socialism presents a multi-faceted and polycentric array of firms.

Also significant is the dominant role of firms in these five categories. Table 2 showsthat even after more than ten years of enormous growth, private and semi-private firms(some of which are classified under the heading of "other" in Line E of Table 2), produceless than ten percent industrial output. It is essential to emphasize that, with the exception offirms identified as "private" (siying) or "individual" (get) enterprises, ALL industrial units,including "collective" (jiti) or "township and village" (xiangzhen) firms, are publicenterprises in the sense that ultimate authority and control over their activities rests withsome governmental body rather than with any group of private individual "owners."Political leaders maintain the option of directly intervening in strategic or even quotidiandecisions regarding enterprises under their authority.

Much confusion arises from the terminology used to describe Chinese industrial units.The term "state enterprise" refers to units that are "owned by all the people" (chuanminsuoyouzhi). Although managers of these firms may routinely report to officials of county,municipal, or provincial as well as national-level agencies, ultimate authority over thesefirms in some sense resides with the central ministries (e.g. the Ministry of ChemicalIndustry) that stand above provincial and local bodies in the same "system" (xitong), forinstance, a provincial or municipal office or bureau of Chemical Industry. Collective andTVE firms may be referred to as "non-state" units or as being "outside the state sector," butthis need not imply freedom from political control. On the contrary, we have numerousaccounts of local government involvement in controlling and directing "non-state" firms.One study finds that local governments have "a profound impact on the nature, speed,direction and accomplishments of rural industrialization in China" (Byrd and Lin 1990:339). A 1989 survey of 254 producers of cotton textiles, electronic components, andindustrial equipment found that, while all firms identified profitability as the chief stimulus toproduct and process innovation, TVE firms attached a higher weight to plan fulfillment thanstate enterprises. The same survey found that state and TVE firms gave virtually identicalresponses to questions designed to measure enterprise decision-making autonomy (Jefferson,Rawski, and Zheng 1992b).


IV. GROWTH, 1980-1990

Information about industrial growth during the 1980s appears in Table 2. In contrast tothe industrial decline experienced in the reform-oriented socialist economies of EasternEurope, Russia, and other former Soviet republics, China's industrial sector expanded rapidlyin the reform environment of the 1980s. The figures for nominal output growth displayed inPanel A of Table 2 reveal a pattern in which output growth appears inversely related to scaleand capital intensity, with the fastest expansion concentrated in those segments populatedwith small, labor intensive firms.

At the same time, the internal balance within the state sector has shifted toward largefirms at the expense of small firms, perhaps reflecting the differential impact of competitionfrom collective and TVE firms on state enterprises at the low end of thescale/capital-intensity/technical sophistication spectrum. This change emerges from thefollowing data for gross output value (current prices) from independent accounting unitswithin the state sector

Large Medium SmallOutput Share from firms

classified as (percent)

1981 33.5 23.2 43.3

1988 43.4 25.4 31.1

Share of incrementaloutput, 1981/88(percent) 49.6 26.9 23.4

Source: data provided by the State Statistics Bureau. These figuresexclude firms below the township (xiang) level.

Although all observers agree that output has risen swiftly, especially among TVE,private, and foreign-linked firms (the latter are classified in the category "other" in Line E ofTable 2), the exact dimensions of real growth unclear. Chinese statisticians, includingspecialists based in the Industry and Transport Division of the State Statistics Bureau, agreethat indexes of real output growth such as those shown in Table 2, which measure the growthof gross output valued at "constant prices," contain an element of upward bias (shuifen).4

There is no agreement, however, on the magnitude of this bias.

4. Field 1988 explains the meaning and manipulation of output measured in "constant prices."


Implicit deflators calculated from published figures on the gross value of industrialoutput at "current" and "fixed" prices appear in Panel B of Table 2. These figures showwhy specialists question the accuracy of estimated real output growth as shown in Panel A ofthe same table. Deflators extracted from these output series consistently portray inflation asrunning above the global average for the products of the state sector, where official pricecontrols are most common and also easiest to enforce, and lowest for the products ofcollective, private, and "other" firms that attract less attention from official regulators andare, in any case, more difficult to monitor. The implicit deflators for the entire collectivesector (not shown in Table 2) rise from 100 in 1980 to 104.1 in 1985 and 126.8 in 1990(Xiao 1991). This flies in the face of common sense, as does the implied price drop forproducts of urban collectives during 1985-1990 (Panel B of Table 2).

Other comparisons paint a similar picture: the 1987 figures assembled in Table 1 implythe following cumulative price increases for various segments of industry between 1980 and1987:

Largest firms 25.0%Other large & medium firms 13.1Small state-owned firms 19.2Urban collectives 4.5Urban private firms 4.7Rural firmsDistrict level 5.0Village level 4.0Individually-owned 7.2

One reason for this surprising outcome arises from the process of compiling industrialdata. Smaller enterprises, especially newly established collective units, apparently tend tomix current with constant prices or to submit nominal output totals that are inadequatelydeflated. If the price level rises, as occurred during the 1980s, such practices mayartificially boost the reported growth of real output, especially in sectors, branches, andregions with a high rate of enterprise creation, and particularly in the TVE sector.'

Inflation measures extracted from output totals may understate the actual rate of priceincrease in the state sector as well. The statistical treatment of goods identified as "newproducts" often includes the specification of "constant price" values that are identical withcurrent prices. A recent survey of several hundred firms in seven cities and surroundingdistricts found identical current and "constant" prices for about half of a sample of new

5. Unlike state firms, which report output totals in both current and constant prices, TVE firms report only in current prices.The resulting output totals are converted to current prices by various municipal and provincial branches of the StateStatistics Bureau using coefficients that are intended to reflect actual inflation experience. National-level officials believethat these coefficients tend to understate actual inflation, lending an upward bias to the output totals for TVE industrycalculated at "constant prices" (interview material).


products introduced during 1985-89. This artificially compresses the difference betweennominal and real output growth, and introduces an upward bias into the latter set of figures.

Even this does not happen, the practice of assigning "constant prices" to new products onthe basis of market values when the new product is introduced can build an upward bias intoreported real output growth for specific branches of industry. This issue is particularlyimportant for branches like electronics and communication equipment, where new productsoccupy a large share of total output (Li and Cao 1990, Jefferson 1992).

There are other indications that measures of gross output value at "constant prices" mayoverstate the growth of real output :

-- in some sectors, particularly chemicals, there is an apparent mismatch betweenoutput and value data: the reported growth of real output runs far ahead of theexpansion of physical production for major goods (Rawski 1991).

-- in some sectors, particularly electronics and communication equipment, (Jefferson1992).

-- the rate of double counting implicit in the use of gross output measures ofproduction growth may have increased (a) because the creation of new marketsinvites the expansion of interdependence and subcontracting by all firms, whichwould cause gross value to grow faster than output; and (b) because the increasingweight of TVE firms in overall industrial activity probably reduces the averagedegree of vertical integration. Data showing a drop in the ratio of net to grossoutput (at current prices) from .35 to .27 between 1980 and 1990 lend credence tothis argument:'

1980 1990

A. NVIO 164.8 509.3

B. GVIO 471.2 1868.

C. A/B .350 .273

Source: 1990 data from TJNJ 1991, p. 399; 1980 data from Industry 1984, p. 42 (NVIO) and fromthe State Statistics Bureau (GVIO). All data refer to "independent accounting units," which accounted for 92percent of overall industrial output in 1978 and 78-86 percent in 1988 (Jefferson, Rawski, and Zheng 1992a, p.242).

6. Since patterns of markups on intermediate and final goods may change, these data do not definitively establish that realrates of value added have declined. I am indebted to William Byrd for helpful comments on this point; on markups, seeJefferson, Rawski, and Zheng 1992a.


reported gains in energy productivity (output value per ton of coal equivalent)seem unrealistically large, especially when compared with the rather smallchanges in physical input-output relationships involving energy consumption(e.g. kg. of coal used per ton of steel or per kwh of electricity produced; seeRawski 1991).

With all these uncertainties, conclusions about real output growth must remaintentative. The safest course is to focus on figures for nominal output growth, recognizingthat price changes and also the particular characteristics of gross output accounting can leadto differences between the growth of nominal and real output. With these qualifications, thefollowing observations about the growth of Chinese industry during the 1980s seemappropriate:

1. The 1980s were a decade of rapid growth. Published figures indicate nominaland real growth averaging 16.6 and 12.6 percent annually for 1980-1990.Applying the SOE implicit deflator of 158.7 (with 1980= 100; see panel B ofTable 2) across the board, a procedure that eliminates underreporting ofinflation in the UCOE and TVE data, reduces the index of 1990 real output(1980=100) from 328 to 292. This adjustment drops the average annual rateof real output growth from 12.6 percent to 11.3 percent. If we assume thathalf of the reported decline in the ratio of net to gross output can be attributedto an increase in intermediate transactions that generate no change in realoutput, the index of real output should be further reduced to (292*.3115/.350)or 260, implying an average annual real growth rate of 10.0 percent forindustrial output during 1980-1990.

2. Although these adjustments do not remove all possible sources of upward bias,they do indicate the probable order of magnitude of the upward bias inherentin recent Chinese figures for real industrial growth. "New product bias"resulting from failure to remove the effects of inflation from prices assigned tonew manufactures is probably concentrated in a few branches of industry(Jefferson 1992) and is unlikely to have a big effect on overall industrialgrowth, which seems to have progressed at an impressive real rate in thevicinity of ten percent per annum during the '1980s.

3. Without pursuing detailed adjustments below the aggregate level, it is clearthat the picture of relative growth rates across different types of industry thatemerges from the nominal figures in panel A of Table 2 is broadly reflectiveof real trends. Output grew fastest in the small private sector and amongownership forms designated "other" in the Chinese data (including jointventures with partial foreign ownership). Within the major organizationalgroupings, output of TVE firms undoubtedly grew fastest, although here wemust remember that growth is inflated by the reclassification of large numbersof (mostly tiny) units from agriculture to industry in 1984 (Field 1988: 584-85)


V. FACTOR PROPORTIONS

Any any attempt to describe production technology in Chinese industry must confrontthe problematic nature of available data on industrial capital. The most readily availablefigures relate to "fixed assets at original value" (KFO) and "net value of fixed assets"(KFN). KFO is simply the cumulation of historic outlays on fixed assets (structures andequipment) undertaken by industrial enterprises, with no allowance for inflation ordepreciation. KFN differs from KFO in that the asset totals are net of (inappropriatelysmall) depreciation allowances. The difficulties with these measures are obvious. During aperiod of inflation like the 1980s, either measure will exaggerate the growth of fixed assetvolume and of capital-labor ratios. A further problem arises from the inclusion ofnon-industrial capital, particularly housing, in both the stock of fixed assets (KFO, KFN) andin measures of "newly added fixed assets at original value." If the share of housing ininvestment outlays rises, as it did during the 1980s, the growth of KFO and KFN willoverstate the real growth of industrial fixed assets even with no inflation. Since state firmstypically provide housing for their workers, while collectives, especially rural collectives, donot, cross-section data on capital intensity tend to overstate the gap between (morecapital-intensive) state enterprises and collective firms, and also between large and smallfirms.

Careful study of capital intensity, productivity change or other aspects of industrialperformance that depend on measures of fixed assets must address the peculiarities ofChinese data on industrial fixed assets. A group of Chinese and American economists hasdeveloped methods of adjusting the data on fixed assets for state and collective industry toeliminate the largest deviations from standard accounting practice; their results show thatfailure to make such adjustments can distort not only the magnitude, but even the direction ofmeasured change in total factor productivity (K. Chen et al 1988a, 1988b; Jefferson, Rawski,and Zheng 1992a).

Despite the shortcomings of Chinese statistics on industrial capital stock, theunadjusted data can be used to survey the relative capital-intensity of different segments ofChinese industry, and to obtain a rough idea of the direction and rate of change for capitalintensity for industry as a whole. For this purpose, the figures on net value of fixed assets(KFN), which at least include some allowance for depreciation, are clearly preferable to thedata on KFO.

As is evident from Table 1, Chinese industry displays an unusual range of factorproportions. Table 3 sharpens this comparison by focusing on net (of depreciation) fixedassets per worker across different types of firms for the year 1987. The figures range fromover 20,000 yuan for large firms, almost all in the state sector, to less than 2,000 for TVEenterprises. Average fixed assets per worker for small SOEs amount to about two-thirds theaverage for all independent units, but more than triple the comparable figure for TVE firms.1987 fixed assets per worker at UCOE firms were about double the TVE average.


Because of weaknesses in the data on fixed assets, information on electricityconsumption per worker and per yuan of gross output may provide a helpful supplement:'

Co Intensity of Use

X/1000 kwh 1000 kwh kwh perper yuan of

Man-year GVIO

All industry (1985) 87.1 3.85 0.29State sector (1985) 82.9 5.61 0.34Collective sector (1985) 111.7 1.31 0.16Other (including 141.6 1.96 0.09private, 1985)TVE enterprises (1987) n.a. 1.45 0.18

Source: for 1985: Outline 1989, pp. 49, 44, 65, 71, 178-181; these data probablyexclude TVE firms. For 1987: XZ 1989, pp. 595, 598, 625.

These data confirm the presence of wide gaps in the amount of equipment availableto the typical worker in different areas of Chinese industry. The size of these gaps,however, is much smaller from the perspective of electricity use than from that of fixed assetvalue. Power consumption per worker in the state sector is 3.9 times the TVE average (vs.a ratio of 6.6:1 for net fixed assets per worker). Furthermore, the 1987 TVE powerconsumption figures are about the same as the 1985 census totals for collective industry(which probably exclude most rural firms).

The 1985 price data for electricity illustrate an important feature of China's urbaneconomy: a policy bias favoring activities that reduce the growth of labor demand. Here wesee that, as of 1985, SOE firms paid below-average prices for electricity. Within the statesector, capital- and energy-intensive branches (e.g. basic chemicals) paid less for power thanlabor-intensive branches like handicrafts (Jefferson and Rawski 1992). Since state firms alsobenefited from artificially low interest charges and paid relatively high wages, long-standingpricing conventions encourage the increasingly profit-oriented managers of SOE firms tosubstitute capital, energy, and (probably) materials for labor. This creates a tendency forurban managers, especially in SOE firms, to undertake projects that drive up such measures

7. Note, however, that industrial electricity consumption, especially for state-owned enterprises, may include powersupplied to workers' homes. However, the share of "industrial" power consumption actually destined for householduse is likely to be small, even for state firms (e.g. less than 2 percent for the iron-steel industry; see Ross and Liu1991, p. 842).


as fixed assets per worker (and also labor productivity) both absolutely and relative to othertypes of firms. This contrasts sharply with circumstances in the TVE sector, where inputprices, including labor costs, are determined mainly by market forces.

Data compiled in Table 4 address the question of trends in capital-labor ratios duringthe 1980s; in the absence of data on net fixed assets for TVE enterprises in the early 1980s,these calculations are based on "fixed assets at original value" (KFO). These figures showthe average capital-labor ratio for "all independent industrial units" (probably excludingvillage-level enterprises) and for state industry rising by more than 100 percent between 1980and 1990.

Figures for TVE enterprises appear in Panel C of Table 4. The only capital-laborratio for 1980 includes all enterprises (not just factories and mines) operated by people'scommunes (she) and brigades (dadui) under the China's pre-reform system of collectivefarming. Of the three 1988 figures in the table, the set marked (b), which refer to"township and village" enterprises (not just industry), seems most comparable to the 1980total. "Township" (xiang) and "village" (cun) correspond closely to the former "commune"(renmin gongshe) and "brigade" (shengchan dadui) administrations. The 1988 data marked(a) are labelled "township and town" (xiangzhen); they presumably include some urbanenterprises and exclude village-level units. The last 1988 data set is limited to industry only.

Based on this discussion, I conclude that the ratio of capital per worker in the TVEsector, which more than tripled between 1980 and 1988, has risen much faster than in othersegments of Chinese industry. This result assumes that trends for TVE enterprises apply toTVE industry, which seems quite reasonable because (i) the capital-worker ratio for 1988 in"township and village" enterprise and industry (items (b) and (c) in Table 4) are virtuallyidentical; and (ii) industry's share of TVE gross output was 78 percent in 1980 and 70percent in 1988 (TVE 1989, p. 8).

What we see, then, is a large absolute and relative increase in the capital-labor ratiowithin the TVE sector, which is both the least capital-intensive and the fastest-growingsegment of China's industrial sector during the 1980s. The big shift in weight toward theTVE sector resulting from its rapid growth (Table 2) suggests a large decline in averagecapital-labor ratios throughout industry. The rising trend in capital-labor ratios evident fromTable 4, especially among TVE firms, points in the opposite direction. What should weconclude about changes in industry's overall capital-labor ratio?

It is evident that a considerable portion of the rise in the ratio of fixed assets perworker in all sectors is attributable to the rising cost of investment goods rather than capitaldeepening. This can be seen from data on price increases for investment goods:


1980 1985 1990

A. Factory buildings 100.0 172.8 304.6

B. Equipment 100.0 134.9 277.8*

Source: for A, TJNJ 1991, p. 164; for B, Naughton 1991, Table 6.

*Naughton's price index ends in 1988, when the index is 222.4. I extend the indexusing reported annual increases of 21.2 percent for 1989 and 2.1 percent for 1990 in theex-factory prices of machinery shown in Zhongguo wujia 5 (1990): 52 and 3 (1991): 59.

The prices of investment goods nearly tripled during the 1980s, with the biggestincreases coming toward the end of the decade. Since the pace of investment alsoaccelerated sharply, we might plausibly assume that, on average, the cost of capital goodsacquired during the 1980s was double the cost of similar assets on hand at the start of thedecade. Applying this assumption (and ignoring depreciation) produces the following revisedfigures for changes in the ratio of fixed assets (original cost) per worker in differentsegments of Chinese industry (based on Table 4):

Index of fixed assets per worker (1980=100)All Independent Units* (1990) 133.8State enterprises (1989) 165.2TVE enterprises (1988) 281.4

* these data probably exclude village-level TVE firms.

These rough corrections scale down the increase in capital per worker, especially outsidethe TVE sector. The adjusted TVE data continue to show large increases in capital perworker. This result is particularly significant because we know that the TVE category wasenlarged by the transfer of many small (probably craft-type) units formerly classified asagricultural enterprises during the mid-1980s (Field 1988, pp. 584-585). Clearly, the TVEdata indicate a decisive shift away from craft production and toward genuineindustrialization.

Despite large increases in capital intensity in both the SOE and TVE sectors, the bigshift in weight toward the relatively labor-intensive TVE segment seems to have preventedthe overall ratio of capital per worker from rising sharply. The big rise in capital per workerwithin the TVE sector, along with the continued importance of large, capital-intensive firms(Table 1) points to the improbability of a significant decline in the overall ratio of capital perworker despite the growing prominence of labor-intensive TVE firms in the enterprise mix.


These figures also bear on the question of policy bias raised above. Although urbanenterprises, especially in the state sector, faced incentives pushing them toward unnecessaryand inefficient substitution of capital for worker throughout most of the 1980s, the gradualtrend toward convergence of capital intensity across different segments of industry suggeststhat the penetration of market forces may be weakening these incentives. Toward the end ofthe decade, a new constellation of economic circumstances, including the substitution ofloans for grants in the finance of industrial capital formation, sharply higher lending rates,new opportunities for business cooperation between firms in different ownership categories,and the erosion of controls over the allocation of industrial inputs, sharply altered the relativeinput prices confronting SOE managers. If this trend toward equalization of relative inputprices across various segments of Chinese industry continues into the 1990s, we can expectfurther shifts in the direction of convergence of factor proportions across enterprise types.

VI. PRODUCTIVITY CHANGE

China, like other socialist economies, has a long history of "extensive" industrialgrowth, in which the accumulation of labor, and especially of capital served as the mainimpetus to higher output. One objective of China's recent reform efforts is to move toward"intensive" growth of the sort experienced elsewhere in East Asia, in which risingproductivity matches or even surpasses resource accumulation as the principal source ofoutput growth (E. Chen 1977).

Initially, observers of China's reform argued that new policies had not altered thepattern of extensive growth. Subsequently, a group of Chinese and American economistsshowed that the impression of stagnant productivity arose from measurement error. Aftershowing that published statistics of fixed assets exaggerate the growth of real industrialcapital stock, these authors constructed a new series for the volume of fixed capital in stateindustry (K. Chen et al 1988). Using the new series and aggregating inputs with weightsderived from the parameters of production functions rather than the arbitrary weights used inearlier studies, these authors showed that total factor productivity in state industry increasedunder the reform regime in China (K. Chen et al 1988b). Three of the same authors thenexpanded the analysis to include collective as well as state firms; they also enlarged theanalytic framework to include material inputs as well as capital and labor. This study foundthat productivity expanded throughout the period 1980-88 in both state and collective industry(Jefferson, Rawski, and Zheng 1992a).

What can we add about productivity change in the TVE sector? In the absence of timeseries data on fixed assets of TVE industries, data assembled in Table 5 can be used toconstruct a rough measure of productivity change for the totality of TVE enterprises, most ofwhich, as noted above, fall into the industrial category. We have time series data for grossoutput (current prices), employment, and net (of depreciation) fixed assets for all TVEenterprises. We ignore possible inconsistencies of coverage as well as any defects in the


measurement of output or input, even though these problems are likely to be more severewith TVE data than with data pertaining to better established firms in the SOE or UCOEsectors. In the absence of a more suitable measure, the implicit deflator for SOE outputcalculated by Geng Xiao is used to convert output from nominal (GVIO) to real (DGVIO inTable 5) terms. Since the study mentioned above found that the weights for aggregatingcapital and labor derived from production function estimates for collective industry werevirtually identical (Jefferson, Rawski, and Zheng 1992a, p. 251), we assign equal weights tocapital and labor inputs.

The results of these calculations, which appear in Table 5, show a steady increase inproductivity within the TVE sector except for the recession years 1989/90, when massiveincreases in fixed assets (exaggerated by our failure to allow for rising investment costs) andslow growth of real (as opposed to nominal) output pushed productivity downward.

It must be emphasized that these calculations ignore potentially large sources of error.On the one hand, the figures for real output growth in TVE industry undoubtedly include asubstantial upward bias. At the same time, the unadjusted index of net fixed assets (KFN)certainly exaggerates the growth of real capital stock in the TVE sector. Since these defectscreate opposing distortions, productivity calculations based on unadjusted data may permit usto draw an approximate comparison of TVE performance with that of state firms andcollectives, even though the following data for state firms and urban collectives come fromcalculations based on adjusted input data:'

1980-84 1984-88 1980-88annual productivity growth (%)

SOE 1.8 3.0 2.4

COE 3.4 5.9 4.6

TVE 10.4 6.1 8.2

Although the TVE data are very rough and include some non-industrial enterprises, wemay anticipate that further refinement of the calculations in Table 5, which probably

8. The results for "collective" industry shown here include data for independent accounting units at and above the district

(xiang) level; thus some, but not all TVE firms are included. As mentioned above, published output data probablyoverstate the real growth of output in all segments of Chinese industry. The degree of upward bias is probably greatestamong TVE firms. Even so, the productivity results shown in the text for state and collective firms could benefit fromadditional adjustments to offset upward bias in the output data. See Rawski 1991, Jefferson, Rawski, and Zheng 1992a

and Jefferson 1992.


exaggerate the relative productivity gains of TVE firms, is unlikely to alter the impressionthat TVE industries experienced more rapid productivity gains than state firms or urbancollectives, especially during the first half of the 1980s. This is the same conclusion reachedby Yanrui Wu (n.d.), who uses panel data (not available to the present author) for 28provinces (Hainan and Tibet are excluded) to estimate sectoral production functions andproductivity indicators for agriculture, urban industry, and rural industry. Wu concludes that"rural enterprise productivity has been steadily rising over time" and that "the growth rate oftotal factor productivity of the rural enterprise sector is much greater than that in both theurban state industrial sector and the rural agricultural sector" (n.d., pp. 23-24).

VII. OUTPUT STRUCTURE

We might expect that the rapid transition from plan to market (including massiveexpansion of manufactured exports) and the concurrent decline in the output share of stateindustry from 76 to 55 percent between 1980 and 1990 would produce massive shifts in thecomposition of China's industrial output. This is certainly the implication of discussionsabout new priorities favoring "light" industry - textiles, food processing etc. (Solinger 1991).Although it is not easy to assemble a consistent quantitative picture of output structurecovering the entire industrial sector, readily available data point to a rather surprisingconclusion. If we view output structure in terms of the shares occupied by the "old"15-branch structure,' then it is evident that the composition of output remained quite stableduring the 1980s. Nor was this the product of offsetting shifts in the composition of statesector output and the share of collectives in total output. There was little change in thebranch composition of state sector output; furthermore, with some exceptions, the branchcomposition of urban and rural industrial output is quite similar.

Table 6 lays out the branch structure of industrial output (excluding village-level firms)for 1970, 1980, 1981, and 1990. Despite several minor difficulties with these data, theoverall impression is clearly one of stable output composition over a period of two decades.These data reveal no evidence of important structural shifts between 1980/81 and 1990. Inparticular, the share of "light industries" - food processing, textiles, apparel, leather, paper,and cultural goods - is, if anything, somewhat smaller in 1990 (32.8%) as in 1980 (33.3%)or 1981 (37.4%). It is only by moving back to 1970, when these industries contributed only25.5 percent of total output, that we find evidence of significant change in the composition ofoutput."o Table 7 displays comparable information for independent accounting units abovethe village level in the state and collective sectors during 1978-87. Here we see that the

9. A new 40-branch classification was introduced during the mid-1980s.

10. Note that 1981 was a year of slack investment demand in which the share of machinery production fell to the lowest level

observed since the Cultural Revolution year of 1968.


stability of output mix across broad product groupings is characteristic of both the state andcollective sectors. Furthermore, the relative size of different branches is often similar inthese two subdivisions. Machinery leads, followed by chemicals, food processing, textiles,and metallurgy in the state sector, and by chemicals, textiles, building materials and apparelin the collective sector.

These data exclude village industries, which grew rapidly throughout the decade andaccounted for 10.0 percent of total output in 1990 (Industry 1991, p. 3). Table 8, based on1990 data, compares the branch structure of urban industry (state firms plus urbancollectives) and rural industry (district and village level firms). Here again, we find asurprising continuity in output composition. Although rural industry displays relatively lowproduction of energy (branches 2, 3, and 4) and metallurgy (branch 1) and stronglyemphasizes the manufacture of building materials (branch 7) and apparel (branch 11), theoverall picture, encapsulated in Figure 1, is of similar output composition in urban and ruralindustry.

The unexpected finding of this brief review is that changes in the commoditycomposition of China's industrial output during the 1980s were, for the most part, confinedto shifts within rather than among the fifteen branches of industry listed in Table 6. Thecombined impact of important changes: the shift from plan to market, the expansion offoreign trade, the decentralization of investment decisions, and the new prominence ofmarket-oriented rural industries apparently made little impact on the broad measures ofoutput composition contained in Tables 6, 7, and 8.

VII. COMPETITION

During the 1980s, Chinese industries of all types operated in an increasingly competitiveenvironment. China's reform policies were primarily enabling measures that allowedenterprises to alter product mix, develop new markets, modify output prices, contract withnew suppliers etc. rather than mandatory directives enforcing privatization, bankruptcyprovisions etc. As Chinese firms began to experiment with new opportunities for flexibilityand change, they quickly encountered rivals based in different geographic and administrativejurisdictions.

One reason for the rapid emergence of commercial rivalry is that China's investmentpolicies during the period of socialist planning included a substantial effort to build completesets of industries in most provinces and, whenever possible, in various regions withinindividual provinces. As a result, the sort of deregulation that leads to monopoly in Russiaor Poland creates competition in China.

Another source of competition comes from the developmental policies of provincial andlocal governments. The emergence of strenuous competition among provinces and localities


for foreign and domestic investment funds and development projects has inclined localgovernments toward behavior intended to stimulate the expansion of the local economy,rather than toward a narrower objective of preserving existing activities from outsidecompetition.

Competition is not, however, without its limits. Chinese sources provide ampleevidence of local protectionism (e.g. Dong 1992). Many local governments have tried tocapture the rents associated with underpricing of tobacco and other raw materials byconstructing inefficient, but profitable processing plants and then restricting the "export" oflocal primary products. Restriction of sales opportunities for manufactured goods (e.g. smalldiesel engines) that compete directly with the products of local factories is another popularform of protection.

Despite the continuation of extensive regulatory intervention and episodic regionalprotectionism, it seems clear that the 1980s have forced virtually all industrial enterprises toconfront unprecedented levels of business competition. For example:

China's largest tractor manufacturer is trying to improve the quality of its products aswell as its marketing and publicity techniques in a bid to offset. . . sluggish domestic sales.. . the sluggish market... provoked incessant price undercuttings by producers. . . . TheLuoyang tractor complex had been forced to sacrifice more than half of its profits in tryingdiscounts, lotteries and free delivery of goods to boost sales (Gao 1990).

China's largest cookie producer, the Shanghai Yimin No. 4 Foodstuff Factory, islaunching a counter-attack to recover [Shanghai's] biscuit market [which has been] taken overby products from Guangdong Province. . .. the factory. . . [is] developing well-packagedbiscuits, a line now dominated by Guangdong products. . . . Sources said the highcommissions and high profit for stores selling Guangdong biscuits are one of the majorreasons that. . . state-run cookie producers are facing difficulties (Bing 1991).

These examples, and many like them, demonstrate that references to "the domestic andinternational competition facing large and medium state enterprises" (Conference 1991, p.46) in Chinese industry are not exercises in rhetoric, but realistic descriptions of widelyshared experience. For TVE firms, the reality of market competition is inescapable:published reports indicate 700,000 bankruptcies in 1986 and three million in 1989 (People'sDaily November 9, 1987, p. 3 and March 23, 1990). Byrd and Zhu (1990, p. 96) find that"state enterprises are significant competitors in many . . . product markets" populated byTVE manufacturers, because most output from TVE firms "consists of product categories inwhich state enterprises have a dominant share."

Although we cannot doubt that sympathetic bureaucrats have shielded some state firms,especially large enterprises, from market forces, competitive pressures began to affectenterprises at all levels of China's industrial system rather early in the reform process. Thisreality is apparent from data showing the share of self-marketed products in 1985 sales for


different types of industrial units included in the industrial census of that year:

Ratio of self-marketing for industrial output (percent)By scale of firm

All L&M Small

By OwnershipType

All firms 54.4 34.8 74.4SOE 44.5 33.9 65.5COE 85.0 75.4 85.4Other 45.5 60.6 39.0

Source: Outline 1989, pp. 122-127.

On the average, more than half of all output was marketed outside the planning systemas early as 1985, even though the universe covered by the census excluded village-levelfirms. Even the most sheltered group, the large and medium-sized SOE firms, distributedone-third of their goods through market channels in 1985. For smaller SOE firms, thepercentage of self-marketed output had already reached two-thirds. The importance ofmarket transactions has expanded rapidly since 1985.

Procurement of materials and semi-fabricates shifted toward the market at a similarpace. Although I have found no overall data, a survey of approximately 500 state enterprisesshowed that the share (by value) of materials obtained through market purchases rose from49% to 61 % between 1980 and 1989 (Dong 1992, p. 12). For small firms, especially thoseoutside the state sector, the share of market procurement is much higher.

Table 9, which uses 1987 data to develop concentration ratios for a number of industrialbranches, illustrates that in China, unlike the former USSR, Poland, etc., the typical industryis not dominated by a small number of giant producers. To show this, I compare outputvalue for the largest firms in each branch (the number of firms is shown in the first columnof the table) with total output for the branch. With the exception of oil and gas extraction,where seven firms produce 86 percent of total output, the output share of the largest firmstends to be small. In ferrous metallurgy, the four largest firms contribute only one-fifth ofnational output. In transport equipment and paper, 11-12 large firms account for no morethan 9-13 percent of total production value. In a number of industries, represented in thetable by building materials, apparel, and food processing, the output share of the largestfirms is less than five percent.

It is possible that relatively low concentration at the branch level conceals extensivemarket power by leading producers of individual products. To see that this is not the case in


China, Table 10 presents data on the output share of leading provinces (not enterprises) inthe manufacture of specific commodities. Typical results appear for products liketransformers, electric wire, washing machines, and bicycles, where the leading provincecontributes about 20 percent of national output, and the addition of three more provincesraises the combined share to approximately half of the overall total. The resulting degree ofconcentration, while by no means insignificant, leaves ample room for competition. Inmotor vehicles, for example, the two largest firms, the #1 plant in Changchun (Jilin) and the#2 works in Hubei produced a combined 1987 gross output of T5.1 billion, or less thanone-fourth of national output, which in 1987 amounted to Y23.4 billion (Industry 1988, pp.89, 353). Indeed, Liaoning, rather than Jilin or Hubei, recorded the highest provincialoutput of motor vehicles even though Liaoning has no large-scale truck assembly facilities.

Extensive research by Chinese economists confirms that concentration ratios forindividual products are rather low. Eight-firm concentration ratios for 1985 exceed 70percent in only 6.5 percent of 523 product lines; for 74.4 percent of product lines, the shareof output supplied by the the eight largest producers is less than 40 percent (Chen Xiaohonget al 1991, p. 196). Furthermore, concentration ratios have declined, often substantially,during the 1980s in such industries as iron and steel, beer, glass, and household appliances(Chen Xiaohong et al 1991, pp. 197-200; Chen and Chen 1991, pp. 306-308). A study ofmachinery and electrical equipment found that the four largest firms produced at least half oftotal output for 31 of 73 product types in 1980, but only 24 of 73 products in 1985. Duringthe same five-year period, the number of products for which four firms produced less thanone-fourth of total output jumped from 13 to 29 (Zhou, Pei and Chen 1990, p. 332).

Increasing competitive pressures come from external as well as domestic sources.China's imports of manufactured goods jumped from US$13 billion in 1980 to US$43 billionin 1990 (TJNJ 1992, p. 629). Although domestic suppliers receive tariff protection fromimport competition and also benefit from administrative limitations on many types ofcommodity imports, gradual decentralization of commodity trade and relaxation of tightcontrols over foreign exchange have eroded many import barriers. As China moves towardmembership in GATT, economic journals are filled with warnings about the expectedintensification of import competition (e.g. Bao 1992). For many producers, importcompetition is already very real. Annual imports of machinery and transport equipmentjumped from US$5 billion to US$17 billion between 1980 and 1990 (TJNJ 1992, p. 629);one author calculates that 1991 imports of machinery and electronic equipment amounted to23 percent of domestic production (Bao 1992; Liu and Chen 1992). China's camera industryillustrates the dangers of import competition: domestic firms hold large inventories offinished goods despite big output reductions in 1989 and 1990 (Bao 1992)

The beneficial consequences of competitive pressures are evident in China's boomingindustrial exports. Manufactured products (excluding coal and crude oil) account for 84.6percent of incremental exports between 1980 and 1990 (TJNJ 1991, p. 616). As withTaiwan's earlier surge of manufactured exports, export success is spread across a broadrange of products, including textiles, toys, chemical products, machinery, and a large array


of miscellaneous manufactures (TJNJ 1991, p. 616).

Available data provide little detailed information on the breakdown of exports amongstate, collective and TVE sources. The information that we do have permits twoobservations. First, it is clear that TVE producers have emerged as active exporters.According to data contained in Table 11, TVE firms maintained a steady share ofapproximately 20-25 percent of manufactured exports throughout the late 1980s. Their sharein manufactured exports, formerly much larger than their share in industrial output (whichincludes mining and utilities as well as manufactures), is now about the same as their sharein industrial output: in 1990, TVE firms contributed 25.3 percent of gross industrial output(Table 2) and 27.0 percent of manufactured exports (Table 11).

A second, and somewhat surprising finding is that industrial exports are spread acrossthe entire range of industrial units when these are classified by ownership type and scale.This emerges from figures for 1985:

Ratio of exports to salesBy scale of firm(percent)

All Large & Small*

By Type of Medium

Ownership

All firms 6.6 7.1 6.1SOE 6.7 7.2 2.4COE 6.1 6.8 6.1Other 13.8 3.0 18.6

*residual

Source: Outline 1989, pp. 122-127.

On the basis of these 1985 figures, we can see that exporting experience was widelydiversified within China's industrial sector even before the export surge of the late 1980s,which pushed manufactured exports from US$13.5 billion to $46.2 billion between 1985 and1990. In both the state sector and the collective sector, small firms were nearly as likely tobe involved in exports as larger units. In weighing the impact of these figures, it must beremembered that the census did not extend to TVE firms below the township (xiang) level(Outline 1989, p. 20). Thus the "collective" (COE) firms covered by these export datainclude only urban collectives and the larger TVE enterprises.


Finally, available data show that the state sector has contributed substantially to China'sburgeoning export of manufactures. This emerges from the following data (US$ billion):

1985 1990

Exports# 25.9 51.7

Share of manufactures 0.495 0.744

Export of manufactures 12.8 38.5Of which:from rural enterprises* 3.9 12.5

from joint ventures* 0.3 7.8

residual 8.6 18.2

# based on data from the Ministry of Foreign Economic Relations and Trade

*assuming that exports from these firms consist solely of manufactures

Source: Lardy 1992a, pp. 694, 698, 711.

The residual figures include manufactured exports from state firms and urbancollectives. They indicate annual growth of 16.2 percent for exports from these firms; ifalternate export data compiled by China's Customs Administration are used, the estimatedgrowth rate for manufactured exports from state firms and urban collectives rises to 22.5percent. The 1985 census, which omitted TVE firms operating below the county level,found that 74.5 percent of industrial exports (including mineral products as well asmanufactures) originated in the state sector. Minerals and raw materials contributed 20.5percent of the 1985 industrial export total. If we assume that all of these goods came fromstate-owned firms, it follows that state-owned firms contributed 100*(74.5-20.5)/(100-20.5)= 67.9 percent of manufactured exports identified by the industrial census of 1985.

If exports of manufactures from state firms and urban collectives grew at an annual rateof 16.2-22.5 percent from a 1985 base, and if state firms contributed at least two-thirds of1985 exports from this segment of manufacturing," it is difficult to avoid the conclusion thatstate firms have contributed substantially to China's export drive during the 1980s. Without

11. The calculated share of state firms in 1985 exports of manufactures is likely to be understated because (i) some 1985

exports of minerals and raw materials may have come from collective firms; and (ii) some of the collective firms' exports

recorded in the 1985 census came from rural rather than urban enterprises.


further information, we may speculate that the annual growth of manufactured exports fromstate firms during the late 1980s could easily have exceeded 10 percent. Indeed, informationfor a sample of 760 industrial enterprises studied by China's Institute of System Reform(Tigaisuo) show that exports (denominated in renminbi) increased by 69.4 percent between1986 and 1989; for 244 large state firms in the sample, exports rose by 88.0 percent duringthe same period, equivalent to annual growth of 20 percent." sample data for

IX. PROFITABILITY

What changes have the 1980s brought to the profitability of different segments ofChinese industry? This issue is addressed in Table 12, which provides annual data on twomeasures of profit for three segments of industry: state firms, collective firms, and TVEunits. Note that the category "collective firms" partially overlaps the TVE category. In thiscontext, "collective" includes urban collectives of all types that are recognized as"independent accounting units," as well as independent accounting units at the county andtownship level. These latter firms are also included in the TVE group, which containsvillage-level and private firms as well.

In considering information about industrial profits, it is essential to remember that theimportant fiscal role of industrial profits encourages enterprises to manipulate financial datafor their own advantage. As of 1991/92, approximately one-third of state-owned firms run ata loss. Some observers believe that many state firms conceal financial deficits to protect thecompensation of managers (and possibly workers as well). While hidden losses no doubtexist, it seems likely that concealment of profits is more common. Indeed, one mightspeculate that informal transfers from state enterprises have provided essential financialsupport to China's burgeoning rural industries during the 1980s.

Chinese statisticians routinely calculate two types of profit rates. One is the "rate ofprofit and tax returns to capital" (Iishui zijinlfi); the other is the "profit rate" (lirun zijinli).The former, shown in the left-hand columns of Table 12, is the ratio of "profit plus tax" to"total capital." The latter is the ratio of "profit" to "total capital." In these calculations,"profit" is simply the difference, positive or negative, between revenue and expenditure priorto payment of income taxes, cumulated over all relevant enterprises. "Tax" appears toinclude levies on the income, profits, and fixed assets of firms, but not the turnover taxeslevied on their products (SSB 1987 1:193). "Capital" is the sum of net (of depreciation)fixed assets and working funds available to the enterprise; it is a measure of the firm'scombined fixed and working assets.

12. Export growth for state firms (N=643) and large-scale firms (N=254) also exceeds the sample average. Restricting thecalculation to firms with positive exports in the initial year produces similar results. Note that the average exchange rateof the Chinese renminbi declined from 3.45 yuan per U.S. dollar in 1986 to 3.76 in 1989 (Lardy 1992b, p. 149).


It is not easy to determine which of these two measures is preferable as an indicator ofenterprise financial performance. Particularly in the case of state firms, it is difficult topinpoint any conceptual difference between "profits" and "sales/turnover taxes." Bothcontribute to the difference between production cost and selling price. With both revenueflows ultimately owned by "the state," there is little economic logic to the division of themarkup between cost and price into segments marked "profit" and "tax." So perhaps theformer measure, which tabulates combined profit and (a limited set of) taxes as a percentageof total capital, is preferable.

In practical terms, the distinction is not important because the trend of profit rates is thesame when measured according to either of the standards reflected in Table 12. The datareveal two important developments. First, the 1980s witnessed a general and, in recentyears, steep decline in profitability that affected all major segments of China's industrialsector. If we compare 1990 with 1980, returns measured by combined profit and tax fell by50 percent or more. If we confine our attention to profit alone, the decline was muchsteeper: in both the SOE and TVE segments, the ratio of profit to total capital for 1990 wasless than one-fourth the comparable figure for 1980.

This decline in profitability is a general phenomenon that is not limited to largestate-owned firms. Deteriorating financial performance has pushed many firms into the red.While the share of firms with negative profits is not unprecedented - nearly one-third ofstate-owned firms recorded losses in 1974 and 1976 (Fang and Wu 1989, p. 378) - the ratiosof losses to net profits (kuisunli) were much smaller than in the early 1990s. Financiallosses are often portrayed as a phenomenon associated with large, unreformed enterprises inthe state sector. But Table 13, which summarizes the characteristics of loss-making firms in1986 and 1990, shows that unprofitable firms are widely dispersed throughout China'sindustrial establishment. Aside from mining, where losses result primarily from theenforcement of artificially low prices for coal, crude oil, and natural gas, the biggestconcentration of losses appears to be among medium and small-scale state enterprises.

These financial data also reveal a process of convergence among rates of profit. Theearly years of the 1980s saw wide variations in profit rates across the three segments coveredin Table 12, particularly for the data that exclude taxes in calculating rates of return. Theinitial rate of return for TVEs was more than 50 percent above the comparable SOE figure.There were also large differences between rates of return in the COE and TVE sector, all themore striking because of the extensive overlap between the two categories. Evidently, ruralfirms at the village level were enormously profitable in the early 1980s.

The degree of convergence is striking. If we sum the difference between profit rates(excluding taxes) in the SOE and COE categories and divide the resulting totals by SOEprofit rates over four-year periods at the beginning and the end of the 1980s, we find thatthis measure of dispersion plunges from 0.467 during 1980-83 to 0.003 during 1987-90.


X. CONCLUSION

This survey of China's industrial experience during the 1980s focuses on firms in thestate, collective and TVE sectors, all of which are linked, to a greater or lesser degree, tosome level of government. Private industry (including firms with partial foreign ownership),which now seems poised to emerge as a significant economic force, was too small during the1980s to affect trends in industrial activity.

This universe of state and state-linked industrial enterprises presents a picture ofextraordinary diversity in terms of scale, factor proportions, technical sophistication, or anyother yardstick one cares to apply. As of 1987, the year for which the most detailedinformation has appeared, industrial production was rather evenly spread across five distinctgroups of firms: giant firms with over 5,000 workers; other firms classified as "large" or"medium" in scale, almost exclusively in the state sector; state-sector smaller than those inthe "large and medium" category; urban collectives; and TVE enterprises.

The 1980s.were a decade of rapid output growth for Chinese industry. In sharpcontrast to the depressed level of economic activity associated with reform efforts in Russiaand Eastern Europe, Chinese reform seems to have accelerated rather than dampened the rateof output growth. Although China's industrial output statistics are surrounded by numerousuncertainties, it seems reasonable to conclude that annual real growth stood in theneighborhood of ten percent during the 1980s, with the largest increases concentrated amongsmaller, relatively labor-intensive firms and within the tiny but dynamic private sector. Thisresulted in a considerable realignment of output shares, with the proportion of outputcontributed by state firms plunging from more than three-quarters in 1980 to barely half tenyears later. At the same time, the contribution of TVE firms leaped from ten to 25 percentof total output, largely at the expense of small-scale firms in the state sector.

Our review of capital intensity, although hampered by pricing problems and by theabsence of good information for TVE industry early in the decade, indicates rather littlechange in the overall capital-labor ratio, as increases in every segment of industry wereroughly balanced by the growing share of relatively labor-intensive TVE enterprises in totalproduction.

Available data on productivity change indicate across-the-board increases in total factorproductivity during the 1980s, with the TVE enterprises showing the best results and statefirms recording the lowest rates of productivity growth.

Product markets for the output of Chinese industry became increasingly competitiveduring the 1980s. The reduced importance of central planning had the effect of sharplyreducing entry barriers surrounding previously protected markets, including markets formerlydominated by large state-sector firms. The long-standing policy of building "full sets" ofindustries in various political jurisdictions, although criticized in the past as wasteful, turned


out to have beneficial consequences in the form of low and falling concentration ratios. Thisoutcome is very different from recent developments in the Russia and Eastern Europe (e.g.Dhanji 1991), where market power seems much more prevalent. Rapid increases in exportsand imports of manufactures exposed domestic firms to additional sources of competitivepressure.

The impact of growing competition is reflected in the broad deterioration of financialresults for virtually every segment of Chinese industry during the 1980s.

How should we interpret these observations? Four themes emerge from the presentsurvey.

The first concerns exposure to markets. Prior to reform, many industrial producers,especially in the state sector, were virtually immune to market pressures. State agencieswere the prime source of labor, equipment, materials, funds, foreign exchange, and demand.Completion of production assignments was accepted as proof of adequate performance, evenif the goods traveled no further than the manufacturer's doorstep. All this has changed.Even though state agencies continue to provide inputs and purchase outputs, virtually allChinese industrial firms are now deeply involved in markets for inputs and products.Although the share of market transactions varies widely across the universe of inputs andoutputs, markets now exist for virtually every commodity or service purchased or sold byChina's industrial enterprises. At the margin, the typical or representative transaction forany Chinese firm, including the largest state-owned units, is a market transaction, even inareas where the share of non-market transactions remains substantial.

Competition provides the second theme. China's rapidly expanding markets forcommodities and services now generate strong competitive pressures. Without invoking thetheoretical ideal of "pure" or "perfect" competition, we may assert that most Chinese firmsnow face strong market rivalry. New producers quickly invade markets that promise highprofits. Indeed, there are many complaints of markets being spoiled by excessive or "blind"supply response, especially in the field of consumer durables.

Falling profits are often attributed to enterprise inefficiency and to the incompletenature of the reform process. But these explanations fail to encompass the totality offinancial outcomes. Why have profits fallen in the market-oriented TVE sector? Why do wesee a sharp reduction in the dispersion of profitability across industrial branches andownership types? These outcomes are not difficult to comprehend once we recognize that,despite the persistence of specific barriers to entry, Chinese industry has experienced amassive increase in competitive pressures during the reform decade of the 1980s. In thisrespect, China may be quite different from the reforming states of Eastern Europe and theformer USSR and from other large Third-World nations like Brazil, Mexico, and India.

The next theme concerns a variety of convergence phenomena, which offer a means ofmeasuring progress in the transition from plan to market. In a market economy, the efforts


of individuals and businesses to "buy cheap and sell dear" acts to compress inter-enterprise,intersectoral, or interregional divergence in the price of goods or the earnings paid toresource-holders. Central planning provides nothing comparable to the "law of one price"found in a market system. In a planned economy, there is no large group -of economicagents who possess the information, the incentive, and the means to eradicate largedivergences in price and productivity.

This characteristic difference between plan and market systems creates a researchagenda for tracking the progress of reform. As the reform process develops, we expect thegradual emergence of a wide range of convergence phenomena typical of a marketenvironment. This survey has revealed several instances of this sort; additional evidencecomes from other studies:

-- The convergence of profit rates across branches (Naughton 1992) implies thatresources migrate toward product lines that promise high profits and seek toescape from product lines with poor market prospects.

-- The convergence of profit rates across ownership types (Table 12) implies similarresource transfers between state and "non-state" firms within the public sector. Inparticular, this result implies the existence of large informal networks that channelfunds from state-owned firms into the fast-growing TVE sector.

-- Several studies find partial convergence of nominal marginal factor returnsbetween state and collective industry (Jefferson, Rawski, and Zheng 1992a),among a small sample of industrial firms in Wuhan (Jefferson and Xu 1991), andwithin a more extensive sample of 226 large- and medium-sized state enterprises(Jefferson and Xu 1992).

-- Another development observed during the 1980s is a reduced dispersion ofprovincial indexes of total factor productivity (TFP) for state-owned industry.There is evidence of convergence for provincial indexes of TFP both across andwithin three major geographic regions - coast, central, and western (see Hsueh,Tsui, and Rawski 1992).

-- We also see a reduced dispersion of capital intensity across enterprise types (Table4).

The widespread appearance of convergence phenomena associated with markets ratherthan planning shows that market penetration extends far beyond rural industry and coastalexport zones. These results leave little room to doubt that market forces have begun to"bite" throughout China's vast industrial establishment, including the large state firms thatformed the core of the pre-reform planning system.


Finally, the unique success of China's reform experience during the 1980s suggests thepossible importance of structural differences between pre-reform economic circumstances inChina and other socialist nations. China's industrial system of the 1960s and 1970s was farremoved from the "classical" pattern of central planning that economists have distilled fromthe experience of the USSR. Several observations from this survey illustrate outcomes thatreflect unexpected features of pre-reform socialism in China:

-- at the margin, nominal returns to intermediate inputs display full convergenceacross state and collective industry virtually from the start of the reform process(Jefferson, Rawski, and Zheng 1992a).

-- during the course of a dramatic increase in the role of market forces in productionand investment decisions, the branch composition of industrial output changedvery little during the 1980s.

-- the broad dispersion of industrial activity among several very different types ofenterprise (Table 1) is not a product of reform. This represents an importantdivergence from the dominance of large, centrally directed firms anticipated undera system of planning.

These unexpected results point to the need for further study of China's pre-reformeconomy, especially on the part of observers who propose to recommend a "Chinese pattern"of gradual reform to policy-makers in nations where initial conditions may be very differentfrom China's.

These themes underline the conclusion that China has experienced a rapid and extensiveprocess of reform that, while far from complete, has injected elements of market activity intoevery corner of China's huge industrial establishment. Despite the retention of mandatoryplan targets, bureaucratic resource allocation, price controls, subsidies, and other trappingsof the old plan system, state-owned industry, widely regarded as the most difficult reformtarget, cannot escape the impact of reform. Reform has forced state-owned industries toconfront unprecedented competition from aggressive newcomers, including other state firms.Enterprises long accustomed to passively accepting official instructions suddenly findthemselves engaged in a hectic scramble for resources and customers.

Realistic Chinese managers expect no early respite from these pressures. Althoughvarious forms of protection continue, the remnants of central planning are everywhere inretreat. Recent developments, including new rules intended to limit government interventionin enterprise activities, the erosion of the central government's fiscal resources, and China'simpending return to membership in GATT offer the prospect of more rather than lesscompetition in the near future.

This survey of Chinese industry during the decade of the 1980s confirms some widelyheld views. It also upsets a number of common perceptions. This mixture of predictable


and unexpected results emphasizes the need for the sort of detailed, empirical researchcontained in the essays that follow. The application of preconceived notions about the natureof socialist economies or the requirements of transition appears likely generate confusion anderror in the case of China, and probably for other transitional economies as well.

30 An Overview of Chinese Industry in the 1980s

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Table 1

Overview of Chinese Industry, 1987

State Sector Industry Urban Urban Township & Village Industry

Independent Accounting Units

Biggest Large Small COE Private District Village Individual

Firms Firms Firms Firms Firms Level Level Firms

[A] [B] [C] ED] [E] [F] [GI [H]

1 Number of firms (units) [F) 1243 8292 64403 134439 2001 257316 712027 61134882 Gross output, curr. price [CVIO] 260.85 304.45 263.35 167.20 16.94 141.40 119.60 80.203 Gross output, 1980 prices [GVIO] 208.58 269.22 220.88 159.95 16.18 134.60 115.00 74.804 Employment (000s) EL] 12244 12372 16493 14765 NA 15749 17651 192665 Fixed assets, original cost [KFO] 368.36 217.98 194.01 68.89 7.73 NA NA NA6 Fixed assets, net value EKFN] 241.87 152.29 139.67 49.88 6.20 NA NA NA

7 Net value of output [NVIO] 98.32 58.75 71.66 48.70 4.52 33.87 NA NA8 Circulating capitaL EKW] 64.35 125.05 NA 48.28 3.95 NA NA NA

9 Profit and tax [P + T] 57.45 NA NA 20.41 2.43 NA NA NA10 Profit [P] 28.75 28.47 24.08 NA NA NA NA NA

11 Retained earnings (RE] NA NA 8.11 NA NA NA NA NA

12 Wage bilL [WBJ 23.08 19.52 22.48 NA NA NA NA NA

13 Material cost [MATS] 162.53 245.70 191.69 NA NA 107.53 NA NA

14 Workers/firm [L/F] (persons) 9851 1492 256 110 NA 61 25 3

15 Output value/firm [CVIO/F] 209.86 36.72 4.09 1.24 8.47 0.55 0.17 0.01

16 Net fixed assets/firm [KFN/F] 194.59 18.37 2.17 0.37 3.10 NA NA NA

17 Fixed assets per firm EKFO/F] 296.35 26.29 3.01 0.51 3.86 NA NA NA

18 Net fixed assets/worker EKFN/L] 19.75 12.31 8.47 3.38 NA NA NA NA

19 Gross fixed assets/worker [KFO/L] 30.08 17.62 11.76 4.67 NA NA NA NA

20 Gross output per worker [CVIO/L] 21.30 24.61 15.97 11.32 NA 8.98 6.78 4.16

21 Net output per worker [NVIO/N] 8.03 4.75 4.34 3.30 NA 2.15 NA NA

22 Wage bill per worker [WB/L] 1.88 1.58 1.36 NA NA NA NA NA

23 Retained profit/worker ERE/L] NA NA .49 NA NA NA NA NA

24 Output/net fixed assets [CVIO/KFN] 1.08 2.00 1.89 3.35 2.73 NA NA NA

25 Output/gross fixed assets [CVIO/KFO] 0.71 1.40 1.36 2.43 2.19 NA NA NA

26 Net output/fixed assets [GVIO/KFO] 0.27 0.27 0.37 0.71 0.58 NA NA NA

27 Retained prof/fixed asset [RE/KFN] NA NA 0.06 NA NA NA NA NA

Units:. Lines 2-3, 5-13, billion yuan; Lines 15-17, million yuan; Lines 18-23, thousand yuan;Lines 24-27 are ratios.

Sources and Notes:

Material cost (Line 13) is the difference between CVIO and NVIO.

[A] LS, pp. 414ff. Biggest firms are those with 5000 or more workers.

[B] Data from firms classified as "Large and medium" employing less than 5,000 workers; LS, pp. 414ff.

[C] ResiduaL. Data for aLL state-sector indepdent accounting units at and above the district (xiang) Level, Lessfigures for large and medium sized firms. Overall data were provided by the State Statistics Bureau.

[D] and [E] Data are from Urban 1988. The data for collective firms are from pp. 86, 140, 167, and 203. Most of these

figures are for COE independent accounting units in the city proper (not including rural districts attached to the

cities). The number of firms is for the urban districts (shigy); this excludes firms in rural areas administeredby municipal governments. siqu" urban districts, and is not limited to independent accounting units. Employment

00figures are derived from data on employment and NVIO or CVID per worker. NVIO data are for independent units

within the urban area (sig). Working capital is the quota figure only; the figures are therefore incomplete.

Data for private urban firms are from the same source and subject to the same qualifications as the urban COE data;

see pp. 86, 140, 176.

[F], [G], [HI. XZ 1989, pp. 581-582, 594. The data in column H include figures for enterprises run by single (getihu)and multiple (Lianhu) households. Net output (NVIO) is calculated using a ratio of net to gross output (NVIO/CVIO)

of 0.2395; this figure comes from 1987 data for district (xiang) level industry in Jiangsu province (Jiangsu 1988,

pp. 204-207).


Table 2Growth of Chinese Industrial Output, 1980-1990

A. Growth of NominaL Output

Gross Industrial Output Average Annual

Billion yuan, current prices Percentage Shares for Growth, 1980/90

1980 1985 1990 1980 1985 1990 Increment (percent)

1980/90

A. SOE 391.6 630.2 1306.4 76.0 64.9 54.6 48.7 12.8

B. UCOE 70.4 129.0 247.3 13.7 13.3 10.3 9.4 13.4

C. XZ 50.9 182.7 605.0 9.9 18.8 25.3 29.5 28.1

D. Private 0.1 18.0 129.0 0.0 1.9 5.4 6.9 100+

E. Other 2.4 11.7 104.8 0.5 1.2 4.4 5.5 45.9

Total 515.4 971.6 2392.5 100.0 100.0 100.0 100.0 16.6

B. Calculated Real Output

Average Annual

Implicit Deflator, 1980=100 Real Output (1980=100) Growth, 1980/90

1980 1985 1990 1980 1985 1990 (percent)

A. SOE 100 109.0 158.7 100 148 210 7.7

B. UCOE 100 74.2 63.4 100 247 554 18.7

C. TVE 100 145.3 214.4 100 247 554 18.7

D. Private 100 102.0 126.4 100 17647 102057 100+

E. Other 100 97.4 121.2 100 501 3603 43.1

Total 100 106.8 141.6 100 177 328 12.6

Sources: Gross output value at current prices is from TJNJ 1991, pp. 378, 391, 394.

Output for urban collectives (Row 8) is the difference between total output of

collectives (TJNJ 1991, p. 394) and output reported for TVE industry (xiangzhen giye; p. 378).

Implicit deflators are taken from Table IOWM5 contained in unpublished worksheets compiled

by InderJit Singh and Geng Xiao at the World Bank. These deflators are derived from output

data in current and constant prices found in TJNJ 1991, pp. 378, 394, 395.


Table 3Net (of Depreciation) Value of Fixed Assets per Worker in Chinese Industry, 1987

Fixed Workers Net Fixed AssetsAssets (million) per Worker(4 bill) Yuan Relative

1. ALL independent units 634.68 70.96 8944 100.0

2. SOE independent units 524.24 47.97 10928 122.1

A. Large* 288.41 13.84 20839 233.0

B. Medium* 105.75 10.06 10512 117.5

C. Small** 139.67 24.93 5602 62.6

3. UCOE 3380# 37.8

4. TVE 87.70 52.67 1665 18.6

*includes some UCOE units

** SOE total Less figures for Large and medium SOE units

# Table 1

Sources: Line 1: Industry 1988, pp. 47, 293. Line 2: assets, Industry 1988, p. 48. Lines 2A and 2B, LS 1989, pp. 311,

323. Line 2C, calculated from Line 2 and data in LS 1989, pp. 311, 323. Line 4, fixed assets (original value)

and employment from TVE 1988, p. 23.

Notes:

Line 2: Average 1987 employment for SOE independent units is estimated as follows: 1987 output value for SOEindependent units is the sum of Light and heavy industry subtotaLs shown in TJNJ 1988, p. 310. Labor

productivity for SE independent units in 1987 is 16,171 yuan per worker (Industry 1988, p. 50). Thus

employment is *799.68 biLLion/16,671 or 47.97 million persons.

Line 4: The ratio of net (i.e. depreciated) to undepreciated fixed assets for the TVE sector is assumed to be 75

percent. This assumption comes from 1989 data for COE independent accounting units within the following

jurisdictions in Jiangsu province: Nanjing, Wuxi, Xuzhou, Changzhou, Suzhou, and Nantong. The ratio of

combined net to gross fixed assets for those Localities is .7551 (Jiangsu 1990, pp. 215-216).


Table 4Fixed Assets (Original Cost) Per Worker in Chinese Industry, 1980-1990

Fixed Labor KFO/LAssets (mill) (yuan)(~bitt)

A. ALL Independent Units

1980 413.40 46.80 8833

(100.0)

1990 1439.00 78.34 18369(208.0)

B. ALL SE Units1980 346.52 33.34 10394

(100.0)

1988 757.99 42.29 17924

(172.4)

1990 1161.07 43.90 26448

(254.5)

C. TVE Enterprises

1980+ 32.63 30.00 1088

(100.0)

1988

a. TVE+ 209.87 95.45 2199

b. Xiangcun+ 182.45 48.94 3728

(342.6)

c. Xiangcun industry 133.04 35.07 3794

Sources and notes: both fixed assets and employment are year-end figures; data in parentheses are indexes with a

1980 base.

+ indicates that ALL enterprises, not just industrial units, are included

Panel A: 1980 data from the State Statistics Bureau. The employment figure is estimated from the 1981 total of

49.02 million by applying the percentage change for industrial employment during 1980/81 shown in TJNJ 1981,p. 108. The 1990 data for fixed assets are from TJNJ 1991, p. 406. The employment total is constructed as

follows: employment at state and collective independent units is 74.01 million (data from the State

Statistical Bureau). Industrial employment (evidently excluding TVE firms) rose by 3.57 percent during

1988/90 (TJNJ 1991, p. 102). In 1990, employment in industrial firms under ownership forms designated as

"other" amounted to 2.20 percent of the combined figure for SOE and COE firms (ibid., p. 99). Estimated 1990

employment in independent units is 74.01*1.0357*1.0220 = 78.34 million.

Panel B: 1988 data from TJNJ 1991, pp. 27, 105; 1990 data from Industry 1991, p. 3.

Panel C: 1980 figures are from TVE 1986, 1980 section, pp. 8, 23. They cover commune and brigate enterprises in

aLL sectors (not just industry). 1988 figures are from TVE 1989, pp. 20, 42, 43. The figures marked (a)

cover all enterprises (not just industry) in the category "township and urban enterprises" (xianqzhen give).

Data marked (b) cover all enterprises (not just industry) in the category "township and village enterprises"

(xianacun give). These data are most directly comparable to the 1980 figures. The figures marked (c) cover

township and village industrial enterprises.


Table 5Rough Estimate of Changes in Total Factor Productivity

for TVE Enterprises, 1980-1990

Index Numbers, 1980-100

GVIO DEFL DGVIO L KFN Index of TFP

1980=100 1984=100

1980 100.00 100.00 100.00 100.00 100.00 100.00

1981 113.46 100.56 112.83 99.00 114.29 105.80

1982 129.87 100.66 129.02 103.77 128.72 110.99

1983 154.79 100.81 153.54 107.83 140.23 123.80

1984 260.30 102.77 253.28 173.60 167.56 148.48 100.00

1985 415.34 108.97 381.16 232.63 221.69 167.79 113.00

1986 539.03 113.52 474.83 264.57 279.40 174.58 117.58

1987 725.27 120.71 600.84 293.50 360.83 183.65 123.681988 988.84 134.50 735.20 318.17 464.10 187.97 126.591989 1130.83 154.41 732.35 312.23 558.72 168.17 113.261990 1288.11 158.73 811.51 308.83 627.33 173.37 116.76

Source: CalcuLated from data on gross output (GVIO), year-end employment (L),year-end net fixed assets (KFN) for TVE enterprises (not Limited toindustry) from TJNJ 1991, pp. 377-79. The GVIO data are deflated using

implicit price indexes for state industry (DEFL) taken from Xiao 1991 (Table

IOWN 7) to obtain the index of deflated gross output (DGVIO).

Index of TFP = 100 * DGVIO/ 0.5*(L + KFN), where DGVIO, L and KFN are

index numbers shown in this table.


Table 6

Trends in the Branch Composition of China's Industrial Output,excluding vilLage-Level firms

(Percent)

1970 1970 1980 1981 1990

rev#

1 Metallurgy 9.4 10.5 8.6 8.8 7.3

2 Electricity 3.1 3.5 3.8 3.8 3.0

3 Coal 2.3 2.6 2.3 3.0 2.1

4 Petroleum 4.3 4.8 5.1 5.5 3.8

5 Chemicals 16.5 18.5 12.5 11.4 12.7

6 Machinery 26.8 30.0 25.5 20.9 28.9

7 Building materials 2.6 2.9 3.6 3.8 4.3

8 Forest products 1.5 1.7 1.7 2.0 1.3

9 Food processing 8.2 9.2 11.4 13.3 10.5

10 Textiles 13.4 15.0 14.7 16.5 14.0

11 Apparel 0.0* 0.0* 2.7 2.8 2.8

12 Leather goods 0.0* 0.0* 1.0 1.1 1.2

13 Paper and publishing 1.2 1.3 1.3 1.3 1.3

14 Cultural & craft goods 0.0* 0.0* 2.2 2.4 3.0

15 Other 0.0* 0.0* 3.4 3.3 3.8

TOTAL 89.3 100.0 99.8 100.0 100.0

Note: Figures for 1970 are calculated from output totals valued in 1957 prices; 1980 data are based on 1970

prices; those for 1981 and 1990 are based on 1980 prices. Adjustment of this inconsistency would have no

significant impact on the branch composition of output.

Source: Industry 1991, pp. 72-73.

#The 1970 figures shown in the source include only 11 of 15 branches and sum to only 89.3 percent rather than

100. The revised data shown in this column have been proportionately increased to bring the total to 100. In

1970, output of branches 11 and 12 is presumably included in the total for textiles; output for branch 14 is

included in the total for paper and publishing.

*no data given for 1970.


Table 7

Branch Structure of GVIO at 1980 prices (percent)

A. Branch Structure for State Enterprises (SOE)

Br 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

1 11.80 11.99 11.81 11.08 10.96 10.73 10.77 10.51 10.58 10.52

2 4.82 4.79 4.87 4.86 4.82 4.59 4.45 4.66 4.61 4.59

3 4.28 3.99 3.61 3.42 3.36 3.25 3.15 2.99 2.83 2.65

4 8.01 7.81 7.49 7.16 6.83 6.69 6.68 6.52 6.43 6.37

5 11.81 11.60 11.92 12.02 12.41 12.44 12.43 11.70 12.61 12.36

6 21.12 21.34 20.26 18.55 19.86 21.34 23.12 24.58 25.86 25.51

7 2.75 2.69 2.67 2.50 2.57 2.56 2.59 2.81 3.45 2.708 1.89 1.86 1.78 1.73 1.67 1.56 1.48 1.24 1.14 1.13

9 12.44 12.65 13.01 14.30 14.58 13.86 13.52 13.19 12.99 12.9910 13.83 14.20 16.11 18.10 16.67 16.78 15.56 15.19 14.56 14.4211 1.04 0.51 0.54 0.60 0.56 0.55 0.56 0.56 0.52 0.5312 0.00 0.53 0.58 0.63 0.57 0.52 0.48 0.47 0.48 0.46

13 3.07 3.18 3.18 2.93 1.44 1.43 1.46 1.48 1.60 1.64

14 0.00 0.00 0.00 0.00 1.48 1.44 1.42 1.48 0.46 0.4715 3.14 2.85 2.17 2.12 2.24 2.26 2.32 2.62 1.89 3.67

Sum 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

B. Branch Structure for CoLLective Enterprises (COE)

Br 1978 1979 1980 1981 1982 1983 1984 1985 1986 19871 1.97 2.28 2.34 2.17 2.32 2.47 2.54 2.89 3.39 3.562 0.11 0.15 0.17 0.21 0.23 0.25 0.22 0.20 0.20 0.203 2.27 2.12 1.94 1.87 1.93 1.94 1.92 1.64 1.63 1.424 0.12 0.13 0.13 0.11 0.11 0.14 0.13 0.15 0.18 0.215 10.94 10.74 10.76 10.93 11.45 11.94 11.26 10.94 11.17 11.306 36.07 34.84 32.63 30.38 30.68 31.55 30.95 33.27 32.83 33.07

7 8.37 8.63 8.32 7.91 8.57 8.46 8.17 7.50 8.89 7.518 2.55 2.73 2.72 2.64 2.71 2.52 2.33 2.23 2.85 2.289 2.96 3.39 3.70 4.39 4.69 4.71 5.04 4.96 5.37 5.46

10 7.90 8.58 10.04 11.92 12.08 12.26 16.02 16.30 15.76 15.96

11 11.28 9.36 10.49 10.96 9.59 9.22 8.44 7.10 6.39 6.2212 0.00 2.35 2.94 3.05 2.58 2.34 2.09 2.08 2.17 2.2013 5.48 5.06 5.35 5.53 5.26 4.61 1.02 1.01 2.45 2.6114 0.00 1.02 1.02 1.06 1.08 1.08 4.18 5.13 3.62 3.9415 9.97 8.61 7.43 6.88 6.74 6.50 5.71 4.59 3.11 4.07

100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00


C. Branch Structure for SOE and COE Combined (percent)

1978 1979 1980 1981 1982 1983 1984 1985 1986 19871 9.99 10.21 9.90 9.18 9.07 8.88 8.69 8.39 8.49 8.372 3.95 3.94 3.92 3.86 3.82 3.61 3.38 3.43 3.33 3.233 3.91 3.65 3.27 3.08 3.05 2.96 2.84 2.61 2.48 2.274 6.56 6.40 6.00 5.65 5.36 5.22 5.02 4.75 4.61 4.475 11.65 11.45 11.69 11.79 12.20 12.33 12.14 11.49 12.19 12.036 23.87 23.81 22.76 21.08 22.22 23.63 25.10 27.00 27.88 27.857 3.79 3.78 3.81 3.65 3.87 3.88 4.00 4.11 5.03 4.198 2.01 2.02 1.97 1.92 1.89 1.77 1.70 1.51 1.64 1.489 10.70 10.96 11.13 12.18 12.42 11.81 11.38 10.91 10.77 10.66

10 12.74 13.17 14.89 16.78 15.67 15.77 15.68 15.50 14.91 14.8911 2.92 2.13 2.55 2.82 2.53 2.49 2.55 2.38 2.23 2.2912 0.00 0.86 1.06 1.15 1.01 0.93 0.89 0.92 0.97 1.0013 3.52 3.53 3.62 3.49 2.28 2.15 1.34 1.35 1.85 1.9414 0.00 0.19 0.21 0.23 1.39 1.36 2.12 2.49 1.38 1.5415 4.39 3.91 3.23 3.14 3.22 3.21 3.17 3.16 2.24 3.79

100.00 100.00 100.00 100.00 100.00 99.99 100.00 100.00 100.00 100.00

Note: these data exclude viLLage-LeveL enterprises; they are confined to independent accounting units.

Key to branches:

1 metallurgy

2 power

3 coal

4 petroleum5 chemicals6 machinery

7 building materials8 forestry and wood processing9 food processing

10 textiles

11 appareL12 Leather processing

13 paper

14 cultural and art products15 other

Source: Data provided by the State Statistics Bureau.


Table 8Branch Structure of Output in Urban and Rural Industry, 1990

(I billion and percent)

Gross Output (current prices) Branch Output Shares (%)TotaL* Urban Xiang Village Urban Rural

A B C D E F

1 MetalLurgy 194.83 179.30 15.53 10.12 11.10 5.212 Electricity 67.66 66.26 1.39 .29 4.10 0.343 Coal 52.88 45.39 7.49 7.08 2.81 2.964 Petroleum 92.90 92.12 .78 .54 5.70 0.275 ChemicaLs 248.28 220.07 28.21 24.30 13.62 10.666 Machinery 440.18 380.63 59.55 53.75 23.56 22.99

7 BLdg. material 98.06 64.02 34.03 45.01 3.96 16.048 Forestry 27.66 22.37 5.29 6.63 1.39 2.429 Food process. 220.15 200.20 19.94 22.00 12.39 8.51

10 Textiles 256.35 211.33 45.02 23.29 13.08 13.8611 Apparel 41.46 29.95 11.50 9.10 1.85 4.1812 Leather 19.91 14.62 5.29 4.16 0.90 1.9213 Paper 38.87 32.38 6.48 7.29 2.00 2.8014 Cultural goods 45.44 36.18 9.26 9.38 2.24 3.7815 Other 24.23 20.60 3.62 16.39 1.28 4.06

Total 1868.92 1615.47 253.44 239.40 100.00 100.00

* excludes vitlage-leveL enterprises

Note: output data are converted from 40 to 15 branches on the basis of informationshown in Industry 1988, pp. 373-379. The conversion is not precise because thedata used here do not include separate figures for sub-branches within the currentforty branch classification.

Sources: [A3 Output value for independent accounting units at or above the district ()iam)level from Industry 1991, pp. 135-141.

[B] Derived as a residual: CB] = [A] - [C].

[C], [D] Output from independent units at the district (Ligm) level and from enterprises at thevillage (cun) level is from TJNJ 1991, pp. 419-420.

[F] branch shares in combined output of district and viLLage-Level firms.


Table 9Concentration Ratios in Selected Industries, 1987 Data

Data for Largest Firms Branch Share

Branch Minimum Combined Output of

Number CVIO CVIO Largest

(Billion Yuan) Firms

A B 100*A/B(percent)

Coal mining 6 0.50 4.1 25.3 16.2

Oil/gas extraction 7 1.00 25.2 29.2 86.3

Mining of bidg. mats. 3 0.03 0.1 4.8 2.1

Food processing 18 0.10 2.7 80.6 3.3

Tobacco 10 0.50 7.4 27.7 26.7

Apparel 4 0.10 0.6 22.8 2.6

Paper 12 0.10 2.1 22.9 9.2

Power 13 1.00 18.8 36.2 51.9

Oil refining 5 2.00 11.0 33.9 32.4

Chemical fiber 3 0.50 4.5 12.9 34.9

Rubber 4 0.30 1.4 16.6 8.4

Bldg. materials 16 0.10 2.3 59.3 3.9

Ferrous metaLLurgy 4 0.20 16.3 76.6 21.3

Transp. equipment 11 0.50 5.6 42.6 13.1

Source: for Large firms, LS 1989, pp. 474-83; branch output from

Industry 1988, pp. 86-89. Output data are based on current prices.

46 An Overview of Chinese Indusyy in the 1980s

Table 10Industrial Concentration Ratios for 1986 and 1987 using Provincial Output Data

Share of Commodity Output

Product Top Top 4 LeadingProvince Provinces Producer

A. Data from Industry 1988:

Railway coaches (223) 57 100 Hebei

Railway freight wagons (223) 38 82 Heilongjiang

Motor vehicles (223) 24 62 Liaoning

Transformers (227) 22 49 Hebei

Electric wire (227) 22 53 Tianjin

Washing machines(227) 16 55 shanghai

Sulfuric acid (181) 9 34 Liaoning

Ammonia (181) 9 33 Hebei

Insecticide (181) 25 57 Tianjin

Silicon (181) 12 29 Hebei

Cotton cloth (166) 15 41 Jiangsu

8. Data from TJNJ 1988

Bicycles (362) 16 50 Tianjin

Sewing machines (362) 33 66 Shanghai

Power generating equip. (363) 45 70 Anhui

Machine tools (363) 17 50 Zhejiang

Large/mediuxn tractors (363) 28 84 Shanghai

Concentration figures by province for industrial goods: share of top 4 PROVINCES in 1987 production of: (1988 industry)

Sources: A. Industry 1988; B. TJNJ 19888. Page numbers are shown in parentheses.


Table 11Growth of Exports from TVE Firms, 1984-1990

(US$ Billion)

Year China's Export of Manufactures

Total TVE TVE Share

(percent)

1984/85 27.7 7.28* 26.3

1986 19.7 4.5 22.8

1987 26.2 5.1 (4.35**) 19.5

1988 33.1 8.02 (9.02) 24.2

1989 37.5 10.1 26.9

1990 46.2 12.5 27.0

* Zwieg derives this figure as a residual, presenting a seeminglyerroneous figure of $2.38 billion for 1984/85

** Alternate figure from XZ 1989, p. 575, using an exchange rate of$1 = 43.7221.

# Alternate figure from TVE 1989, p. 13, using the same exchange rate.

Sources: export of manufactures from TJNJ 1991, p. 616; except as noted,TVE exports of manufactures are taken from Zweig 1991, p. 718.


Table 12Profit/Capital Ratios in Different Segments of Chinese Industry,

1980-1988, (percent)

Rate of Return Including Tax Rate of Return Exclusive of Tax

100*(Profit + Tax)/K 100*Profit/K

SOE COE TVE SOE COE TVE

1980 24.8 26.6 32.5 16.0 18.5 26.7

1981 23.8 23.4 29.1 15.0 15.2 22.31982 23.4 22.0 28.0 14.4 13.8 20.21983 23.2 23.7 27.8 14.4 15.3 18.5

1984 24.2 22.3 24.6 14.9 13.9 15.21985 23.8 24.5 23.7 13.2 15.3 14.5

1986 20.7 19.4 19.7 10.6 11.1 10.61987 20.3 NA 17.0 10.6 NA 9.01988 20.6 19.7 17.9 10.4 11.3 9.31989 17.2 NA 15.2 7.2 NA 7.1

1990 12.4 NA 13.0 3.2 NA 5.9

Rate of return including tax: 100*(P+T)/K

Rate of return excluding tax: 100*P/K

where P = sum of profit figures (positive or negative) for all firms

T = sum of tax payments by all firms

K = sumn of net fixed assets plus average amount of working capital in use

Sources:

SOE data for independent accounting units calculated from TJNJ 1991, p. 416

COE data for independent accounting units are calculated using data from the following sources: for 1980-84,Industry 1984, p. 85; for 1985, Industry 1986 p. 87; for 1986, Industry 1987, p. 128; 1988 data wereprovided by the State Statistical Bureau

TVE data for alL enterprises (not just industry) calculated from TJNJ 1991, pp. 377-79,


Table 13Characteristics of Loss-Making Enterprises, 1986 and 1990

1986 1990

Percent of firms making losses

ALL firms 13.2 21.0

State firms 13.1 27.6

CoLLective firms 13.3 19.4

Other ownership forms 15.8 32.6

Light industry 13.6 22.0

Heavy industry 12.6 20.0

Mining 16.1 18.1

Materials production 12.9 22.9

Processing industries 11.8 19.5

Large scale 9.2 23.7

Medium scale 8.7 25.0

Small scale 13.2 21.0

Ratio of Losses to net profitsa

All firms 8.2 81.0

State firms 7.9 89.9

CoLLective firms 9.3 61.5

Other ownership forms 13.4 59.6

Light industry 6.5 80.3

Heavy industry 9.2 81.5

Mining 63.0 -209.3b

Materials production 2.2 28.2

Processing industries 8.4 49.8

Large scale 4.4 68.2

Medium scale 7.5 86.1

SmaLl scale 12.6 94.2

atosses of Loss-making firms as a percentage of combined (positive or negative) profit/Loss for aLL firms; afigure of 100 indicates that profits of profitable firms are double the losses of loss-making enterprises.

bnegative number indicates negative gross profits in this segment of industry.

Source: Industry 1991, pp. 97-99, 124-126.

an overview of chinese industry in the 1980s

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