The Development of China’s National Oil Policy

State Capitalism, An Explanatory Model

Henrik Bergsager

Master Thesis, East Asian Studies

UNIVERSITY OF OSLO

09.11.2011.

The Development of China’s National Oil Policy: State Capitalism, An Explanatory Model

Henrik Bergsager

© Henrik Bergsager

2011

The Development of China’s National Oil Policy: State Capitalism, An Explanatory Model

Henrik Bergsager

http://www.duo.uio.no/

Trykk: Fridtjof Nansen Institutt

Abstract

Since China opened its economy up to foreign investments in the late 1970s, its growth measured in GDP has centered around ten percent annually. Unsurprisingly, its energy consumption has followed and currently situated China as the second largest energy consumer in the world with the fastest increase in energy consumption per capita. Naturally, the topic of how China will secure this rising energy demand has spurred discussion not only within the Chinese government but also throughout other major energy consumers in the world, underscoring China’s potential impact on the availability and market price of energy resources such as oil and gas.

In this graduate paper I will discuss the important factors influencing the decision-making process and power relation relevant to the development of China’s national oil policy. The reason why I have chosen this topic is of course rooted in the presented problematic issues above. In addition, although this has been a widely published topic there are still uncertainties of which factors actually drives the Chinese oil related investments overseas. As a result, in this paper I will present an institutional framework which I have developed to answer exactly this issue. This institutional framework is primarily based on two overlapping theoretical frameworks, namely that of neo-mercantilism economic theory and Institutional Political Economy. Through an assessment of China’s economic model and how it has evolved since the opening up in the late 1970s, I correlated these economic frameworks to the Chinese empirical model and developed the institutional framework I refer to as China’s version of state capitalism. Based on this framework, I formulated three principles that, as will be presented in this paper, dictate the overall agenda of China’s policy in terms of the importance of State-Owned Enterprises and National Oil Companies to the Chinese economy.

These qualitative research results combined with my institutional framework and two case studies illustrating the adaptation and promotion of my research results have resulted in the conclusion that: China is not promoting a neo-mercantilist policy of “locking up” foreign oil reserves. On the other hand, the Chinese institutional framework of state capitalism which executed through its principles and coordinate between the state and the institutions through the Chinese cultural and socio political guanxi network and the nomenklatura system constitute the best explanatory model for how the Chinese national oil policy is developed and executed.

Acknowledgements

As I have been working on this paper’s topic for over three years there are several people I would like to give thanks to.

First of all, I want to especially thank my thesis supervisor Vladimir Tikhonov. He has been of great help both through the comments he has given me, but also for challenging me in taking on a topic of such difficulty and complexity. I also want to thank my second supervisor Øystein Tunsjø for contributing with his expertise on the Chinese oil industry.

In addition, I want to thank the Fridtjof Nansen Institute and everyone who works there. Especially, Lars H. Gulbrandsen, Per Ove Eikeland and Anna Korppoo for their valuable comments.

I also want to thank my family and friends for being such a support throughout this period.

Last but not least I want to especially thank Egil Ingvar Bergsager and my Chinese friends for helping me acquire the qualitative data necessary for answering my thesis question.

Lysaker, 09.11.2011.

Table of Contents

1Introduction: A Short Summary1

1.1The Problems to Address2

1.1.1Why address the development of China’s national oil policy?2

1.1.2My approach to the topic4

1.1.3My contribution to the current debate5

1.2Methodology6

1.2.1Why I have chosen to use qualitative interviews6

1.2.2The Testing of My Institutional Framework7

1.2.3The Measures Taken to Heighten the Integrity and Originality of this Paper8

2China’s Version of State Capitalism10

2.1An Introduction to its Institutional Framework10

2.2Theoretical Background: Current Academic Work on Chinese State-Led Capitalism11

2.3State Capitalism: Theoretical Background13

2.3.1Neo-Mercantilism and the Importance of SOEs13

2.3.2Friedrich List and East Asian Economies’ Incorporation of His Theory15

2.3.3Institutional Political Economics16

2.4State Capitalism and Its Guiding Principles16

2.5The Characteristics of the Contemporary PRC Economic Model18

2.5.1The Chinese Tradition of Activist Growth-promoting State19

2.5.2The Regional Influences on China’s Economic Strategy Development20

2.5.3A Regional Comparison between China’s State Capitalism and South Korea22

2.6The State Capitalist’s Principles and Their Relevance to China’s National Oil Sector25

2.6.1China’s Adaptation of the State Capitalist Second Principle26

2.6.2The First, Second and Third Capitalist Principle – The State Role to Guide the Institutions of the Market27

2.7China’s National Oil Policy: Strategy Development and Institutional relevance29

2.8A Brief Historic Summary30

2.8.1The Development of the Chinese Petroleum Industry 1949 - 198030

2.8.2The Reconfiguration of China’s Oil Sector33

2.9China’s Energy Bureaucracy35

2.9.1National Development and Reform Commission37

2.9.2China’s National Energy Administration38

2.9.3China’s National Energy Commission39

3The Chinese State’s Ways of Influencing China’s NOCs42

3.1The Investment Approval System43

3.2The Nomenklatura System44

3.3The Guanxi Network46

4Case Studies50

4.1Case Study 150

4.1.1The Importance of Developed Institutions to China’s Oil Industry51

4.1.2The History of CNOOC53

4.1.3How the State Capitalist Principles Determine China’s National Oil Policy56

4.1.4CNOOC: A Representative of The Chinese State or A Profit-centered Autonomous Company?67

4.2Case Study 2: The Chinese Banking Sector: The Connection between State and Company69

4.2.1Why The Chinese Policy Banks are Relevant to the Chinese Oil Policy Development70

4.2.2China’s Bank Sector: A State Capitalist Institution?71

4.2.3The Chinese Bank Sector and Its Benevolence Towards the State Capitalist Principles73

4.2.4Politically Initiated EBLs75

4.2.5Commercially Initiated EBLs77

4.2.6How the State Capitalist Principles Stipulate the Agenda for the Financial Sector’s Involvement with the Energy Industry78

5Conclusion82

5.1What Are the Underlying Factors which Dominate the Shaping of the Current Chinese National Oil Policy?82

5.2Which Specific Factors Determine the NOCs’ Decision-Making Process when Expanding Their Overseas Operations?83

5.3What Sort of Influence Does the Government Have on the NOCs and Their Various Sub-Companies?83

5.4How Is the Relationship between the State and Its Companies Developed since 1993, and Is It Likely to Change in the Future?84

5.5The Importance of My Contribution to Contemporary Research85

Bibliography87

End notes99

Figures

· Figure 2.1. China’s Energy Imports

· Figure 2.2. Relations between state-owned enterprises and government in China.

· Figure 2.3. China’s “New” Energy Administration

· Figure 4.4. China’s Oil Empire

· Figure 4.5. Acquisitions by Chinese and other Asian NOCs

· Figure 4.6. China’s Crude Oil Imports by Source (2010)

Tables

· Table 2.1. The Development History of China’s Oil Industry

· Table 2.2. National Energy Commission Members

· Table 3.3. NOCs motivations and strategies

· Table 4.4. Chinese Overseas Oil Acquisitions

· Table 4.5. Chinese Overseas Oil Acquisitions

· Table 4.6. Chinese Overseas Oil Acquisitions

· Table 4.7. China’s Crude Oil Import by Origin (% share)

· Table 4.8. The Development History of China’s Oil Industry

· Table 4.9. Losses on Investments in Western Financial Institutions

· Table 4.10. CDB’s Energy-Based Loans, 2005-2010

· Table 4.11. Comparison of CDB and the Export-Import Bank of China, 2009

Abbreviations

NOC – National Oil Company

SOE – State Owned Enterprise

LNG – Liquefied Gas

CNPC – China National Petroleum Corporation

SINOPEC – China Petrochemical Corporation

CNOOC – China National Offshore Oil Corporation

NDRC – National Development and Reform Commission

EAEPE – European Association for Evolutionary Political Economy

NESH – National Committee for Research Ethics in the Social Sciences and Humanities

PRC – People’s Republic of China

CCP – China Communist Party

FDI – Foreign Direct Investment

GVIO – Gross Value Output

GDP – Gross Domestic Product

R&D – Research and Development

U.S. – United States

IOC – International Oil Company

SC – State Council

WTO – World Trade Organization

LIBOR – London Interbank Offered Rate

EBL – Energy Based Loan

Chinaoil – China National United Oil Corporation

PDVSA – Petroleos de Venezuela SA

MPI – Ministry of Petroleum Industry

PLA – People’s Liberation Army

MOG – Ministry of Geology

SASAC – State-Owned Assets Supervision and Administration Commission

NEC – National Energy Commission

NEA – National Energy Administration

SPC – State Planning Commission

SDPC – State Development and Planning Commission

China Exim Bank – China Export Import Bank

CDB – China Development Bank

CC – Central Committee

MOP – Ministry of Personnel

CEO – Chief Executive Officer

II

107

Introduction: A Short Summary

The first chapter constitutes an introduction to the topic and this thesis, presenting the problems to address, my research questions, how the institutional framework of state capitalism is unique and conclusive in regard to the current debate, and lastly, how the methodological approach I have chosen makes possible the objective set through my research questions.

The second chapter of this thesis will focus on my institutional framework of state capitalism that dominates China’s economic policies, more specifically, an evaluation of the institutional framework incorporated into state capitalism. This institutional framework is emphasized, as it constitutes a possible explanatory model for the underlying factors dominant in shaping both the former and current national oil policy. In effect, an introduction to state capitalism’s main principles, together with the theoretical frameworks that underpin them, will be presented to reveal China’s contemporary emphasis on competitive State-Owned Enterprises (SOEs) within key industrial sectors. Consequently, through an evaluation of the SOEs’ economic relevance to long-term growth in the real economy, the National Oil Companies’ (NOCs’) correlational role with the Chinese growth model will be presented, thereby effectively providing a basis for answering the question of how energy security correlates with the purposes of state capitalism.

The third chapter will assess cultural and socio-political institutional influences such as the nomenklatura system and the guanxi network. The purpose of this is to uncover some of the specific characteristics of the Chinese version of state capitalism and how this affects the power relation between the various institutions involved in developing and executing China’s national oil policy. Moreover, this chapter will present the factors relevant to the decision-making processes and power relations between the state and the NOCs.

The fourth chapter of this thesis substantiates the argumentation for the institutional framework of state capitalism by reviewing the first of the three institutions relevant to China national oil policy, namely the state. More specifically, it presents an assessment of the strengths and weaknesses of the state’s energy bureaucracy. This will help explain the different reasons for why and how the NOCs and the financial institutions have been able to increase their authority of where and when to invest.

The fifth chapter of this thesis will emphasize the specific relationship and interactions between the Chinese state, the financial institutions and NOCs in relation to their pursuing overseas expansion based on the state capitalist principles. To illustrate the contemporary development of this relationship, this paper will divide this issue into two case studies.

As a result, the fifth chapter and first case study has two objectives. The first is to disregard the assumption that China is currently promoting a neo-mercantilist policy of “locking up” foreign reserves, but that since the 1990s the decision-making process and strategy development has gone from such a neo-mercantilist approach to one that has gradually implemented and adapted state capitalist principles when investing. The second objective is to explain and illustrate why this transition has taken place, emphasizing structural reorganization in China’s petroleum sector and the globally developing situations of peaked oil reserves and the financial crisis.

The Second case study has the purpose of providing a more detailed overview over how and why the state capitalist principles have been implemented through overseas investments. To illustrate this approach, this paper will review the third relevant institution for the development of China’s national oil policy, namely the policy banks. Furthermore, this paper will evaluate the difference between politically oriented and commercially oriented investments made by the policy banks, and how these deals are formulated. It will also present a more detailed explanation of the topic, which together with this paper’s first case study and the cultural and socio-political influences presented above, will provide a sufficient basis for a valuable evaluation and conclusion as to how the state capitalist principles will exert an influence on the development of China’s national oil policy.

The seventh chapter will present the conclusion of this paper’s research results in regard to the thesis questions I decided to analyze.

The Problems to Address

Why address the development of China’s national oil policy?

China became a net oil importer in 1993 due to the fact that throughout the years since the 1980s, China’s demand for energy has rapidly increased. Today, China has the world’s fastest growing energy consumption and is the second largest oil consumer and importer in the world, after the US.[endnoteRef:1] Even though China is capable of filling 90% of its primary energy consumption based on its abundant reserves of coal, the need for expanding its oil imports has become vital for further development.[endnoteRef:2] The reasons for this lie in China’s massive expansion in the number of private automobiles, a gradual change from using coal to generating electricity to the use of fuel oil and diesel,[endnoteRef:3] not to mention meeting international environmental demands. Additionally, there are other resources that can be used to meet China’s growing energy demand such as liquefied gas (LNG), hydropower, solar power and wind power. Nevertheless, up until today, oil has been the only natural resource able to satisfy China’s expanding energy consumption, taking into consideration availability and import diversity. China’s expanding role in the international oil market has therefore not been unexpected, although it has created concerns within other major energy consuming countries, such as the US, over how China’s expanding role may affect the availability and possible implications for the security situation in East Asia. This provides an incentive to ask: How China plans to cover this growing import dependency? A solution to this problem is what China has promoted throughout the last twenty years, namely developing a competitive domestic oil industry that is technically advanced enough to extract domestic resources. This has been successful to some extent, but as the geographic of China’s domestic oil resources reveal: China’s proven oil reserves are inconveniently located, are far away from the industrialized eastern coast and have most likely reached their peak[endnoteRef:4] (this is a projection based on the prerequisite that no large oil basins will be discovered in the near future). As a result, China’s most probable approach in obtaining enough “clean” energy is to import energy resources from abroad (oil, gas) and diversify their energy sources (the development of clean energy sources intensifies energy usage, both within the heavy industry sector and in promoting energy conservatism within the private and household sectors). In an effort to secure this demand, in addition to establishing a presence within the international oil market, three state companies were established in 1988,[endnoteRef:5] 1983[endnoteRef:6] and 1982:[endnoteRef:7] the China National Petroleum Corporation/Zhōngguó Shíyóu Tiānránqì Jítuán Gōngsī (CNPC), the China Petrochemical Corporation/ Zhōngguó shíyóu huàgōng jítuán gōngsī (SINOPEC) and the China National Offshore Oil Corporation/Zhōngguó Háiyáng Shíyóu Zǒnggōngsī (CNOOC), respectively. [1: China Briefing, “China Overtakes Japan as World’s Second Largest Oil Importer”. 26.06.2008. http://www.china-briefing.com/news/2008/06/26/china-overtakes-japan-as-worlds-second-largest-oil-importer.html [Accessed 09.11.2011.]] [2: Erica Strecker Downs, “China’s Role in the World: Is China a Responsible Stakeholder?” August 4, 2006, The Brookings Institution. ] [3: Dr. James Tang, “With the grain or against the grain? Energy security and Chinese foreign policy in the Hu Jintao Era”, The Brookings Institution, October 2006..] [4: Xiao Wan. “China depending more on imported oil,” Chinadaily.com. 20.01.2010. http://www.chinadaily.com.cn/china/2010-01/20/content_9346446.htm [Accessed 08.10.10.] Also see Chinanews.com “如何看待我国原油对外依存度扩大” (“How to look to expand our dependence on foreign oil”). 09.08.2011. URL: http://photo.chinanews.com/ny/2011/08-09/3245010.shtml [Accessed 24.10.2011.]] [5: See 中国石油天然气集团公司, 大事记 (China National Petroleum Corporation, Events) http://www.cnpc.com.cn/cn/gywm/dsj/ [Accessed 12.10.2010.]] [6: Edited by Cheng Li, China’s Changing Political Landscape: Prospects for Democracy, Washington D.C.: Brookings Institution Press, 2008,. page 122. ] [7: See 中国海洋石油, 大事记 (China National Offshore Oil Company, Events) http://www.cnooc.com.cn/data/html/chinese/channel_114.html [Accessed 12.10.2010.]]

Hence, its petroleum policy was pursued based on the state-driven/state-dominated approach, rather than a liberal market approach. As a result, since these three NOCs and their respective subsidiaries have established their presence abroad, the question as to the degree the Chinese state still represents an important influence on their strategy development is up for discussion. This topic has been further spotlighted, as the Chinese bureaucracy seems to be unable to establish a functioning energy ministry powerful and effective enough to dictate energy policy.

In addition, considering the amount of energy it imports from the international market, ranking China as the largest energy importer in the world, though with still a long way to go before reaching the levels of Europe and the US in energy consumption per person, the topic which I am pursuing, namely China’s national oil policy, is in itself nothing new. The issue of the Chinese oil policy has been a widely published topic throughout various journals, analyzing its relevance to geopolitical issues such as East Asian power relations, the availability of oil in the international market, as well as China’s repercussions toward the trading price of fossil fuels and its implications for global economic growth.

My approach to the topic

In broader terms, when the issue of China’s national oil policy is discussed, the participants more often than not base his or her argumentation on one aspect of the topic of oil policy development. To illustrate, oil policy development is often included when debating Chinese energy security, primarily drawing on the actions made by the state to diversify and secure its energy imports through bilateral agreements. This is often seen in connection with the neo-mercantilist policy of “locking up” natural resource reserves abroad. This approach to the development of China’s oil policy is not wrong, though it often exempts other relevant factors which should be included in the discussion. To be more specific, I argue that there are four pillars that are relevant when discussing Chinese oil policy development, namely political, cultural, historic and economic. Thus, when I state my first research question:

What are the underlying factors which dominate the shaping of the current Chinese National oil policy?

I am stressing the importance of incorporating the relevance of the aforementioned four pillars. Moreover, by taking an overall approach, one can draw the distinction between the four pillars, thereby providing a sufficient basis for explaining how the various factors affect cooperative influences on the development of the Chinese oil policy. Nonetheless, to some commentators, this approach would rightfully be too broad and lacking the specificity needed in an MA paper, which is a problem I am well aware of. For this reason, some more specific sub-research questions are appropriate in combination with a specific summary of how I in detail have approached this topic. The importance however is that although these questions would be more specific, they should together provide all four pillars relevant to Chinese oil policy development.

Research Questions

Which specific factors determine the NOCs’ decision-making process when expanding their overseas operations? What sort of influence does the government have on the NOCs and their various branches? And how is the relationship between the state and its companies developed since 1993, and is it likely to change in the future?

My contribution to the current debate

Although I will use this paper to answer these research questions, I will elaborate in short as to what my exact contribution to this topic is and how I use this to answer my research questions. Through an assessment of China’s economic model and how it has evolved since the opening up in the late 1970s, I correlated the appropriate economic frameworks to the Chinese empirical model and developed an institutional framework I refer to as China’s version of state capitalism. Based on this framework, I formulated three principles that dictate the overall agenda of China’s policy in terms of the importance of SOEs and NOCs to the Chinese economy. In turn, I use this to review China’s oil-related overseas investments and to assess to what degree it is possible to apply the Chinese state capitalist principles to these investments. As I will present, these principles do indeed dictate the long-term investments of the institutions involved in the Chinese oil industry, thereby answering why and how China’s national oil policy is developed and executed. In accomplishing this, I also go into detail about the relationship between the state and the NOCs, emphasizing the development of the oil policy. This also contributes to the explanation of how the current power struggle between the state and the NOCs is defined through China’s transition towards becoming a more consumption-based economy.

Methodology

Why I have chosen to use qualitative interviews

In order to comprehend the extent to which the theory of state capitalism is relevant in China’s pursuit of energy security, a qualitative research method is needed. This will complement the previously published material on state capitalism and China’s energy policy, in addition to providing a broader basis of empirical data with regard to the interactions between the Chinese state and the NOCs. Since this is a qualitative research method, specific sources within the relevant institutions are valuable to the degree that this paper will be able to provide any useful conclusions. As a result, I have been in contact with sources within the Chinese petroleum sector, CNOOC, the National Development and Reform Commission/Guójiā Fāzhǎn hé Gǎigé Wěiyuánhuì (NDRC) and Chinese, UK and US researchers within the field of energy policy and state capitalism.

To emphasize the importance of these interviews to this paper’s research results, I will elaborate a little further on the process of developing my network within the Chinese oil and state sector, and how this contributed to how my interview objects in this paper are some of the most influential and relevant people to China’s oil policy development. As many familiar with the Chinese tradition for network development undoubtedly know, the process of obtaining access to people within the Chinese leadership is primarily done on the basis of recommendations, and through a series of meetings that together develop a relationship based on trust. This takes time (in my case three years) but through recommendations and a series of meetings I was able to develop a network within the Chinese oil industry. In sum, I have conducted five in-depth interviews in Chinese, one by audio recording and four with notes. Together, the participants in my interviews represented one members of the Chinese State Council, one employee from the CNOOC, one employee from CNOOC’s subsidiary COSL, one employee from the SINOPEC and one employee from the NDRC.

The research results I will present in this paper are rooted in a combination of theoretical, empirical and qualitative interview data that I have collected over the past three years. Since most of my Chinese qualitative interviews were conducted during my trip to China, in August 2011 (from the 10th-19th), the purpose of this acquired data was to confirm the implementation of my institutional framework and principles that I had developed prior to the trip. However, the qualitative data also contributed to my realization of the role that the nomenklatura system and guanxi network play in the relationship between the state, the NOCs and the financial institutions. Additionally, my interviews also confirmed my assumptions that there has been a correlation between the increasing implementation of state capitalist principles, the transformation of the Chinese economy towards becoming more consumption oriented and the liberalization and restructuring of the Chinese oil sector.

As a result, the qualitative research data I obtained provided me with specific information on: 1. The relationship between the state and the NOCs. 2. The importance of the state capitalist principles as coordinated tools. 3. How this relationship is made visible throughout the decision-making process of the long-term objectives of China’s national oil policy. This laid the groundwork for me to proceed to my two case studies that I will present in Chapters 4 and 5.

The Testing of My Institutional Framework

It is also important to stress that the institutional framework of state capitalism that I use to explain China’s growth model is a new approach. In order to present answers to how the Chinese national oil policy is developed and executed, I realized that one first has to understand the framework of the factors relevant to Chinese oil-related decision-making processes. Consequently, in addition to pursuing the expansion of my aforementioned network within the Chinese oil sector, I have also focused on the relevant long-term interests and factors of the Chinese state that the Chinese oil companies and financial institutions have included when investing overseas. My method for developing this institutional framework was to assess the role of the Chinese state in relation to economic growth from the beginning of the 20th century up until today. My emphasis in this regard has been to review the traditional role of the state to economic growth and how its function to the market has evolved and been incorporated into more recent economic frameworks, such as Maoism, prior to 1978. The key, however, has been to incorporate theory from Western frameworks that correlates with China’s tradition for the state’s role in promoting economic growth. Thus underscoring how this framework of state capitalism has been increasingly relevant, as China is currently in a transitional phase of becoming a consumption-based economy. I will elaborate further on the specifics of this framework later in my chapter on state capitalism.

Nevertheless, since it was important to sustain the integrity of my institutional framework, I realized that this new approach needed to be tested and discussed by leading researchers within the field of economic development theory. As a result, I have participated and presented my framework at several economic conferences (the European Association for Evolutionary Political Economy (EAEPE) summer school, the ICD conference: The Sino Global Discourse, and the EAEPE Conference: Shumpeter’s Heritage – The Evolution of the Theory of Evolution). Through these conferences, my institutional framework has been discussed and commented on by leading world scholars on economic and state theory such as Bob Jessup and Tridico Pasquale who contributed to the correctness and adaptability of this institutional framework to the Chinese growth model.

The Measures Taken to Heighten the Integrity and Originality of this Paper

Because I have previously obtained a proficiency in Mandarin, the issue of language barriers has not been a problem when conducting my research. Consequently, these various sources have provided a sufficient number of interviews which have created a comprehensive research database. This qualitative research has also been a part of certain case studies evaluating the decision-making process of China’s NOCs when purchasing assets outside of Chinia. More specific, I test the extent it is possible to see the implementation of the state capitalist principles in the NOCs’ and financial institutions’ overseas investments.

Moreover, I thought this to be an important factor, as this would not only supplement the basis of my own assumptions concerning the topic, but also provide this short MA paper with the possibility of presenting valid conclusions that contribute to the current debate on the factors involved in the development of China’s national oil policy.

I also want to stress that I will take a normative approach throughout this paper. More specifically, through establishing a new institutional framework when evaluating the decision-making process for the development of China national oil policy, I have highlighted factors which can be confirmed by the Chinese qualitative sources involved in the development of the Chinese national oil policy.

In addition, as my paper’s methodology has been based on a qualitative research method, my interviews were conducted in accordance with the appropriate guidelines set up by the National Committee for Research Ethics in the Social Sciences and Humanities (NESH). Besides evaluating the complete list published by NESH, I will highlight some specific points relevant to my qualitative research. In short, these are: 1. Protect the privacy and close relationship that my interview object has with the Chinese oil sector or state bureaucracy and avoid putting the informant under pressure that could result in the inclusion of information which could be considered harmful to the informant; 2. To inform the informant of the outline and purpose of the paper before initiating interviews; 3. Obtain a free and informed consent from the informant on the incorporation of the information and views provided to me by him or her; 4. Demonstrate respect for confidentiality if necessary. 5. Give specific consideration to plausible private interests and information that the informant wishes not to include in the paper.

China’s Version of State Capitalism

In this chapter, I will introduce my institutional framework on the Chinese version of state capitalism. More specifically, present an evaluation of the institutional framework incorporated into state capitalism. This institutional framework is emphasized, as it constitutes a possible explanatory model for the underlying factors dominant in shaping the current national oil policy. In effect, an introduction to state capitalism’s main principles, together with the theoretical frameworks that underpin them, will be presented to reveal China’s contemporary emphasis on competitive SOEs within key industrial sectors. Consequently, through an evaluation of the SOEs’ economic relevance to long-term growth in the real economy[endnoteRef:8], NOCs’ correlative role with the Chinese growth model can be presented later in this paper. [8: Throughout this paper I will underscore the NOCs’, financial institutions’ and SOEs’ importance to long-term growth in the real economy. Since it is possible to argue that all states wish to promote long-term growth, I want to emphasize that there is currently a difference between the Chinese emphasis on this objective compared to other states. More specific, as I will illustrate in my second case study on the Chinese financial institutions’ foreign investments, the Chinese state promotes (through cheap loans and political support) its institutions to emphasize investments that in the short-term might be unprofitable, but in the long-term has the potential to not only be profitable but also contribute to the competitive development of domestic industries. This model is rooted in the notion that; if Chinese companies are to be competitive to for example western companies in the petroleum service industry, Chinese service companies need an international arena where they can develop experience and technological competitiveness. In short, as will be presented in my second case study, the prerequisites of these long-term contracts, by the Chinese financial institutions, serves exactly this goal of providing international experience for domestic Chinese companies which will contribute to the overall long-term growth of the Chinese real economy. This assumption of the Chinese state’s long-term objective has been confirmed by the qualitative research interviews I conducted in China, August 2011. ]

An Introduction to its Institutional Framework

As any person who has studied economic development theory should know, the possibility of determining a country’s economic policy strategy within the framework of a single economic theory is close to impossible. The reason for this is not that there are no applicable choices, but that states tend to implement various theoretical tools from different frameworks suited to their stage of development.[endnoteRef:9] As underscored by Max Weber: Most theoretical frameworks for economic development do not exist in their “pure” form, but instead are coordinated with others to provide the best possible result. This idea was rooted in his argumentation that he presented in his book The Protestant Ethic and the Spirit of Capitalism[endnoteRef:10]. Therefore, it would be unwise for this paper to stipulate that China is different and that one theoretical framework for economic development is single-handedly dictating China’s strategy development. As a consequence, this paper will limit itself to an assessment of the most suitable framework that stresses the specific interactions between the Chinese state and its SOEs, while also including elaborations on other relevant institutions such as the financial institutions that intermediate with and influence the development of the state-NOCs relationship. Moreover, I will present an institutional framework that facilitates China’s SOEs’ step-by-step introduction to the globalized market principles through a decreased state control that promotes private, municipal and state-owned capitalist companies (one should also include hybrid firms, as this has become a more popular business venture in China as its economy has become increasingly globalized).[endnoteRef:11] [9: To illustrate, since the 2009 financial crisis the U.S. has implemented economic tools originating from different economic development theories, ranging from Keynesianism’s stimulation of the aggregated demand through the 2009 stimulus package, Monetarism and the Federal Reserve’s aggressive monetary policy to stabilize the economy, as well as the neo-Liberal agenda of relieving the U.S. financial sector of regulatory procedures.] [10: Max Weber. The Protestant Ethics and the Spirit of Capitalism. New York: Charles Scribner’s Sons, 1958. ] [11: Satya J. Gabriel, Chinese Capitalism and the Modernist Vision. See essay number 18: “Strange Bedfellows? The Transition from State to Private Capitalism in China: The Network of Distributive Class Payments, Modernization, and Growth of the New Social Strata”. New York: Routledge, 2006. ]

As will be elaborated on later in this paper, the Chinese approach towards SOEs can be best explained by the principles of the institutional framework of state capitalism which I have developed. However, before proceeding to the elaboration on China’s version of state capitalism, a short summary of the contemporary research carried out on this topic is appropriate.

Theoretical Background: Current Academic Work on Chinese State-Led Capitalism

It is important to emphasize that when discussing China’s institutional framework, one should include the research done on neighboring countries such as Japan and South Korea, as well as the work done on assessing the region as a whole. This paper will therefore include works that underpin the current agenda on development economics. With regard to this, it will be relevant to elaborate further on the works done by Friedrich List, particularly his main theoretical contribution, namely The National System of Political Economy. List’s relevance to China’s institutional framework will be elaborated on further when this paper proceeds in discussing the theoretical framework underpinning China’s version of state capitalism.

Nevertheless, to assess the contemporary institutional framework relevant to China’s oil policy development, this paper will include works done on contemporary development economy, such as Ha-Joon Chang’s empirical work on institution’s importance to economic development in East Asia. Chang’s most relevant books on this debate are: Reclaiming Development: An Alternative Economic Policy Manual and Globalization, Economic Development and the Role of the State.

Concurrent with China’s increased economic relevance to the growth and stability of the global economy, a range of literature has also been published on the topics of China’s version of state capitalism and the relevance of institutions to China’s growth model. Two recent “popularized academic books” by Ian Bremmer (The End of the Free Market: Who Wins the War Between States and Corporations) and Stefan Halper (The Beijing Consensus: How China’s Authoritarian Model Will Dominate The Twenty-First Century) emphasize Chinese state capitalism as a dominant factor in China’s institutionally led growth model. They also stress the key position that SOEs play in securing the success of China’s institutional development model.

Nevertheless, due to a dependency on secondary materials and a lack of specific analysis by Bremmer and Halper in reviewing the state-SOEs relationship, in addition to Chang’s primary focus on other East Asian industrial states (Japan and South Korea), the aforementioned works do not offer an adequate explanation of the influential factors that determine the SOEs’ strategy development in China. Thus, a valuable contribution to the discussion on the relevance of state capitalism to China’s development model has been the empirical work done on the specific institutions involved in the state-SOEs relationship.

Among these academic works, one should seek out Kenneth Lieberthal’s contribution, most notably his books: Policy Making in China: Leaders, Structures and Processes and Governing China: From Revolution Through Reform. Through these books, he provides an extensive elaboration with concern to obtaining an understanding of institutional development and leadership selection within both the state bureaucracy and SOEs in China. This is also the case with Peter Nolan’s empirical work on SOEs’ strategy development and interactions with the international market. Books of specific relevance are, China and the Global Economy: National Champions, Industrial Policy and the Big Business Revolution and Transforming China: Globalization, Transition and Development. The work by Erica S. Downs will also constitute an important part of this paper, particularly her report, Inside China, Inc: China Development Bank’s Cross-Border Energy Deals, which discusses the growing relevance of Chinese banks to the national oil policy, more specifically its function as an initiator for overseas oil acquisitions.

However, this in itself does not constitute a sufficient basis for an analysis of the Chinese version of state capitalism. A valuable contribution to the determination of the unique characteristics of China is the research results obtained through the qualitative interviews discussed above in the methodology part.

Taken together, the aforementioned publications and my own research results constitute the most relevant as well as recent contribution to state capitalism theory-based analysis of China’s state-SOEs/NOCs relationship, thereby influencing a significant portion of this paper’s institutional framework. Yet, since state capitalism is not a recent term for an activist state, this paper will elaborate on the framework that underscores the theory incorporated into the Chinese policy measures.

State Capitalism: Theoretical Background

Throughout history, the theoretical concept of state capitalism has been associated with a number of institutional frameworks emphasizing an activist state as a necessary condition for long-term growth in the real economy. One example is its contradictory usage both before and after the establishment of the Union of Soviet Socialist Republics.[endnoteRef:12] Even so, as the liberal trading regime established a dominant position in the globalizing world and the feasibility of a socialist command economy lost much of its leverage in the debate on economic development theory, the former terminology of state capitalism has evolved into an overall description of an economy supported by an activist state. Its institutional framework is primarily based on two overlapping theoretical frameworks, namely neo-mercantilist economic theory[endnoteRef:13] and Institutional political economy. It is appropriate to stress that they overlap since policy measures in theory can be applied to one or both of these theoretical frameworks.[endnoteRef:14] This correlates with Weber’s “ideal types,” which do not exist in their “pure” form alone. Nonetheless, since their theoretical principles focus on state capitalism’s emphasis on SOEs’ importance to economic growth in the real economy, this paper will present the relevant theories contributed to by these frameworks. Yet, since this paper focuses on the Chinese version of state capitalism it will be important, in regard to the implemented theory, to include the works by Friedrich List, as it has been underscored that his theories have influenced the development model of East Asian countries such as South Korea and Japan, which in turn has influenced the Chinese approach towards economic liberalization. [12: It has been issued as a critique towards the former leadership in the USSR by the former communists from the left for its reintroduction of capitalist methods of production; it has also been used by leaders and economist, such as Lenin and Hilferding, when describing a transitional phase from capitalism to socialism. Paul Mattick, Economics, Politics and The Age of Inflation. New York: M.E. Sharpe, 1978. ] [13: It is important to note that when discussing neo-mercantilism’s relevance to the Chinese growth model, one has to make a distinction. More specific, when this paper refers to the policy of “locking up” reserves one refers to neo-mercantilist policy. However, when this paper refers to neo mercantilism as a source for why Chinese promotes SOEs, I emphasize the implementation of neo-mercantilist economic theory. It important to separate the two as neo-mercantilist policy is not promote by the Chinese state, while element of the neo-mercantilist economic theory is part of the Chinese state capitalist institutional framework. ] [14: Examples of overlapping theory could be neo-mercantilism’s and Institutional Political Economy’s emphasis on state subsidization, or stimulation of the aggregated demand through state support.]

Neo-Mercantilism and the Importance of SOEs

The twentieth century neo-mercantilism derived its principles and protectionist policies from mercantilism[endnoteRef:15], which in the sixteenth and seventeenth centuries exerted a strong influence on the development of the theoretical framework of the modern European states. There are four basic principles which are, based on the footnoted literature, emphasized as mercantilism’s primary legacy to the neo-mercantilist economic theoretical framework[endnoteRef:16]: [15: Since the prosperity of a nation was based on a positive trade balance in gold, the overall purpose of mercantilism was to increase the monetary wealth of the national economy, which was to be accomplished through state regulations such as state subsidies and protective trade remedies. Although states tended to combine the tools promoted by the two, it is correct to differ between two forms of 18th and 19th century mercantilism. The benign version of mercantilism pursued national security and prosperity by emphasizing a strong domestic economy. Although this form underscored the importance of developing a competitive domestic industry before following the principles of free trade, it did not aggressively minimize the possibilities for other states to develop. One example of such a promotion of this benign mercantilism can be found in China through the philosophy of Guan Zi, and his emphasis on a regulated market and economy. The other version of mercantilism was a more aggressive method for achieving domestic prosperity. This was achieved through a hegemonic foreign policy that took advantage of military superiority for economic and political dominance of other states. This form of aggressive mercantilism is best exemplified by the imperialistic policies of European states promoted during the 19th century. One should note that although different, the two forms most often contribute with their different approaches to the same economy. First there is a benign or defensive form of Mercantilism, which aspires to secure a nation’s economy, thereby increasing its national security. This version of mercantilism does not necessarily denounce the prosperity of other states, but put its own economic prosperity before promoting free trade. The other more aggressive form of mercantilism promotes an active foreign policy that seeks prosperity in the demise of other states. To secure its own economy it takes advantage and exploits the international economy through an imperialistic foreign policy. Robert Jackson and Georg Sørensen, Introduction to International Relations, Theories and Approaches. Second Edition, Oxford: Oxford University Press, 2003, page 178 and W.A. Rickett, Guanzi: political, economic, and philosophical essays from early China. New Jersey: Princeton, 1985.] [16: The four principles are summed up based on the following literature: Dani Rodrik, “Mercantilism Reconsidered”. Project Syndicate http://www.project-syndicate.org/commentary/rodrik33/English, [Accessed 27.11.2010.] and C. Fred Bergsten, “The Dollar and the Deficits, How Washington Can Prevent the Next Crisis”, Foreign Affairs 88, No. 6 (November/December 2009) and R.J. Barry Jones, Conflict and Control in the World Economy: Contemporary Economic Realism and Neo Mercantilism. Harvester Press, 1986.]

1. That supervision of the monetary flow both in and out of a country is important in order to sustain a healthy economy.

2. That a favorable trade balance is important for sustaining a continuous economic development.

3. A strong domestic economy is important for national security.

4. The importance of long-term growth in the real economy.

These four principles are achieved through state intervention in an economy, be it protectionist trade remedies or state subsidies. While neo-mercantilist economic theory underscores a range of tools to facilitate the long-term sustainability of these principles, their influence on the growth of the SOEs is of specific importance to this paper.[endnoteRef:17] These are the late twentieth and early twenty-first centuries’ neo-mercantilist protectionist tools or trade remedies, which can be summed up by the following: A favorable monetary policy,[endnoteRef:18] the recently popularized “safeguard” provisions,[endnoteRef:19] antidumping measures[endnoteRef:20] and countervailing duties.[endnoteRef:21] These tools contribute to and support the sustainability of the four principles of neo-mercantilist economic theory[endnoteRef:22] by actively promoting and protecting domestic industry, most notably securing the SOEs’ competiveness in establishing long-term growth in the real economy. In effect, the result of implementing these neo-mercantilist tools is a more secure and sheltered domestic industry that inspires long-term growth, competitive development and a diversified manufacturing and industrial sector. As a result, by combining this with a neo-mercantilist controlled monetary policy that prevents currency fluctuations, speculations and excessive cross-border currency flow, in addition to increased competitive advantages to the international market, the neo-mercantilist principles and its tools provide a semi-free market with the overall purpose of securing domestic long-term growth in the real economy, as opposed to growth in the financial sector. [17: Prior to the mid-twentieth century, the trade remedies or protectionist tools that were most common were tariffs, (for a further elaboration on types of tariffs, how tariffs are implemented and on which grounds tariffs are based, see Jones, Conflict and Control in the World Economy: Contemporary Economic Realism and Neo-Mercantilism. 1986, Pages 151 and 152. For information concerning the GATT and later WTO regulations, see Paul Blustein, “Top 10 Global Economic Challenges Facing America’s 44th President, Reimaging Global Trade”. The Brookings Institute, October 2008. Quotas (this tool of protectionism is implemented on specific good and services viable to domestic industrial growth or just imposed on products exported from a specific country which represent some kind of threat. Quotas are useful in giving domestic industry time to reorganize and improve its competiveness on a competitive product) and a favorable tax policy. (For a thorough explanation on favorable tax policy, see Jones. Conflict and Control in the World Economy: Contemporary Economic Realism and Neo-Mercantilism, page 171.) However, as the liberal trade regime achieved greater influence on the global market through the establishment of the General Agreement on Tariffs and Trade (GATT) and later with the World Trade Organization (WTO), these former trade remedies were regulated: Decreasing their effect by limiting the scale of implementation, which resulted in a lesser degree of protectionism. However, although GATT and the WTO succeeded in limiting the excessive implementation of tariffs and quotas, other trade remedies have developed over time.] [18: The purpose of a favorable monetary policy is to prevent unregulated cross border monetary flow, limit currency speculation, stipulate strict regulations in the areas where foreign direct investment is accepted and enhance the competitiveness of domestic exports to the international market. ] [19: Safeguard measures are taken advantage of to provide some temporary relief to help domestic industries adapt to increased foreign competition. Takatoshi and Kazuo Ueda, “Growth and Development: New Theory and Evidence”. Journal of the Japanese and International Economics, No. 4 (January 1993).] [20: The purpose of antidumping is to obstruct the import of products sold beneath what is regarded as a “fair” price. For more information on Anti-Dumping, see Jodie Keane, “Is anti-dumping a big deal? China and developing country exporters of textiles and clothing”. Overseas Development Institute: Opinion, December 2008.] [21: The implementation of countervailing laws is initiated when a foreign product is subsidized by the state, thus increasing its competitiveness against similar domestic products.] [22: W. Raymond Duncan, Barbara Jancar-Webster and Bob Switky, World politics in the 21st century. Third Edition. New York: Longman, 2006, page 414.]

Many commentators would emphasize that neo-mercantilist policy is the best framework for understanding the Chinese version of state capitalism, using the NOCs’/SOEs’ seeming strategy of “locking up” natural resources throughout the developing world.[endnoteRef:23] Although plausible, this paper will emphasize that this strategy is not valid due to the fact that most Chinese oil production, which is far away from the Chinese mainland, is sold to the international market, thus contributing to the international oil market rather than decreasing the global supply. The argument against the neo-mercantilist political vision of China’s “locking up” reserves will be more thoroughly discussed later for the sake of the integrity of this paper. Hence, this idea of “locking up” moves the attention away from the actual relevance of the neo-mercantilist economic theory to the Chinese growth model, namely the Chinese state’s support of promoting long-term growth in the real economy through incentives. As previously mentioned when discussing this idea, several financial incentives are offered to the domestic economy through state intervention that can be summed up by the following: A favorable monetary policy and the recently popularized “safeguard” provisions, antidumping measures and countervailing duties. The Chinese attachment to the neo-mercantilist economic theory is its overall agenda of securing the competitiveness and diversification of its industrial and manufacturing sectors. Thus, the empirical data illustrate that China has not excessively implemented the aforementioned trade remedies of “safeguard” provisions, antidumping measures and countervailing duties (at least not to the same degree as the European states or the US). It is therefore more appropriate to regard the neo-mercantilist influence on primarily the policies concerning a tightly controlled monetary policy and financial system, in combination with a subsidization of China’s seven core industries, financial institutions and infrastructure development industries. [23: Just to name a few examples, one can underscore the Chinese involvement in Zambia’s copper industry and CNPCs involvement in Sudan. ]

Friedrich List and East Asian Economies’ Incorporation of His Theory

The most famous and important contribution that Friedrich List has made to the field of economic development theory is his book, The National System of Political Economy, 1856. List’s main argumentation throughout the book is that a state should not pursue the principles of Adam Smith and free trade before the establishment of a domestic industry competitive with other states.[endnoteRef:24] List explains this by taking an empirical approach, assessing the industrial development in Europe throughout the nineteen century. List says that the reason for Great Britain’s eventual hegemonic dominance was rooted in her pursuit of securing a strong domestic manufacturing industry superior to all others through protectionism.[endnoteRef:25] List proceeds to underscore that all states can achieve the economic and national power of Britain by pursuing three phases of economic policy: 1. Promote free trade in raw materials with states of higher cultural, economic and political power; 2. Next, proceed through protectionism to develop a competitive and diversified domestic industry with an emphasis on manufacturing; 3. When achieving the state of hegemonic competitive power, skill and wealth, the economic policy should return to the principle of free trade. However, to sustain supremacy the state must support the developed industries in order to sustain their competitive edge.[endnoteRef:26] The reason why List is important when discussing the Chinese version of state capitalism is the overall East Asian incorporation of his thoughts into the economic policies of their development model[endnoteRef:27]. With regard to the inclusion of List’s three phases in this paper, this will be illustrated through an empirical development of the relationship and support by the Chinese state for the NOCs and SOEs in general. His importance to the Chinese growth model will also be made clearer as the paper later proceeds to discuss the core similarities of the East Asian economies and how their basic principles can be rooted in List’s thinking. [24: One should underscore that compared to Adam Smith, List’s thinking is not as different as current neo-liberals say. Smith was not a complete free trader, as he understood and stresses the importance of the state framework for the promotion of economic growth. ] [25: Friedrich List, National System of Political Economy. Philadelphia: J.B. Lippincott & CO. 1856. Pages 117-118.] [26: Ibid. Page 188.] [27: Recent work on the importance of List to the East Asian economies. See James Fallows. Looking at the Sun: The Rise of the New East Asian Economic and Political System. New York: Knopf Doubleday Publishing Group. June 1995.]

Institutional Political Economics

Institutional political economy draws its theoretical basis from the former Institutional economics, which to a certain extent emphasizes them both as bodies of thought within the theoretical framework of Keynesianism. Not surprisingly, the Institutional political economy bases its theory on work done by Institutional economic academicians such as Torstein Veblen, John Kenneth Galbraith and John R. Commons. The most notable academic whose research will be of specific importance to the assessment of China’s version of state capitalism and its relation to the oil sector is Ha-Joon Chang. His contribution will first and foremost be highlighted when presenting the principles of state capitalism. However, a short introduction to the Institutional political economy is appropriate. As emphasized by Chang in his book, Globalization, Economic Development and the Role of the State, one important aspect of the Institutional political economy is its view in regard to influential factors involved in economic, political and social development. In contrast to the classical economic doctrine, the market is regarded as one of the numerous institutions involved in shaping economic development.[endnoteRef:28] Hence, the state is obliged to act as an entity in charge of mapping out the rules and regulations beneficial to all institutions within the economy to the degree that the end result will be growth in the real economy.[endnoteRef:29] As a result, the state promotes “an industrial policy aimed at particular industries (and firms as their components) to achieve the outcomes that are perceived by the state to be efficient for the economy as a whole.”[endnoteRef:30] This “favoritism” from the state is based on the necessity of developing SOEs, which will be better explained when mapping out the principles of state capitalism below. [28: These are the sociopolitical agendas within the population, companies and firms as institutions of production and consumer entities (conglomerations of firms, producer associations, trade unions, purchasing cooperatives and subcontracting network). See Ha-Joon Chang, Globalization, Economic Development and the Role of the State. London: Zed Books Ltd., Page 98. ] [29: Ibid. Page 107. ] [30: Ibid. Page 113.]

State Capitalism and Its Guiding Principles

The state capitalist principles which this paper now proceeds to discuss are the theoretical ideas incorporated into the Chinese version of state capitalism that are relevant when reviewing the state bureaucracy, the NOCs and the financial institutions influence on the Chinese oil policy. These principles of state capitalism which I have formulated on the basis on the existent relevant theory and the Chinese state’s historic role to economic growth are what Weber underscores as overlapping, as they draw on the theory promoted by the neo-mercantilist, Friedrich List and the Institutional Political Economic theoretical frameworks.

The institutional framework of state capitalism in East Asia was most importantly based on the principles of Friedrich List’s thinking and the neo-mercantilist economic theory. Still, as the global economy has developed over time, neo-mercantilist economic theory and List do not sufficiently cover the institutional framework apparently followed by China. For that reason, other perspectives such as the specific theory represented by the Institutional Political Economist complement the institutional framework and adjust it to the current twenty-first century global trading regime. As a result, this paper will now present the three principles that I have formulated on the basis of the theory incorporated into my institutional framework, China’s version of state capitalism:

1. A workable financial system must be in place that is able to guide the material self-interest of individuals and corporations in pursuing long-term profit goals through regulation, and not only increase the short-term profits of its shareholders.[endnoteRef:31] More specific, investments overseas should not only contribute to the growth of the company but also to the long-term growth of the domestic economy. This correlates with John Kenneth Galbraith’s theory that the financial system should determine price and wage levels in order to control inflation[endnoteRef:32]. However, this approach should be attributed to the state’s responsibility in promoting the objective of full employment.[endnoteRef:33] [31: Ha-Joon Chang, 23 Things They Don’t Tell You About Capitalism. London: Allen Lane an imprint of Penguin Books, 2010. Pages 255-256. To promote this principle, state capitalism takes advantage of both neo-mercantilist and neo-Keynesian theories and tools. ] [32: Galbraith, John Kenneth, The New Industrial State. First Princeton Edition, Princeton: Princeton University Press, 2007.] [33: As underscored by Galbraith’s son, James K. Galbraith, the main policy in achieving this objective is through the state’s capability in sustaining a low interest rate over the long-term. The strategies opted in order to pursue this objective are various, and often chosen based on social, geographical and historic experiences and expectations. This points out that a state’s execution of the state capitalist principles more often than not results in a unique version of state capitalism based on that state’s former experiences. For further information concerning James’ argumentation, see James K. Galbraith, The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should To. New York: Free Press, 2008. And James K. Galbraith, Created Unequal: The Crisis in American Pay. Chicago: The University of Chicago Press, 1998.]

2. Sustaining manufacturing is vital for supporting the continued development of high-value services. Here, the state’s role is to promote key competitive manufacturing sectors (SOEs) or large state-supported companies (within the sectors relevant for national security[endnoteRef:34]), which help to develop productivity growth and an industrial niche for the promotion of international trade and further innovative thinking. Even so, a competitive and diverse manufacturing industry is also emphasized based on the lessons drawn from the insufficiencies of the neo-liberal market economy prior to the 2008-2009 financial crisis.[endnoteRef:35] Hence, an important task is the state’s obligation to provide the necessary preconditions for private sector development such as institutions securing the rights and security necessary for private enterprises to thrive and develop, in combination with a capable banking sector willing to support this development. [34: These key sectors for national security will be further elaborated on when discussing China’s adoption of the state capitalist principles into its development of a national oil policy strategy. ] [35: As proven, economic specialization is insufficient in the long-term, and a diversified economy is needed to ensure an overall high employment rate and the prospect of real growth. A combination of both the neo-mercantilist promotion of SOEs and a neo-Keynesian focus on a diversified economy is relevant when substantiating the basis for this principle. Chang, 23 Things They Don’t Tell You About Capitalism.]

3. Governmental interventions should be present in order to encourage economic dynamism and stability. Furthermore, through Research and Development (R&D) investment, worker training and risk sharing in projects low on private returns but high on social returns, as well as the protection of “infant” industries, the state can increase its industries’ competitive level on the international market.[endnoteRef:36] [36: Especially in regard to developing countries, governmental protectionism should be present in order to regulate foreign investment and protect and develop a competitive domestic industry. Chang, 23 Things They Don’t Tell You About Capitalism, Page 261. It is appropriate to trace this principle to the theory of Keynesian, neo-Keynesianism and neo-mercantilist thinking.]

As the principles above suggest, the general purpose of China’s version of state capitalism is not to promote a dominant state that is influential within all aspects of social and economic development. To the contrary, the idea is to let the domestic market interact with the contemporary global trading regime in developing competitive growth. However, as history has taught us, an un-regulated market may often contribute to market depressions[endnoteRef:37]. The principles above therefore present a framework of how a state may choose to best guide the domestic market in a long-term growth in the real economy when confronted by the insecurity of fluctuations and disruptions imbedded in the liberal economic doctrine. Nevertheless, before proceeding I see it as necessary to elaborate further on the factors that underscore why my institutional framework and its principles fits as an explanatory model for how China’s national oil policy is developed. [37: To name two, see Galbraith Created Unequal: The Crisis in American Pay and Ha-Joon Chang, Bad Samaritans: The Guilty Secrets of Rich Nations & the Threat to Global Prosperity. London: Random House Business Books, 2008. ]

The Characteristics of the Contemporary PRC Economic Model

Although the institutional framework this paper has presented above is pursued by the Chinese state in promoting long-term growth through its oil industry, I regard it as relevant to provide a short introduction as to why and how this framework constitutes a large part of the unique version of the Chinese contemporary People’s Republic of China (PRC) economic model. This introduction will provide some insight into the preconditions for why China has chosen to pursue the aforementioned framework.

As previously mentioned in this paper, it is important to differentiate between four pillars that influence a state’s decision-making process when it comes to policy development. These are historic, cultural, political and economic conditions that are relevant to most of all the national states. In most cases, these four pillars also stipulate how and why a state’s institutional framework differs from other comparable cases. This is also the case with China, for which I will now provide some specific factors which comprise the core for why China has developed towards its current state. Consequently, this paper will first present some overall comparative and different developments between the East Asian economies to demonstrate the apparent uniqueness of the Chinese model. Yet, this paper also sees it as necessary to present a more in-depth comparative analysis between China and South Korea, as until recently South Korea has been the best comparable example to the Chinese export model.

The Chinese Tradition of Activist Growth-promoting State

To start, when characterizing the Chinese model one cannot escape the importance that the last century’s history has had on its current social structure. Although the empirical factors relevant to the contemporary institutional framework will be discussed later, I want to point out some characterizations that differentiate the Chinese state from other comparable East Asian institutional frameworks. This will show how the state bureaucracy has developed as it has, thereby bringing about the possibility of promoting the state capitalist principles.

First, it is important to emphasize that the role of the state in promoting growth is not a new phenomenon in China. Several early statesmen such as Wang Anshi (1021-1086), Wang Mang (45 BC- 23 AD) and Guanzi (720-645 BC) promoted much of the same ideas as the neo-mercantilist economic theory and Institutional Political Economy, in regard to the responsibility of the state to promote growth. As a result, these early statesmen have been important for how these new theoretical frameworks gained acceptance and were adapted into the Chinese institutional framework. One can imply that they later supplemented the already accepted economic framework of Maoism[endnoteRef:38]. It is also appropriate to conclude here that although China has reviewed other state’s experiences in regard to policy and economic developments, China can to some degree pinpoint a long history of state-centered economic thinking, while in the case of Japan and South Korea this is a more recent phenomenon[endnoteRef:39]. [38: Interview with representative from the Chinese oil industry. 13.08.2011.] [39: For more information on this topic see Ju Kim Kyong, The Development of Modern South Korea: State formation, capitalist development and national identity. London: Routledge, Taylor & Francis Group, 2006. One could mention the early nationalization period during the Japanese Nara Period from 710 to 784 AD when the state increased its involvement in national financial matters. However, compared to the Chinese and Korean traditions, the Japanese history of state involvement is much smaller in scale when taking an empirical view of the two last millenniums.]

It is also important to mention the dominant role of the China Communist Party (CCP) compared to other East Asian states. More specific, since 1949, it is appropriate to characterize the CCP government as a Leninist model in which the party sustains complete dominance over all power. One should mention that during the period of the Kuomintang (1928-1949), a state-controlled economy was also promoted. However, compared to the CCP leadership, the state bureaucracy during the Kuomintang was far more corrupt and ineffective[endnoteRef:40]. Nevertheless, the dominant position of the CCP can be illustrated by the lack of a legal political opposition within the general population throughout the last sixty years. This is framed on the Soviet Communist model, which differentiates China from other Japan in the period from 1949 until the 1980s. One can imply that similar power relations existed in South Korea during the reign of Pack Chong Hee, though considering the consistency of ideological dominance and party dominance, it is difficult to find any comparable state in East Asia. [40: For more information on the corruption during the Kuominang government. L. Blake Finley, “Chiang Kai-shek & the Kuomintang: America’s Friends”. The Uranian Institute. 2005. ]

The Regional Influences on China’s Economic Strategy Development

From an economic perspective, although China has drawn on its own history of economic thinking, the experiences of both South Korea and Japan have also been important in how to develop an export model that would fit the global liberal market philosophy. Because of this, the South Korean and Japanese experiences have been taken into account. Nevertheless, it is important to emphasize that there are some variations between the East Asian models, e.g. in terms of Foreign Direct Investment (FDI) usage. That FDI has been a central factor for China in its development has not been decisive for either South Korea or Japan to the same extent. However, one can draw a line to the other smaller Asian states such as the three of the four Asian dragons (Taiwan, Singapore, and Hong Kong) to see where China has drawn its knowledge from. One way to explain this can be to review the geopolitical situation during the economic development of South Korea (1970-80) and Japan (1950-1970), in that their access to US and European loans, as a way to finance its development was favorable in comparison to the Chinese situation in the 1990s. This influenced China to look for other ways to regulate as well as promote foreign investment in its economy.

In accordance with what has been presented above, the uniqueness of the Chinese model can be regarded as mixture of experiences and approached proposed by other states to promote a regulated long-term growth based on the export model. Throughout Chinese history, however, there has been a tradition by the state to contribute and promote growth through state subsidization of the agricultural sector, which should be highlighted as a relevant factor for why it has been natural to incorporate List’s three phases and the state capitalism institutional framework to China’s development model.

Nevertheless, it is difficult to attach any specific unique character in the sense that few aspects of the Chinese economy are actually new. Be that as it may, it is important to look at the period in which China was actually developing a unique framework separately from other states’. The unique version of China’s state capitalism came into effect after the East Asian credit crisis in 1996-1997. The reason why this crisis determines the uniqueness of the Chinese model is more rooted in the shift of economic policy within other East Asian countries, most notably the South Korean model. The reason why the alteration of the financial system in South Korea is important for the Chinese framework is rooted in the fact that up until 1997 China pursued the same approach. The negative effects of the crisis illustrated what could happen if China opened up its economy in the same way as South Korea, as it is rooted in the South Korean state’s reconfiguration of its financial regulations that laid the groundwork for how the Chinese economy became unique in comparison to others. After 1997, China was the only country that pursued an economic model which was ideal for promoting the state capitalist principles, most notably the neo-mercantilist economic theory described above[endnoteRef:41]. This is also because the Chinese Communist Party’s vertical governance was legitimized in its populous support, not only through dictatorial governance. One should underscore that the CCP’s legitimacy after 1979 was no longer ideological, but economic. Moreover, although its legitimacy was based in the party’s ability to provide a consistent growth percentage, this legitimacy also gave the CCP complete control over the financial system, the market and the political sphere.[endnoteRef:42] [41: One could say that Vietnam inhibits the same prerequisites as China. However, as Vietnam is currently in an earlier phase of development, it is unlikely that China would look to Vietnam for guidance on how to develop its economy in the future. ] [42: For example, without difficulty the state had the power to increase the tax on investments from 25 percent to 50 percent with no real opposition.]

I do realize that the characteristics of the Chinese model discussed seem overly general. Therefore, I see it as necessary to provide a more specific comparative review through an example of the difference between the South Korean and Chinese states when it comes to the state-SOEs relationship, and how South Korea’s change brought about the unique version of Chinese state capitalism. Since most of my paper will focus on the Chinese relationship between SOEs and the state, this next part will elaborate on the South Korean model. Thus, I have chosen to present a summary of the South Korean model for the purpose that it will serve as a comparative example later in this paper.

A Regional Comparison between China’s State Capitalism and South Korea

Since 1962, the South Korean economy has presented an annual growth rate of 10 percent for over 20 years, and a growth in exports that has increased from $52 million in 1962 to $24.22 billion in 1983.[endnoteRef:43] This initial economic success was carried out by changing South Korea’s comparative advantage from rice production to light and then heavy industry such as shipping and automobiles.[endnoteRef:44] One can divide the South Korean economic development into four phases. First, up until 1960 the economy was dominated by rice and textile production. Second, the 1970s were dominated by steal, automobile and ship development. Third, during the 1980s the South Korean economy incorporated the production of semiconductors. Fourth, the phase from the 1990s up until today in which there has been a gradual transition towards high-value service and IT. Over time, the contributing factor that resulted in this change in industrial development was the South Korean government’s reliance on state capitalist principles.[endnoteRef:45] More specifically, the South Korean industrial development was achieved through the state’s role in changing the focus from import substitution to export-oriented manufacturing industries through the establishment of chaebols (South Korea’s national business conglomerates). One example of this is Samsung’s shift from trading and light industrial activities (shoes and textile production) to the manufacturing of other more high-value products that are in accordance with the different phases presented above.[endnoteRef:46] [43: R.R. Krishnan, “South Korean Export Oriented Regime: Context and Characteristics”. Social Scientist 13, No. 7/8 (Jul-Aug 1985), page 90.] [44: Krishnan, “South Korean Export Oriented Regime: Context and Characteristics” Jul-Aug 1985.] [45: Joseph E. Stiglitz, Freefall: Free Markets and the Sinking of the Global Economy. London: Penguin Books, 2010, page 196.] [46: Erik S. Reinert, “The Role of the State in Economic Growth”. Journal of Economic Studies 26, No. 4/5 (1999): 268-326, pages 26-27. ]

What is important to emphasize here is South Korea’s economic development in accordance with Sombart’s principle. Werner Sombart (1863-1941) said that while setting the pace and pattern for industrial organization, the demand that SOEs create when developed functions as a catalyst for the further development of capitalist industries. [endnoteRef:47] Since China’s promotion of national business champions is similar to what South Korea experienced in its early stages of development, the chaebols’ role in today’s South Korean economy encompasses extensive economic and political power compared to their Chinese counterparts.[endnoteRef:48] Nevertheless, based on the state capitalistic principles of protectionism, R&D investment, worker training and risk sharing, South Korea’s industrial sector has developed a significant number of chaebols, or key industries, that produce goods supported by a network of underpaid subcontractors that provide dynamic increasing returns.[endnoteRef:49] In addition to the promotion of national businesses, other state capitalist principles are prevalent in the current South Korean economy in order to acquire long-term growth in the real economy. [47: Reinert, “The Role of the State in Economic Growth”, page 34.] [48: The Chinese private sector accounted for approximately 60 percent in 2000, while in South Korea the chaebols accounted for about 80 percent of GDP and 50 percent of exports. See Christopher Lingle, “Korea’s chaebol are obstacles, not answers”. The Japan Times Online, 24.08.2000. http://search.japantimes.co.jp/cgi-bin/eo20000824a1.html [Accessed 28.11.2010.]] [49: For more information on what dynamic increasing returns are and their relevance to industrial development, see Reinert. “The Role of the State in Economic Growth”, page 26.]

One policy that China and South Korea emphasize to the same degree is the state’s responsibility of investing in infrastructure to create employment and stimulate aggregated demand. Regardless of the degree of its pragmatic value, one example of a significant infrastructure project is the South Korean government’s Four Major Rivers Restoration Project[endnoteRef:50]. As I will later discuss in the sector study on the Chinese policy banks, the state’s emphasis on the support through investments of infrastructure development is highly relevant to the function of the NOCs and SOEs investing overseas, and how this influences domestic growth in the real economy. [50: For more information on the Four Rivers Restoration Project, see The 4 Major Rivers Restoration, Revival of Rivers: A New Korea. URL: http://www.4rivers.go.kr/news/eng/ [Accessed 25.11.2010.]]

Although not relevant to this paper’s topic, I will present a short summary of the reasons for why South Korea was forced to change its political and economic polices away from the state capitalist principles. I mention this for the purpose of illustrating that for the state capitalist principles to function, it is important that the government sustains overall control of the financial system. If not, as I will present below, the South Korean experience is a good example of how a lack of regulation of the SOEs (in the case of South Korea, chaebols) can disrupt the status quo and develop an unhealthy power relationship between the state and the SOEs.

2.5.3.1. The 1997 East Asian Financial Crisis Relevance to the Development of a Unique Chinese version of State Capitalism

The Asian financial crisis in 1997 represents the main reason why South Korea was forced to partially move away from the state capitalist principles of structural financial control. The crisis from that year nearly bankrupted the South Korean economy, which in order to survive had to accept a substantial rescue package from the International Monetary Fund. Although this saved the South Korean economy, the agreement required the opening of the South Korean financial market. To be more precise, foreign companies/investment firms could buy majority shares in former state-protected sectors such as banking. One important case is the purchase of a 51% share of the South Korean Exchange Bank by the American company Lone Star Funds[endnoteRef:51] for $1.5 billion.[endnoteRef:52] As the shares were later sold back to a South Korean financial conglomerate, the Hana Financial Group, for $4 billion, the funds were not reinvested into the South Korean economy. To the South Korean government, the general population and the Chinese leadership, this outflow of money clearly demonstrated the predatory nature of the neo-liberal trading regime. It also revealed the consequences of opening up the financial market, namely the negative outcomes of increased cross-border monetary flow. Due to a larger Western influence on the South Korean financial system, this negative development has not only affected the slow liberalization of China’s financial market (the appreciation of the yuan to the dollar), but also became a warning as to what could happen to a national champion if bought up by a Western company.[endnoteRef:53] It should be mentioned that, South Korea was under more pressure than China if it was to find itself in the same situation. More specific, the IMF also could apply more pressure due to the South Korea’s reliance on the U.S. for access to markets, loans/credits, and military and political support[endnoteRef:54]. [51: Chris Oliver, “ANZ Bank in talks over Lone Star’s KEB Bank stake”. Market Pulse, 29.04.2010. http://www.marketwatch.com/story/anz-bank-in-talks-over-lone-stars-keb-bank-stake-2010-04-29 [Accessed 30.11.2010.]] [52: Yahoo News. ”S. Korean bank close to buying KEB”. 15.11.2010. http://news.yahoo.com/s/afp/20101116/bs_afp/skoreausaustraliabankingkeblonestaranz_20101116041946 [Accessed 30.11.2010.] ] [53: Interview with representative from the Chinese oil industry. 13.08.2011. ] [54: See Kyong Ju Kim, The Development of Modern South Korea: State formation, capitalist development and national identity. London: Routledge Taylor & Francis Group. 2006. Chapter 7,8 and 9.]

In short, what separates the Chinese from the South Korean version of state capitalism is their commitment in pursuing state capitalist principles, whether willingly or unwillingly. While both countries focus on Galbraith’s theory of the state’s responsibility in determining prices, the two countries incorporate different types of state interventions to achieve this goal. While China supports the “dumping” of domestically manufactured goods on the domestic market, the South Korean government determines rice prices through state subsidies in order to justify low urban wages.[endnoteRef:55] However, one should realize that the South Korean method of forcing peasants to sell the produced rice at artificially low prices damages their economic outlook to a large extent. Regardless, both countries focus on the state’s responsibility in protecting and promoting domestic industries through state subsidies or trade remedies, whether they be large multinationals such as chaebols or “infant” industries, in terms of developing industrial competitiveness. [55: For information on South Korea’s wage and price control, see J. Albert Evans, “Government intervention in South Korean agriculture”. Business Publications, World Agriculture, June 1991. findarticles.com/p/articles/mi_m3809/is_n63/ai_11174350/ [Accessed 28.11.2010.] ]

One should mention that South Korea’s dependency on the success of the chaebols demonstrates a difference between China and South Korea. While the chaebols and their subcontractors comprise a significant share of the South Korean industrial output, the small- and medium-sized enterprises in China are more important. This exhibits China’s promotion of a more diversified economy with both low and high-tech manufacturing industries. South Korea and China also promote different ways of controlling currency fluctuations, with China being a more aggressive participant in increasing its export’s competitiveness to the international market[endnoteRef:56]. [56: With respect to its monetary policy, South Korea has pr