Characteristics of resource allocation

during crisis: the case of Zhengzhou’s manufacturing

enterprisesMaria CsanádiInstitute of Economics HAS

Collaborating partners and funding Institute of Economics HAS: Maria Csanádi Beijing Normal University: Li Shi and 15 phd and master

students interviewing and collecting news : Gao Xia, Feng Yi, Zhu Mengbing, Cui Yaqiong, Yuan Zeqing, Nie Zihan (+assistant), Zhang Jiliang, Li Chao, Bao Chuanjian, Dai Song, Zhao Guohua, Chen Jianwei, Xu Yantian, Wang Chuanchao, Sundan (assistant)

Institute of Economics CASS: Liu Xiaoxuan Fudan University: Zhao Chen + Xu Wei Changzhou U. Ferenc Gyuris Department of Economic Geography at

ELTE University Hungary Aniko Polenyik PhD student at Szeged University H. Financed by: Hungarian National Research Fund

Approach

M. Csanádi 3

ChangzhouZhegzhou

News analysis 1760 news collection on crisis, enterprises, investment and migration

Manager interviews

45

Enterprise questionnaire: representative

sample445+119+300

Zh.m + Zh.c +Ch.m

Migrant interviews

200

Presentation

Number of locations and number of interviews weredetermined by my guanxi and the collaborators’ physical capacity

Sampling

Manufacturing enterprises 12 subsectors Random sampling (10) Size and ownership concerns: SOEs and large enterprises

included owing to their low number 14% SOE or state controlled enterprises

Size characteristics in the sample

FIXASS08 LARGE

FIXASS08 MEDIUM

FIXASS08 SMALL

Sum

SALE08 LARGE

15(3.8%)

40(10.3%)

42(10.8%)

97(24.9%)

SALE08 MEDIUM

4(1.0%)

8(2.1%)

209(53.6%)

221(56.7%)

SALE08 SMALL

1(0.3%)

0(0.0%)

71(18.2%)

72(18.5%)

Sum 20(5.1%)

48(12.3%)

322(82.6%)

390(100.0%)

M. Csanádi 5

Motivation and working hypothesis Motivation: How does a transforming economy like

that of China adapt to global crisis? Hypothesis: Shock induced by the crisis activates state

interventions, interventions activate the decision-making network, the network in turn, activates the system characteristics of resource distribution

Characteristics: political rationality of selective allocation preferring large enterprises that are closely integrated into the decision-making process (IPS, Csanádi, 2006)

Consequences: General system-characterisitcs imply structural motivation of economic units for growth and thereby for repetitive investment overheating

Sensitivity to crisis in production between 2008-2010 Though only 11% of the enterprises were directly

exposed to global crisis through export, over 30% stressed to have been strongly hit by it.

Yet, among those strongly hit, only 10% suffered steady decline in output, while 45% demonstrated steady growth, and 34% recovered after the first year of stagnation or decline

Would this be true regarding other economic indicators?

Sensitivity to crisis through other indicators between 2008-2010 The dynamics of other economic indicators: changes

in profit, fixed assets, employment and migrant employment between 2008-2010: Show somewhat higher sensitivity (lower growth)

to crisis than that of the output Still, steady growth and recuperation after

stagnation or decline are the most frequent cases in all indicators

Puzzle: low sensitivity or flexible adaptation to market conditions? Indicators suggest either low crisis sensitivity, despite

30% stressing to be hit strongly by it Or low profit sensitivity: about 70 percent of the

enterprises stressed that they would survive zero or negative profit– taking them as temporary.

Third option: flexible adaptation to market rather than low crisis- or profit sensitivity, since also profit showed high percentage of steady growth and recovery

Signes of adaptation to market in a transforming economy Most frequent enterprise strategies in case of zero profit or loss:

to remain on the market with production rationalization by decreasing costs (63.6%), by changing production structure (38.7%), by retraining staff (27.5%) or by increasing domestic sales (19.1%),

The less frequently would they choose: Different ways of „physical” withdrawal from the market (in

increasing order): to cut export (0.4%), to reduce the proportion of migrant workers (2.7%), to cut working time (7.0%), to implement paycut (7.4%), to lay off (10.0%).

Different ways of economically rational adaptation through development was not among the most frequently chosen solutions: invest in R and D (10.0%) and to raise funds (9.7%).

Investment sensitivity during crisis? Are they avoiding investment during crisis? No 55% percent of the enterprises had resources from banks,

29.4% received from commercial institutions, 29.4 % invested from own sources – apparently low investment sensitivity.

The share of the sources in investment: 47.5% own sources followed by bank loans 16.9%, and commercial credit 12.6

Resources were overwhelmingly for short-term, since only 13.5% of enterprises had long-term debts 18% of the enterprises were involved in the stimulus package

Low percentage suggest strong selection in resource distribution for larger investments. Criteria?

Biased selection in allocation? A bias towards larger enterprises (compared to the

sample’s size- distribution), increasing with the years. A bias towards size and level of integration: both large-

and medium-sized enterprises are overrepresented in connections compared to the basic ratios of the sample

Bias towards those with network increasing with the years Size and connection bias simultaneously reflects the non-

market focus of adaptation of enterprises in their drive for resources

Allocation of resources and guanxi in a transforming economy These drives motivated by biased selective allocation

in the politically monopolized decision-making structure -- despite transforming economy -- implies strong connections with distributor organizations not only in case of SOEs but also in case of private enterprises

This is supported by the fact that while only 14% of the enterprises in the sample are state owned and state controlled, 40% have connections to the LDRC, 36% to Land Bureau, 30% to Housing Committee. Do connections matter?

Distribution and guanxi Those with guanxi had more chance to participate in the

stimulus plan. (This was the fact with 42% of those with connections to Cadre Administration, 33.6% of those who had connections with the LDRC, 30.0% of those with Housing Committe, 30.6 with connections to the Planning Bureau and 22.6% with the Land Bureau.)

Those 83 enterprises who got the stimulus support, had more frequently connections with distributor organizations than those in the sample (53% in LDRC compared to 28.0%), (36.1% with Land Bureau as opposed to 22.7% in the sample)

How general is this in the sample

Chances for being privileged Seven direct or indirect sources: longterm debt, stimulus

support, investments directly related to stimulus plan, urgent need for long-term financing, slight longterm financing gap to be financed, projects financed by provincial government, new project

Chances (Ch): the number of received privileges (Pr) times the number of enterprises in the given group (N), divided by all potentially receivable privileges (PPr) in the group times the number of enterprises in the group (N). (GrCh = PrxN/PPr.xN).

Average chance of all sample enterprises will be deducted from group chances GrCh-AvCh = (-) below or (+) above the average chances

Politically rational reactions to crisis in allocations – bail-out Export sensitivity: Exporting enterprises, had

substantially higher chances to get privileged (17.0%, 16.5%, 18.5% along the three years), compared to those who were not (-1.1%, -1.0%, -1.3% along the three years).

Crisis sensitivity: Enterprises had somewhat higher chances for resource allocation if they were strongly hit by the crisis (2.9%). Chances declined radically if they were hit mildly (-0.4%) or were not hit by the crisis

(-4.4%).

Politically rational criteria of allocation-- size and type sensitivitySize Large Medium Small

2008 2009 2010 2008 2009 2010 2008 2009 2010

Sales 3.1 2.8 1.9 -0.1 -0.2 -0.5 -2.9 -1.7 -2.8

Fixed Ass. 4.7 11.6 4.2 2.7 1.3 2.2 -0.2 -0.6 -0.8

Employm. 18.3 16.9 12.8 1.6 2.9 2.3 -1.8 -2.2 -2.4

Size-type sensitivity rank: employment, fixed assets, sales in all years Size sensitivity rank: large, medium, small in all yearsBoth reflect timeless political, rather than market sensitivity of allocation

Sensitivity of allocation to state ownership and central subordination1 2 3 4 5 6 7 8 9

% -5.4 -2.0 0.5 4.0 4.9 0.2 3.3 2.1 12.4

Central Provincial

City Others

% 18.5 0.4 7.3 1.7

Chances according to administrative subordination

Chances according to ownership forms

Note: Numbers show the deviation from the average which is 11%

Note: Numbers show the deviation from the average which is 11%

Sensitivity of allocation -- the strength of guanxi

 Strength of connection

No connection

Mild Medium Strong

Banks -2.8 1.5 2.2 8.6Government departments

-2.6 -0.5 5.2 7.1

Chances to get privileges and strength of connection with banks and government departments

Note: Numbers show the deviation from the average which is 11%

Hierarchy of chances according to distributing goverment authorities

.Institutions Chances of those who do not have connections

Chances of those who have connections

Planning Bureau -0.8 9.6

LDRC -2.8 6.9

Land Bureau -1.6 4.2

Hierarchy of chances according to official visits

Institutions Chances of those who do not have connections

Chances of those who have connections

Official visits from prov. level or above

-2.9 13.0

Official visits from city level

-0.1 1.2

Official visits from county level

0.6 -3.0

Official visits from below county level

0.1 -0.5

Chances in case of institutional backing – type of collaterals

No collateral

Have collateral

Private collateral company

Government guaranteed comp.

Priv+gov

-1.1 8.7 6.5 8.8 14.7

Chances in case of positional backing –personal positionsPersonal positions

0 1 2 More than two

2008 -1.5 1.0 6.8 7.4

2009 -1.8 1.3 6.6 4.0

2010 -1.8 1.2 6.2 6.0

Self-similarities of allocation in party-states

Conclusions Owing to economic transformation a schysophrenic

behavior of enterprises is experienced: economically rational adaptation to market on the short-term and politically rational adaptation to allocation preferences on the longer term,

Allocation of resources have a fixed path: Higher are the chances to be priviledged for large and state-owned or state controlled enterprises, deeply integrated into the decision-making network through guanxi

Conclusions (cont.) Allocation preferences induce politically rational

economic behavior of enterprises for growth and drives for deeper integration into the network

Politically rational allocation preferences and politically rational economic behavior lead to overheated investments rather then for economically rational adaptation to market

These characteristics probably become more salient in case of stronger state intervention to compensate the impacts of the crisis as it happened during crisis through the stimulus package and its multiplicative effect

Future research plans? In order to find out if these local results are indeed the

characteristics of politically monopolized resource allocation even in an economically transforming party-state independent of space and aggregation level further surveys should be done at prefecture and provincial levels, in spatially different locations.

In order to find out if these characteristics emerge only in case of stronger state intervention in transforming economies reacting to larger shocks, or are independent of time owing to general system characteristics of allocation such survey should be repeated also after the short-term impact of the stimulus package

:--(

However, I have already exploited all possible guanxi of my friends

Thank you for their help and for your listening