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China's Regulatory StateA New Strategy for Globalization$

Roselyn Hsueh

Print publication date: 2011

Print ISBN-13: 9780801449956

Published to Cornell Scholarship Online: August 2016

DOI: 10.7591/cornell/9780801449956.001.0001

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Deliberate Reinforcement in Strategic Industries

Deliberate Reinforcement in Strategic Industries

Chapter:
(p.193) 8 Deliberate Reinforcement in Strategic Industries
Source:
China's Regulatory State
Author(s):

Roselyn Hsueh

Publisher:
Cornell University Press
DOI:10.7591/cornell/9780801449956.003.0009

Abstract and Keywords

This chapter surveys strategic industries (financial services, energy, and automotives) to test, extend, and refine the broader applicability of the strategic value framework developed in previous chapters. The state exercised the most deliberate control over financial services. Financial services scored high on measures of strategic value (importance to national security broadly defined and contribution to national technology base) but low in domestic sector competitiveness. The energy sector scored medium high to high in degree of strategic value, and domestic firms are not as competitive as foreign companies in the energy industry. In energy, more than in other industries, the state has sought to balance China's resource requirements for industrialization with concerns for internal stability and energy security. The Chinese automobile sector has few national security implications and infrastructural assets that required central coordination. Thus, the state delegated industrial management to provincial governments. Decentralization and market liberalization created a domestic market made up of over one hundred automakers under provincial ownership and management and thousands more state-owned and nonstate producers of auto parts.

Keywords:   state control, industry regulation, liberalization, financial services industry, energy industry, automotive industry, strategic value

In the preceding chapters, I systematically mapped sectoral and cross-time variation in how the Chinese government reregulated after economy-wide liberalization. In the next two chapters, I will survey other industries to test, extend, and refine the broader applicability of the strategic value framework developed in earlier chapters. The following mini case studies contribute methodologically (more cases) and empirically (broadening the scope) to the story told in this book: the transformation of Chinese statecraft toward the economy, more broadly, and the differentiated relationship between government and business across strategic and nonstrategic industries in the post-Deng era, more specifically. The cross-sector survey also reinforces how China has pursued a separate path from the East Asian developmental state. Japan, South Korea, and Taiwan restricted FDI, managed competition, and worked closely with domestic private industry to coordinate technological and industrial development through market-conforming policies; this dominant pattern of government-business relations applied across industries. In contrast, this book’s main case studies and the next two chapters show that China has liberalized FDI on the macro-level and permitted fierce competition among market players. But depending on the strategic value of the sector in question, the Chinese government strictly manages ownership structures, market entry, and business scope, or deregulates markets and relinquishes regulation to local authorities.

The remainder of this chapter surveys strategic industries (financial services, energy, and automotives), and the next chapter surveys nonstrategic industries (consumer electronics, foodstuffs, and paper). Each case study is organized according to the industry’s strategic value and distinctive features, state goals and methods, narrative of regulatory change, and subsectoral variation. The dominant (p.194) pattern of state control in strategic sectors is deliberate reinforcement, comparable to the approach taken in telecommunications. These industries make a major contribution to the national technology base; in most cases they are considered important to national security; and they comprise a domestic sector that is less competitive than foreign companies (see figure 2.4). They involve complex, interactive technology, connect to producer-driven commodity chains, and require high capital/knowledge intensity. During economy-wide liberalization, the state separated regulation from ownership and introduced competition. Yet, to achieve national security imperatives, develop physical or service infrastructure, and promote industrial development, the separation of state assets from regulation involved corporate restructuring and reorganization, not full-scale privatization or the relinquishment of state control. Moreover, managed entry and exit accompanied the introduction of competition.

In the most strategic subsectors, after business units and companies legally separated from the bureaucracy and underwent corporatization, they retained strong links with state agencies. Central government departments governed markets by limiting the number of players and restricting FDI to equity investment or minority shares in JVs. The central government delegated economic decision making to local branches of central bureaucracies in the less strategic subsectors. Foreign and domestic private companies entered and exited without interference so long as they satisfied China-specific rules on conformity compliance and product or service inspections. The politics of decentralization governed until central imperatives necessitated intervention. The increasingly competitive domestic sector voiced policy preferences through state-controlled sector associations.

Financial Services

Among the strategic industries surveyed, the state exercised the most deliberate control in financial services. Figure 2.4 shows that financial services scores high on our measures of strategic value (importance to national security broadly defined and contribution to national technology base) but low in domestic sector competitiveness. Since the Mao era, the state has retained its monopoly of the financial industry to finance economic reform. It required state-owned banks, disconnected from international markets, to lend in their respective policy areas to state-owned enterprises. Economy-wide liberalization in the 1990s introduced foreign investment but the state did not relinquish its control. Rather, reregulation designed to enhance state control and develop and diversify financial services orchestrated reform, which accelerated in the mid-2000s. Notwithstanding strict controls in the most strategic subsectors, a growing nonstate sector, including informal banking, which addressed the credit scarcity faced by private domestic industry, flourished outside of regulatory boundaries.

(p.195) State Goals and Methods

To achieve economic and national security imperatives, the state calibrated regulatory reform in ways that introduced competition, promoted the development of sophisticated financial services, and retained state control of the money supply. To develop financial services, the state selectively introduced competition across subsectors in the 1990s, committed to further liberalization in its WTO accession agreement, separated the central bank from regulation in 2003, and restructured the top national banks in the mid-2000s and beyond. It also managed banking restructuring, created functional line regulators, strictly regulated the market entry and business scope of nonstate financial institutions, strategically utilized foreign investment, and purposively timed the introduction of new financial services. The Big Four banks (Agricultural Bank of China, Bank of China, China Construction Bank, and Industrial and Commercial Bank of China) underwent corporatization, assets reorganization, and international public offerings typical of national champions in strategic industries. To control the money supply, including inflation and credit overexpansion, the state employed administrative measures and macroeconomic instruments. These control mechanisms also diversified financial markets and enhanced the state’s control of financial infrastructure, allowing it to institute capital controls, manage inflation, allocate capital, rescue SOEs, raise domestic consumption, and ensure social stability. The prevailing practice of capital allocation, which favored SOEs and government imperatives, however, gave rise to parallel financial institutions disconnected from the state, which reregulation sought to incorporate under state control.

Regulatory Change

The Chinese government regulated financial services and the money supply through administrative decrees until 2003. That year, it separated regulation from the central bank. Throughout the 1980s until the mid-1990s, the central bank issued nonnegotiable loan ceilings to regional branches and channeled loans only to recipients approved by state planners. Moreover, a national credit plan quantitatively managed national, provincial, and sectoral lending. In this context, national state-owned banks formed along policy jurisdictions and came to dominate financial services.

China’s national banks were established during the first decade of reform.1 The People’s Bank of China (PBOC) gained ministerial status in 1978 and became the central bank charged with the foreign currency portfolio in 1984. The Agricultural (p.196) Bank of China (ABC) established in 1979 to handle the financing of grain procurement and rural development. In 1984, the Industrial and Commercial Bank of China (ICBC) took over the PBOC’s previous deposit-and-lending functions to finance SOEs. Around the same time, the China Construction Bank (CCB) separated from the Ministry of Finance and came under the State Council’s administration. To formalize foreign financial exchange, China joined the World Bank and the International Monetary Fund in 1980 and created the China Investment Bank. The bank assumed responsibility for development funds when China joined the Asian Development Bank in 1986.

Provincial-level banks, including national bank branches, developed in parallel. The Notice on the Method of Controlling Loan-to-Deposit Difference granted provincial branches the authority to distribute a part of their respective credit quotas to local development projects. Local party committees also obtained the authority to jointly appoint local Big Four bank managers and central bank officials, the local party groups within these financial institutions, and local disciplinary and inspection networks. Moreover, large state-owned regional banks received licenses to operate in the 1980s. For example, the Shanghai-based Bank of Communication received its license to operate in 1987. Until the late 1990s, however, rules restricted private ownership of local banks. The Minsheng Bank, China’s first private bank, received its license to operate without geographical restrictions in 1996.2

In the late 1980s and early 1990s, the central bank experimented with assetliability management as a replacement of the credit plan. The State Council introduced asset-liability management in commercial banks in 1993, and five years later a guidance plan replaced the credit plan. But even earlier, given administrative decentralization in the 1980s, the credit plan and reserve requirements did not completely constrain local lending. Responding to central and local development goals, provincial and local governments pressured state bank branches and other financial institutions into extending loans. Corruption and collusion ran rampant as local politics governed lending decisions and bank managers siphoned off funds, often without detection or with political protection.3

Though local governments possessed the authority to lend, ordinary citizens and nonstate and small businesses had little access to formal financial institutions; local banks served predominantly state-owned companies and local political interests. Moreover, a fragmented regulatory regime governed secured transactions or loans based on collateral, making it confusing and inefficient for borrowers to qualify for business loans. Laws allowed tangible moveable property only to be used as collateral; this meant a majority of TVEs could not borrow because they lacked the requisite secured property for collateral. Also, without a centralized (p.197) property registration system, borrowers often ran into difficulty providing proof of their qualifications. Some scholars argue that the Property Rights Laws of 2007 recognized and provided security for more property, prompting banks to lend more to small and medium enterprises.4 In response to capital scarcity, small business owners created a variety of informal financing mechanisms, including rotating credit associations and private banks disguised as other types of organizations.5 Urban and rural credit cooperatives, the more formal of these local institutions, began converting into urban commercial banks and rural commercial banks in the mid-1990s.

The 1986 Provincial Banking Regulations established the basis for a national commercial banking system, including financial services, such as securities, to serve specific developmental objectives and market niches.6 During the 1980s through the 1990s, financial services were diversified and conventional methods for financial intermediation were created through the establishment of trust and investment corporations, including the China International Trust and Investment Corporation (CITIC); insurance companies, such as the People’s Insurance Company of China (PPIC); fund management corporations to assist ailing SOEs; and the Shanghai and Shenzhen stock markets to raise capital. The securities and insurance sectors developed slowly. For example, the stock exchanges began operation in 1990 and the government established the China Security Regulatory Commission in 1992 but the regulatory commission did not have much authority until 1998 or attain legal status until 1999 under the Securities Law. Moreover, banking dominated financial services despite the entry of brokerages, such as Anshan Securities, established in 1988 by a local branch of the central bank.7

The Central Bank Law and the Commercial Bank Law of 1994 began the transformation of the Big Four into commercial banks. To set the stage, between 1994 and 1996, the central government unified the official and market exchange rates and allowed current accounts to convert (but it forbade capital account convertibility and exerted other capital controls). The state also created a ten-year plan for reforming financial services; consolidated central authority over a fragmented system of financial market supervision; and prepared domestic industry for competition ahead of WTO accession.8 As a first step, to centralize market supervision and at the same time develop and diversify financial services, the State Council created three regulators to oversee banking, insurance, and securities in 1998. The State Council further created the Central Finance and Economics Leading Group (p.198) (CFELG) to make policy. The Communist Party also formed the Central Financial Work Commission (CFWC), charged with installing new CCP organs and centralized party hierarchy in the regulators and the twenty-seven most important national financial companies. The CFELG and CFWC functioned essentially like a shadow central bank.9 What is more, the CFELG mirrored the function of the State Office of Informationization in telecommunications; it brought together top leadership to set sector-specific policy, and through the CFELG, the central leadership consolidated control of financial sector personnel.10 Once the state enhanced regulatory authority and installed leadership discipline, the State Council dismissed the CFWC in 2003.

That year, the PRC Banking Law eliminated the central bank’s jurisdiction over the regulatory commissions and formally granted the Big Four banks permission to engage in commercial activities. The regulatory commissions also gained ministerial status.11 Notwithstanding their new status, a complex web of regulators with competing agendas—including the line regulators, the finance and commerce ministries, the NDRC, the State Administration of Foreign Exchange, and the central bank—slowed policy developments and regulatory enforcement. Moreover, even while the March 2008 administrative and industrial restructuring eliminated overlapping jurisdictions and consolidated state control in many strategic industries, the regulatory landscape in financial services remained the same. “Financial services remain separately regulated and, without further institutional reform, personnel problems and competing local and national interests will continue to plague the industry,” economics professor Deming Huo of Peking University explained.12

Subsectoral Variation

Imperatives to prepare the banking sector for international competition and to diversify financial services, and to retain state control of the money supply to finance development priorities, motivated the state’s approach to the reregulation typical of strategic sectors. Reregulation enhanced state control, and state goals, government-business relations, and state methods varied across banking, securities, and insurance. Bargains between local and national banks and foreign ones tested and stretched the scope of rules even before formal market liberalization. The strategic (p.199) value of subsector and political imperatives arising from the organization of state institutions and economic conditions shaped the nature of company-level bargains and other market and nonmarket measures that controlled market developments across subsectors.

Banking

To rid the Big Four banks of nonperforming loans (NPL) and attract foreign investment, the state created four asset management companies (AMCs) in 1999, before WTO accession.13 The Ministry of Finance injected billions of dollars into the AMCs and issued bonds to purchase bad loans. The AMCs also began selling distressed assets to foreigners that year. Foreign activity in the NPL market slowed, however, when the shift from closed negotiations to open auctions in 2004 favored well-funded domestic institutions. In 2005, foreign investors boycotted the Xinda auction to protest NPL sales by the AMCs to one another at unrealistic prices. In 2006, foreign participation returned when the State Council pressured AMCs to meet recovery quotas.

At the end of 2003, the state created Central Huijin Investment, a subsidiary of the sovereign wealth fund, China Investment Corporation (CIC), to transfer funds, supervise investment, and institute corporate governance reform.14 This commenced the typical process of China’s “privatization” of strategic assets. Through Huijin, the state injected USD 100 billion to strengthen the Big Four and enlisted foreign experts and bankers to help institute corporate governance reform. By mid-2010, the Big Four’s most competitive assets became listed on the Hong Kong and Shanghai exchanges.15 The newly raised cash from global listings allowed the “reformed” banks to make acquisitions overseas.16 “The government owns 80 percent of the financial industry but calls them ‘privatized’ because they trade in international stock exchanges,” explained Jack Wadsworth, former chairman of Morgan Stanley Asia and China International Capital Corporation.17

Through the 2000s, the AMCs had limited success in recovering or selling off bad assets, and Huijin moved slowly in corporate governance, transparency, and risk management reform. Experienced mainly with loaning to SOEs as a matter of policy, state banks struggled with managing risk and pricing capital. Further (p.200) frustrating reforms were strict controls on interest rates, weak independent credit rating agencies, a feeble corporate bond market, inadequate regulatory capacity, political relationships, poor management, and a huge default risk. Not to be overlooked, the employment of tens of millions of people by state banks and their branches made social stability also a concern. In late 2008, in the midst of a global financial crisis, the CIC announced it would purchase stakes in commercial banks to further reform. Industry insiders interpreted this as the state’s readiness to bail out financial services when it saw fit. This initiative was part of a government stimulus package worth USD 645 billion, which helped China weather the economic slowdown. In remarks in January 2010, central bank governor Zhou Xiaochuan of the People’s Bank of China vowed to “keep a good handle on the pace of monetary and credit growth, guiding financial institutions toward balanced release of credit and avoiding excessive turbulence.”18

Foreign banks invested in China as local governments, empowered by decentralization, lured FDI through bargains that stayed within the investment ceiling and business scope allowed by the central government in its WTO accession agreement. The WTO accession protocol committed China to liberalizing market entry in banking from a 15 percent foreign equity ceiling in 2001 to 20 percent in 2006, when geographic restrictions were lifted. Moreover, the government began permitting wholly foreign-owned branches, limited to the foreign currency business, in 2001. Despite the gradual relaxation of the FDI ceiling, market-access barriers persisted, including high working capital requirements for bank branches and a limit of one branch expansion per year.19 To obtain market foothold, some foreign banks targeted smaller regional banks in exchange for bigger shares while other banks targeted large national banks in exchange for smaller shares. In 2008, no foreign valuation reached the legal ceiling in the Big Four, but foreign equity in smaller banks came close. In 2009, HSBC (China) Company Limited, the locally incorporated foreign subsidiary of HSBC, became the first bank to underwrite an RMB-denominated bond issued by the Bank of Shanghai.

Securities

The Commercial Banking Law of 1995 separated securities from other forms of banking and enacted strict rules to regulate this subsector.20 China’s WTO commitments limited FDI to a 33 percent equity ceiling in brokerage JVs with domestic partners and 49 percent in domestic fund management firms. These minority- (p.201) owned JVs were prohibited from directly trading A shares and were limited to underwriting and trading government and corporate debt and B and H shares.21

China International Capital Corporation (CICC), the foreign-invested investment banking JV between majority owner CCB and U.S. financial services provider Morgan Stanley, represented a state-FDI bargain that exceeded China’s WTO commitment. Morgan Stanley owned 35 percent of CICC when it formed in 1995, at a time when rules prohibited FDI. But from the beginning the government did not strictly enforce the contract between the partners, which covered personnel issues to investment projects. Politics and mistrust between employees separately appointed by the partners further strained the partnership. In a sign of Morgan Stanley’s falling out with CICC, in 1997 the central leadership chose Goldman Sachs to partner with CICC in managing China Telecom’s first IPO in Hong Kong and New York.22 After losing management control and becoming a passive investor, Morgan Stanley sold its stake in CICC to an investor group led by equity investors in 2010.

Since CICC, FDI-state bargains in investment banking approved by the China Security Regulatory Commission have not exceeded China’s WTO commitments. Goldman Sachs, Credit Suisse, and Deutsche Bank hold 33 percent stakes in their brokerage JVs with Gao Hua Securities, Founder Securities, and Shanxi Securities, respectively. Morgan Stanley, along with JPMorgan Chase, entered China again in 2011, when they gained approval in January 2011 to form JVs with Huaxin Securities and First Capital Securities, respectively. The only global investment bank to hold a 49 percent stake is UBS, in its fund management JV with the State Development Investment Corporation, approved in 2005.

In addition to rules on ownership and business scope, other rules, such as a high fixed minimum capital requirement, dissuaded smaller entrants in securities and reduced the overall attractiveness of the JV vehicle. What is more, in late 2006 the government announced a moratorium on FDI in securities and increased the investment required from qualified foreign institutional investors from $10 billion to $30 billion. Industry insiders attributed these actions to the state’s fear of FDI dominating a domestic sector teetering on bankruptcy. “Between 2006 and 2008, the Chinese government launched full-scale sector reform to get the house in order. In 2008, it lifted the moratorium and approved two JVs to underwrite mergers and acquisitions,” explained a principal at a foreign-invested securities company.23 During this period, securities reform, including liberalizing the convertibility of tradeable (p.202) and nontradeable shares, diversified ownership in securities, but state-affiliated agencies and management teams represented a majority of the owners. The banking regulatory commission also issued a rule in December 2006 that required that senior executives pass a Chinese financial knowledge test. This barred Goldman Sach’s top choice to run its JV from taking the position the following year.

The government also regularly intervened with non-market-based mechanisms to manage the stock market. It adjusted taxation involved with stock trading as it responded to domestic and global economic conditions. For example, to provide incentives for stock purchases during the 2008 global financial crisis, the government eliminated the two-side collection of the stamp tax on stock purchases and replaced it with single-side collection from the seller only.24 The 0.1 percent tax remained at the same rate as it was in April 2008, when it was reduced from a threefold hike in 2007 to cool down the domestic economy. The government also regularly purchased stock in SOEs and permitted them to buy back stocks as assurance against company failure. In another response to global conditions, the CIC announced in September 2008 that it would purchase stock from China’s Big Four banks. Moreover, to maintain a “healthy” stock market, practices common in Western stock markets, such as short selling, were made illegal.

Ambiguous rules, such as those on corporate stock disclosures, allowed the government to exercise discretion in suspending corporate trading and allowed local companies to conceal negative news. For example, in November 2008 the government suspended trading in shares of Gome Electrical Appliance Holdings because of an investigation into a sudden percentage jump in mid-2007 in shares of the medical company SD Jintai, owned by Huang Junqin, the brother of Gome CEO Huang Guangyu. In 2010, it fined and sentenced Huang Guangyu to fourteen years in prison for insider trading and bribery involving another company, Beijing Centergate Technologies.25 Murky corporate stock disclosure rules also helped companies when negative factors led to uncertain financial prospects.26 Yunnan-based Yuntianhua, a producer of fertilizer, suspended shares for nearly eight months, until an asset injection by its state-owned parent in late 2008.

The actual level and scope of foreign equity investment that brokerages were permitted to invest and that companies were permitted to attract varied according to the strategic value of a sector logic and the extent of global and domestic attention paid to particular bargains. When U.S. Treasury Secretary Henry Paulson began the U.S.-China Strategic Economic Dialogue, the Chinese government approved UBS’s purchase of a 20 percent share of Beijing Securities in 2006, allowing the Swiss Bank to hold the biggest quota among foreign groups to invest in onshore stocks.27 This came shortly after licensure delays to protect the domestic (p.203) securities sector. All the same, local lobbying regularly vetoed foreign equity arrangements in extensively liberalized industrial sectors. In those sectors where the central government possessed less nonnegotiable imperatives, it more readily responded to “popular” opinion. For example, after two and a half years of aggressive lobbying by sector and business associations and domestic competitor Sany Heavy Industry, the National Development and Reform Commission, in mid-2008, vetoed on “national economic security” grounds the attempt by Carlyle, a U.S.-based securities firm, to purchase a minority share of Xugong Heavy Machinery in Xuzhou, Jiangsu Province.28 Other cases where similar concerns came into play included Pepsi’s thwarted attempt to purchase Wahaha and Coke’s quest for Huiyuan, which failed in 2009 after the Ministry of Commerce concluded that the acquisition would adversely affect competition. This came after an Internet survey launched by Sina.com and letters issued by Chinese scholars protested the acquisition in the name of national brand and industry protection. Danone’s existing JV with Wahaha and 22.98 percent stake in Huiyuan did not jeopardize national interests since these were not controlling stakes and presumably transferred technology and know-how.

As a consequence of protectionist practices, sector-specific restrictions, and economy-wide rules such as the Anti-Trust Law looming on the horizon, large and small investors and funds targeted smaller deals or routinely broke large investments into chunks to escape central-level scrutiny.29 The Mergers and Acquisitions Law, recalibrated in 2006, spurred local governments in Shanghai, Shenyang, and Chongqing, which traditionally have been strongholds of the state sector, to court foreign securities to assist in sectoral development.30 The central government granted approvals by case based on structure, target type, and transaction value; the two-year moratorium against foreign investment further slowed market activity. Localities, however, possessed approval authority for equity investment in the nonstrategic sectors and for smaller deals. Until 2008, foreign securities companies routinely circumvented rules to participate in primary and secondary equity and debt markets through offshore vehicles, which became popular in the 1990s.31 Even after the government relaxed or lifted rules against foreign entry, the use of these (p.204) offshore holding companies remained the most popular market entry model in sectors where strategic imperatives delayed the issuance of operation licenses and for foreign equity investors weary of confronting regulatory barriers.

Many Chinese companies without genuine foreign investment also adopted this model of entry. In the absence of vibrant domestic financial markets and with financial controls that restricted consumer finance and prohibited domestic companies from making loans to one another, domestic companies participated in underground banking and turned to offshore vehicles to enjoy incentives granted FDI and to raise funds at home and abroad.32 The government began cracking down on this “round-tripping” strategy in 2005. Circular No. 75, issued by the State Administration of Foreign Exchange, required that PRC corporate and individual residents register their offshore vehicles, though it set no clear review standards, nor did it indicate the time frame required to register. The rule also required repatriation of foreign exchange received by PRC residents from offshore dividends or income.33 Many foreign venture capitalists viewed the reregulation as harmful for the venture capital industry and believed that it would dramatically slow down FDI while proving no solution for stopping Chinese companies from taking advantage of FDI status.34 Others viewed this phenomenon as a clear signal of “growing demands of a domestic constituency in equity investment.”35

After a series of implementing rules restricted round-tripping between 2006 and 2008, the government proposed the Regulation for Lenders. This law would allow private companies and individuals to lend to one another, widen access to capital, and increase RMB investment. It would also regulate underground banks and strengthen the imperative for foreign equity investors to partner with local investors to structure equity deals.36 Importantly, it represented government efforts to enhance its control of money supply and financial services and to promote domestic sector development. By bringing underground banking, which some studies reported comprised as much as 20 percent of total lending in the economy, under the regulatory regime, the government also aimed to bolster lending to small and medium enterprises hit hard by the 2008 economic downturn and narrow the gap between rural and urban incomes.37 Rural Zhejiang and other localities experimented (p.205) with permitting nonfinancial businesses to lend to other businesses, and Citigroup received state approval in October 2008 to set up two lending institutions in rural China.38 However, rules that prohibit deposit taking by nonbank-run entities and control rights to nonbanks, require high registered capital, and restrict interest rates and loan amounts made these nascent efforts to formalize underground banking. According to Stephen Green of Standard Chartered China, “So far there has been no breakthrough.”39

Insurance

Relative to banking and securities, the government liberalized insurance and permitted high FDI ceilings, making it one of the more liberal financial services. Moreover, in 2003 FDI in all market segments except life insurance and fund management could register as WFOE. Rules on business scope, however, restricted underwriters of policies other than for life insurance to insuring master policies and large commercial risks nationwide; they were also restricted to a 15 percent reinsurance floor until 2005, when the floor dropped to 5 percent. Rules further restricted foreign fund management companies to a 33 percent ownership ceiling, which rose to 49 percent at the end of 2004 (see discussion in above section on securities). To tap more market segments, foreign insurers routinely entered into JVs with domestic insurers. For example, AIG purchased a 9.9 percent stake in People’s Insurance Company of China to access the accident and health insurance markets.

Individual deals varied according to company-level factors, and government backing continued to play an important role, especially because several agencies possessed the authority to approve licenses. The German Industry and Commerce in Beijing believed that because China did not want German companies to dominate the insurance industry, the government routinely delayed granting licensure approvals to GIC’s members. Attempts by the GIC to contact the China Regulatory Insurance Commission on behalf of these companies went unanswered. These companies could not go straight to the WTO because the Chinese government had not formally rejected their applications. Moreover, since the EU possessed jurisdiction over European cases, whether the EU would pursue WTO arbitration remained unclear.40

(p.206) Other Financial Services

The Chinese government permitted foreign-invested JVs to operate credit card and other fee-based income businesses (such as trust and wealth management). However, competing bureaucratic agendas delayed the issuance of rules, such as the Credit Card Law, to promote the development of universal banks. Moreover, although the Chinese government committed to removing market barriers and national treatment limitations in electronic payment by the end of 2006, China Union Pay (CUP), the only domestic credit card organization, monopolized the handling of domestic-currency payment card transactions. In September 2010, the U.S. government requested consultations from the WTO alleging that the People’s Bank of China, the regulator of electronic payment services, favored CUP with a series of measures dating back to 2001, which excluded other potential suppliers, including U.S. credit and debit card companies.

Leasing and credit financing (in transportation, including in automobiles and aircraft), however, remained the one subsector in financial services free of entry restrictions. What is more, the Chinese government aggressively courted FDI to expand the underdeveloped domestic sector. The government also used money from the stimulus package introduced in 2008 to stave off a sharp economic slowdown to encourage consumer finance companies to subsidize purchases of private cars and large appliances.41 But “the word on the street,” according to one industry insider, “is the government is starting to write regulations in this area. As a result, lots of foreign companies are rushing to this market, so they can be grandfathered in.”42

Energy

The energy sectors score medium high to high in degree of strategic value, and domestic firms are not as competitive as foreign companies in the energy industry (see figure 2.4). In energy, more than in other industries, the state has sought to balance China’s resource requirements for industrialization, which it strived to address through indigenous development, with concerns for internal stability and energy security. During the reform era, energy requirements soared, but although China possessed some capabilities in conventional oil and gas, it did not have the technical expertise or manufacturing capacity in many value-added subsectors. Comparable to energy market infrastructures around the globe, which in recent years experienced at least partial privatization while China’s did not, state-owned companies dominated the oil and petrochemical sectors, and state-owned grid companies monopolized electricity and other power distribution. In contrast, quasi-private and foreign companies competed in renewable sectors; the state strategically utilized (p.207) FDI to develop domestic capacity. Similar to what occurred in other strategic industries, reregulation, favoring domestic industry and enhancing state control, soon followed.

State Goals and Methods

Securing sources of energy tops China’s priorities. From gas to electricity to renewable energy, the state sought to develop and control China’s energy infrastructure and resources; to promote technological upgrading and the competitiveness of the domestic sector; and to decrease reliance on fossil fuels and limited natural resources, such as coal. To achieve these goals, the state liberalized and courted FDI in those subsectors not directly linked to the energy infrastructure and where China possessed less technological and infrastructural capacity. It limited nonstate investment in oil and gas distribution and forbade FDI in electricity retail and distribution, but decentralization led to a proliferation of quasi-private players in power generation. To create more competitive players, reregulation restructured and corporatized state-owned oil companies and power distributors and calibrated market liberalization in oil and gas exploration and refining and renewables. Moreover, although the state dismantled subsectoral ministries in the 1990s, various rounds of reregulation enhanced state control in strategic subsectors.

Regulatory Change

The state retained central regulatory discretion over the energy sectors because of their importance to national security but introduced structured nonstate competition to develop infrastructure, maximize competitiveness of domestic industry, and enhance the national technology base. In the 1998 round of administrative restructuring, instead of consolidating regulatory control with the creation of a supraministry, as it did in telecommunications, or creating separate regulatory commissions to supervise subsectoral development, as it did in financial services, the State Council dismantled several ministries formerly responsible for the oil, gas, petrochemical, coal, and electricity sectors.43 To facilitate its goal of relinquishing control in less strategic areas while retaining control in the most strategic subsectors, the state created bureau-level government offices under the State Economic and Trade Commission to replace these sector-specific ministries. In 2003, these bureau-level energy offices, along with other SETC industry planning and management offices (p.208) and the State Development and Planning Commission, came under the supervision of the NDRC.

By the mid-2000s, administrative and corporate reforms in the 1990s generated what the central leadership viewed as administrative and policy fragmentation. To enhance state authority in energy sectors, the State Council created the Leading Group on Energy, an interagency task force. The Leading Group was headed by the premier and its members included two vice premiers and leaders from thirteen other government agencies. It coordinated the many different institutions that governed energy and helped formulate subsectoral regulation.44 The Leading Group also supervised the NDRC’s Energy Bureau, which regulated electricity and set energy prices. Between 2005 and 2008, rumors circulated that administrative restructuring in March 2008 would create a supraministry to regulate energy sectors and eliminate bureaucratic fragmentation. Ultimately, the State Council did not create a supra-ministry. Instead, it created an administrative body outside of NDRC control, which “paves the way for cabinet development of the energy sector,” according to Zhang Libin, chief representative of Baker Botts LLP in Beijing.45 The State Council created the National Energy Administration (NEA), merging the Leading Group on Energy, the NDRC’s Energy Bureau, other NDRC energy offices, and the nuclear power administration of the Commission of Science, Technology, and Industry for National Defense. It also formed the State Energy Commission, a high-level discussion and coordination body.46 The State Council empowered NEA with a broad mandate, including managing energy sectors, drafting energy plans and policies, negotiating with international energy agencies, and approving foreign investments. Li Junfeng, a member of the NEA, expects the People’s Congress to adopt an energy law in 2011 embodying the concept “‘that energy supply should be where you can plant your food on it,’ meaning that as much energy as possible should come from within China.”47

Subsectoral Variation

Through administrative restructuring, the state attempted to enhance its regulatory authority in energy writ large while relinquishing some control to achieve state goals. Subsectoral variation in the extent and scope of state control reveals the government’s strategic orientation and approach in energy at the same time that it illustrates how the organization of institutions influenced bureaucratic politics, (p.209) which prevented a coherent energy policy in practice. The government courted FDI with fiscal policies and attractive production-sharing contracts to develop high-tech, value-added subsectors. Moreover, market liberalization in less strategic subsectors attracted quasi-private enterprises to growing markets in oil exploration and refining, power generation, and renewable energy. In contrast, the state limited market competition in strategic energy subsectors to SOEs, which underwent the corporatization process typical of strategic state assets. National oil and power companies formally separated from government offices, but corporate restructuring did not undermine state control; rather, ownership restructuring to establish a centralized corporate shareholder model, similar to the experience of the telecommunications carriers, enhanced state authority over sectoral developments.48

Oil and Petrochemicals

In oil and petrochemicals, to increase efficiency and profit, the State Council established national oil corporations along functional lines when it dismantled the Ministry of Petroleum Energy in 1988.49 A decade later, the state introduced competition when it restructured the national oil corporations to create vertically integrated regional monopolies. This restructuring of state monopolies is similar to that of state-owned telecommunications carriers that occurred during the same period and in 2008. In restructuring along regional lines, the state hoped to better utilize and employ resources, including foreign investment, to develop particular oil fields and build infrastructural capacity.50 The national oil and petrochemical companies also underwent Chinese-style corporatization, similar to that experienced by the telecommunications carriers and the Big Four banks. The State-Owned Assets Supervision and Administration Commission held their assets, with the core competitive ones issued as shares on the Hong Kong and New York capital markets.

The extent of decentralization and rules on market access, business scope, and FDI varied across oil and petrochemical subsectors according to a strategic value logic. Eager to obtain technology and knowledge transfers and at the same time retain ownership and control, the state permitted foreign equity investment as minority stakeholders without board participation in listed stock and foreign minority partners in JVs to develop crude and refined oil with the national oil companies. Moreover, a generous fiscal policy attracted FDI in high-tech, value-added upstream subsectors where national oil companies were less competitive. (p.210) Production-sharing contracts, similar to global industry standards with minor variances, governed typical project collaborations with national oil companies. All the same, the State Council possessed final authority in approving energy projects, budget allocations, and financing arrangements, and the Ministry of Land and Resources became involved in issues related to oil exploration and greenfield natural gas reserves. Moreover, FDI faced limits on choices in suppliers and JV partners, restrictions on business scope and market access, and cumbersome licensing and import procedures that required minimum capitalization and earnings, storage capacity, and port infrastructure.51 The government controlled its take through a windfall tax, which adjusted profit levels, and an export tax, which it levied to encourage domestic sales.

To protect and promote the domestic sector in downstream sectors, the government channeled the bulk of imported refined and processed oil through four designated state-trading companies.52 Furthermore, the state subsidized petroleum producers at the pump through retail price regulation. This produced a major gap between domestic and international prices, forcing the national oil companies to self-correct through increased exports, which led to shortages at home. Actual retail prices varied according to location and China-specific sectoral attributes, such as consumer type. In this regulatory environment, foreign companies with first-mover advantage, such as Shell and Exxon, collaborated with national or local retailers with strong connections to local authorities. But delivery via a lower cost base, with little concern for safety, too often motivated these authorities. In 2003, Total, a French oil giant, won a bid against Shell in a project that eventuated in three hundred deaths and the evacuation of ten thousand people when a well exploded.53 Other FDI opted out of retail. For example, Chevron invested predominately in upstream subsectors, including offshore exploration with China National Offshore Oil Corporation, a government-encouraged collaboration, because China lacked expertise in this area.54

The state took a mixed orientation toward the regulation of petrochemicals. It combined central-level discretion in high-value projects with decentralized regulatory authority and a more liberalized FDI regime. Petrochemicals is an applications subsector rather than one with infrastructural implications within energy, yet it serves as value-added input for strategic subsectors of nonstrategic industries. In its WTO protocol, the state committed to removing restrictions on the import, (p.211) resale, and distribution activities of existing foreign-invested petrochemicals; to permitting the provincial approval of FDI projects with less than $30 million in total investment; and to enacting no restrictions on foreign ownership. The state dismantled the Ministry of Chemical Industry in 1998 along with the Ministry of Power and Coal Industry, and in 2001 it downgraded residual government offices to sector associations.55 In this regulatory environment, FDI in petrochemicals operated at the whim of local governments and group companies, which were spin-offs of former chemical industry bureaus or subsidiaries of national petrochemical companies. A crowded market, with roots in a Mao-era policy of localized production of critical commodities that was augmented by the decentralization of regulatory enforcement of petrochemicals in the reform era, pitted foreign-invested JVs against their Chinese parents. Many Chinese competitors were able to produce serviceable products and sophisticated copies of foreign products.

All the same, because petrochemicals serve as upstream inputs for strategic subsectors of nonstrategic industries, such as technical textiles, the central government retained its licensure authority in certain market segments, such as ethylene cracker and its derivatives, that produce commodity plastics. Moreover, new tariff structures favored domestic refiners that supplied raw materials. The government reduced tariffs on raw feedstock for cracker producers but not those for the downstream inputs of their foreign-invested competitors.56

Electricity

Compared to oil and petrochemicals, the state regulated the power industry in a less centralized manner and less strictly regulated the market entry of nonstate companies. Through the mid-2000s, the government experimented with relinquishing regulatory enforcement in power sectors during several rounds of administrative restructuring. In 1988, the electric power bureaucracy merged with other energy bureaucracies to create the Ministry of Energy. Centralization under the Ministry of Energy between 1988 and 1993 created provincial power companies that formed power groups. In 1993, the government created the Ministry of Electric Power, which supervised provincial power companies. In 1998, the government demoted the Ministry of Electric Power to a bureau-level office, and power companies merged and corporatized to form the State Power Corporation.57 In 2002, the state introduced state-owned competition when it separated State Power’s generation, transmission, and service units.58 The state also separated policy and regulatory (p.212) functions with the creation of the State Electricity Regulatory Commission, which regulated the power sector from the plant to the consumer. In March 2008, after a decade without a centralized bureaucracy, the creation of the National Energy Administration represented the state’s attempt to increase regulatory capacity in a decentralized and conflict-ridden institutional terrain.

State control varied across subsectors of electrical power. The state strictly controlled and managed electricity grids, mindful of the importance of an efficient electricity infrastructure to national security and ultimate control over the more liberalized energy equipment and generation subsectors.59 The linking of regional grids to create two state-owned regional grid monopolies in 2005 served this purpose.60 Moreover, provincial utilities routinely joined forces with the regional grid monopolies to tender bids for power stations and substations.61 The government forbade FDI in distribution, but in its effort to interconnect regional grids, the Chinese government elicited foreign equipment makers, including ABB, a Swedish power equipment maker, to help with systems engineering.62 In 2004, FDI obtained loan financing for some power transmission projects.63 Foreign companies, however, were excluded from contract bids for ultra-high-voltage power transmission schemes after participating in research and development. As in telecommunications networking equipment, the Chinese government aimed to master the technology that runs the infrastructure; in this case, to develop ultra-high-voltage transmission lines. Hoping to leverage its good will, ABB, in a JV with Xian High Voltage Switchgear, submitted a proposal to the State Grid Corporation to develop the Shanxi-Hubei transmission project.64

The NDRC’s energy and pricing bureaus set and regulated electricity prices to balance affordability and industrial goals.65 In practice, the decentralized nature of regulatory enforcement and the type of user (commercial, industrial, or residential) (p.213) and their importance to local interests affected how actual prices varied across localities. The large number of regulatory and market stakeholders fighting for influence disallowed prices from conforming to official prices.66 The State Council created the NEA, according to an industry insider, to enhance state control of energy infrastructure and other energy subsectors.67 In 2010, to improve energy efficiency, the NDRC forced twenty-two provinces to halt the practice of providing electricity at discounted prices. The two thousand–plus factories on a government list would be barred from obtaining bank loans, export credits, business licenses, and land, and have their electricity shut off, if necessary. The prolonged decentralized nature of electricity regulation left open the question of enforcement.68

As early as the 1980s, the central government shifted the responsibility of building electricity capacity to the provincial and local levels and liberalized competition in power generation. Although approval for projects resided initially in the planning commission, in practice local governments approved and regulated small independent power producers, often quasi-private companies. Well-connected local entrepreneurs began to build electricity capacity, often turning to hydropower and coal, commencing the problem of small polluting coal power plants, which dot China’s immense rural countryside.69 Coal-fired power stations, a consequence of deregulation and decentralization, generate 75 percent of electricity.70

The government also courted FDI in electricity generation. As early as the mid-1980s, to generate capital, local power generators lured foreign investment with power purchasing agreements that promised generating hours and generous electricity rates.71 Through 1997, during a period of de facto liberalization much like that experienced by telecommunications carriers during the same period, FDI flooded power generation and signed build-operate-transfer agreements with local power operators. Since 1998, however, a series of broken contracts (which the central government refused to honor), rising coal prices, fixed electricity tariffs, state (p.214) subsidies to state-owned power groups, and overinvestment by local governments forced existing FDI to withdraw as their build-operate-transfer agreements expired and slowed FDI in general.72 American Electric Power, Siemens, and Hew (a unit of the Swedish electricity firm Vattenfall) separately decided to exit the market when their contracts expired in 2005 because of profit shortfalls.73 The regulatory environment led to overinvestment in power infrastructure, fast and unsustainable economic growth, and, ultimately, energy shortages.

Renewables

Even as FDI decreased in electrical power generation, FDI increased in renewable energy. The state promoted the development of renewable energy sectors through installation-based fiscal incentives and procurement policies. The policies were aimed at subsidizing local and provincial utilities that controlled generation and distribution, grid companies that controlled transmission infrastructure, and energy farm developers that sold power to grids. It also supported domestic equipment makers technically unable to produce equipment that connected successfully to grids.74 Regulatory initiatives in hydropower and wind power, the fastest renewable sources to deploy technologically and with low barriers of entry, provide a good case study.75 In late 2001, the NDRC introduced a Wind Power Concession approach, a tendering procedure aimed at bringing down the cost of wind-power generation. This empowered local governments to invite international and domestic investors to develop 100 megawatt wind farms on potential wind sites. In 2002, the Ministry of Finance and the State Duty Bureau implemented a new tax policy that reduced the value-added tax for wind generation from 17 percent to 8.5 percent.

Starting in the mid-2000s, government policies shifted to promoting an emerging domestic sector in renewables. In 2005, the government mandated the newly created grid companies to deploy wind power and the NDRC began awarding contracts to local wind power manufacturers without tender. Goldwind, a domestic company that licensed technology from German companies and whose first product copied an earlier product of Vestas, a Danish wind turbine company and global leader in the industry, routinely received lucrative government contracts outside of a formal procurement process.

Moreover, high local content requirements, which violate the WTO rules, favored domestic companies over foreign ones. In July 2005, the NDRC replaced (p.215) the existing 50 percent local content requirement on certain wind power projects with a 70 percent floor, which forced foreign vendors of domestic generators and distributors and state-initiated projects to produce domestically.76 In an effort to meet the local content requirement, Vestas began operations at a wholly foreign-owned factory in Tianjin in mid-2006.77 Meeting the 2005 NDRC requirement also entailed instructing domestic contractors in the manufacturing processes involved in steel forgings and castings and fabricating complex electronic controls. By the time the Chinese government dropped this particular local content requirement in November 2009, in response to foreign motions to challenge the rule in front of the WTO, most foreign wind turbine makers’ domestic inputs far exceeded the 70 percent obligation.

In hydropower, ABB established a JV in 1998 with Chongqing Transformer, an SOE, to produce power transformers, which move energy from power stations to grids, to service the Three Gorges infrastructure.78 Transformers assembled at the plant included up to 46 percent domestic content, which satisfied the localization rule at the time and avoided high import duties.79 In the first round of procurement, ABB did not win contracts; Chinese hydro equipment maker Baoding received all the left bank bids. In the second round of procurement, however, “ABB’s ‘made in China’ efforts won twelve contracts to power the right bank.”80

The Renewable Energy Law of 2006 further incentivized investment in high-tech, value-added energy sectors. It spurred the development of the domestic sector as well as increased investment and market opportunities for foreign equipment makers.81 “After the promulgation of the Renewable Energy Law, Vestas gained twenty-five competitors overnight,” exclaimed Troels Beltoft, senior strategy manager for Vestas. Similar to the pattern witnessed in technical textiles, existing industrial equipment producers, with part of their supply chain already in place, tweaked (p.216) their equipment to enter wind power. Other domestic companies purchased technology from less successful European and other Western companies or partnered with FDI eager to enter the Chinese market. The domestic wind power sector took off so fast that foreign securities companies began to invest in Chinese wind power equipment makers.82

Other regulatory interventions to promote the domestic sector and accelerate R&D efforts in wind power included prioritizing the sector in the 2007 update of the Foreign Investment Catalogue and in the fifteen-year Medium-to-Long-Term Plan for Science and Technology (2006–20). Moreover, the government gave foreign turbine manufacturers of 1.5 megawatt turbines three weeks to register before they had to form JVs with Chinese partners, a rule effective November 2007. The National Debt Wind Power Program subsidized domestic turbine manufacturers; favorable national debt interest subsidy programs made possible wind farms supplied with domestically produced turbines. Furthermore, the State Council released a white paper on energy in December 2007, and starting in 2008, the domestic manufacturers received a 10 percent subsidy per megawatt and the Special Fund for Wind Power Manufacturing awarded grants ranging from USD 6.7 million to USD 22.5 million to wind turbine and components manufacturers. “These initiatives are in line with the shift from the ‘Made in China’ to the ‘Created in China’ strategy announced at the October 2007 meeting of the National People’s Congress” and exemplify how “the Chinese government maps out industry and releases regulations accordingly in a systematic and proactive manner,” explained Beltoft. In December 2010, claiming that the Special Fund violates WTO policy because grants awarded appear to be tied to a local content policy and that Chinese policies lack transparency and are released only in Chinese, the U.S. government requested dispute settlement consultations through the WTO.83

Automotives

China overtook the United States as the world’s top automotive market in November 2009, according to figures from the China Association of Automobile Manufacturers.84 The development of the Chinese automotive industry cannot be (p.217) disconnected from the government’s priority in increasing its technological and infrastructural base or the deliberate orientation of its policies and interventions toward developing indigenous capacity. But as the Chinese automobile sector had few national security implications and infrastructural assets that required central coordination, the state delegated industrial management to provincial governments. Decentralization and market liberalization created a domestic market made up of more than one hundred automakers under provincial ownership and management and thousands more state-owned and nonstate producers of auto parts. Among domestic automobile producers, overcapacity and underutilization reigned as an onslaught of them completed only a few thousand units per year with outmoded plants and equipment. Fewer in numbers, foreign-invested automobile joint ventures made up 75 percent of the domestic market in sales in the mid-2000s. Foreign component manufacturers tended to adopt wholly foreign-owned structures and competed with a domestic sector subsidized by localities.

State Goals and Methods

The state’s primary goal in the automotive industry is the development of indigenous capacity to dominate domestic markets and compete internationally. The state separated state-owned manufacturers from ministerial ownership and supervision, introduced subsectoral competition, and decentralized administrative supervision of market developments. On the one hand, it facilitated the entry of FDI to increase technology and knowledge acquisition, especially in passenger car production. On the other hand, it restricted the market access, investment level, and business scope of FDI, and central measures and local initiatives promoted domestic manufacturers. Provincial and local governments implemented industrial policy; and sector-specific rules on imports, exports, and local content subsidized the domestic sector.

Regulatory Change

The development of the Chinese automotive industry began when the government collaborated with the Soviet Union in the 1950s and 1960s to build trucks. The need for trucks and buses for freight, passenger, and military transport overshadowed passenger car production; through the 1960s, the state relied on Eastern European imports to supply its minimal needs. During the Cultural Revolution, only top leadership had access to passenger cars. After the economic opening in 1978, imports surged as demand skyrocketed. By the mid-1980s, nearly all provinces operated plants, which built a variety of commercial vehicles, including trucks, buses, and special utility vehicles. Empowered by the general trend of decentralization, provincial governments and provincial-level municipalities, such as Shanghai and (p.218) Beijing, became especially active in promoting local state-owned automakers, a pattern that continued in the 2000s.85 The 124 state-owned automakers that operated in 1993 reflected the decentralized nature of the market. Local authorities formed automotive leading groups that drafted industrial plans; they also incorporated industrial groups that connected suppliers to manufacturers.

Since the early 1990s, administrative restructuring formally delegated economic decision making concerning domestic sector entry and exit to lower levels of government and production to corporatized companies separated from the ownership and daily management of a bureaucracy. Moreover, a State Council–level leading group staffed by NDRC bureaucrats and consisting of members from multiple ministries, such as those found in telecommunications, financial services, and energy today, had not presided over industrial developments for more than twenty years.

A central-level office last officially regulated automotives between 1987 and 1993. After realizing that China could not depend on domestic manufacturers producing outdated models to satisfy growing demand, the Chinese government under the leadership of Li Peng recentralized during that period to coordinate cooperation with foreign investors to use their technology, capital, and management skills to foster large-scale manufacturing. In 1987, the State Council created the Automobile Leading Group, which it dismantled two years later after the merger of the State Machinery Industry Commission and the Ministry of Electronic Industry created the Ministry of Machinery and Electronic Industry. In a further attempt to enhance central control of domestic sector developments, the China National Automotive Industry Corporation (CNAIC), founded in 1982 by the machinery bureaucracy and given the responsibility for automotive planning, project approval, and technology acquisition, regained bureaucratic status.86

During administrative restructuring in 1993, however, the central government relinquished central supervision of automotive sectors. The CNAIC became a sector association, and the State Council reorganized the Ministry of Machinery and Electronic Industry. The reestablished Ministry of Electronic Industry and newly created Ministry of Machinery held peripheral responsibility for the automotive industry. In 1997, the MEI merged with the Ministry of Post and Telecommunications to form the Ministry of Information Industry and the Ministry of Machinery was downgraded to a bureau-level office. In 2003, reduced to a single office, the automotive planning bureaucracy folded into the NDRC when the industrial planning offices of the SETC merged with the NDRC.

Yet sector-specific rules and policies, such as the 2004 Policy on the Development of Automotive Industry and the Planning on Restructuring and Revitalization of Auto Industry issued in 2009, promoted the development of the domestic (p.219) industry and managed market developments. Import tariffs and domestic content policies subsidized domestic automakers and auto parts manufacturers.87 Moreover, to stem overexpansion and ensure the competitiveness of the domestic sector, the central government retained the discretion to veto new operation licenses, regularly forced smaller, uncompetitive domestic companies to shut down, and merged the remaining companies with large manufacturers.88 Importantly, the state also strategically utilized FDI to deepen industrialization and promote domestic sector competitiveness at home and abroad. For example, Zhejiang Geely, whose development benefited from the mechanisms of FDI utilization described in this case study, exported around 5 percent of its compact cars annually and further expanded globally with its acquisition of Volvo from Ford Motor Company in March 2010.89 Thus, even while decentralization and liberalization introduced competition, the government strictly managed the investment level, ownership structure, and business scope of FDI. Between the 1980s and 1997, the “Big Three, Small Three, and Mini Two” policy limited FDI to eight automobile joint ventures. Ownership shares and technology transfers varied among these foreign-invested JVs. FDI has increased considerably since the late 1990s, but a “two-plus-two” rule restricted the number of JVs a foreign automaker could operate to two passenger and two commercial productions.

Subsectoral Variation

Bargains between foreign automakers and local governments illustrate how a strategic value logic influenced subsectoral variation in government control of automotives. To develop competitive automakers, the central government assigned local partners to foreign automakers of commercial and passenger vehicles from a small coterie of SOEs.90 Law limited each foreign automaker to two 50-percent-equity JVs and each JV to one plant producing a single model based on a local sourcing requirement of 40 percent. “Without economies of scale and fierce competition from all the major global players also in China, the costs of locally produced cars made of locally procured components are much higher than they need to be,” explained the general manager for a foreign-invested automaker.91 Moreover, local partners and their local government owners supervised daily operations. Since China’s WTO accession, foreign automakers shared control of domestic distribution. “While the (p.220) ownership share is 50–50, different incentives motivate the partners—market profits drive foreign partners while Communist Party reward systems motivate local partners,” the manager elaborated.92 Moreover, the Opinion on Promoting Auto Consumption issued in 2009 explicitly stated that future revisions of the rules on Branded Auto Sales would encourage various sales models to balance the market power of automobile suppliers (manufacturers and general distributors) vis-à-vis brand dealers restricted to a single brand under current rules.

Commercial and Passenger Vehicles

China’s explicit strategy toward automotives favored domestic automakers and promoted the development of domestic producers of automotive parts. Among recent rules, the Policy on Development of Automotive Industry (Order No. 8), issued in 2004 by the NDRC, outlined government objectives for building the local automotive industry. It included a 50 percent market share for domestic automakers by 2010, and stipulated tariffs on imported parts and subassemblies as part of a domestic content strategy.93 Measures for the Administration of Import of Automotive Parts and Components for Complete Vehicles (Decree 125) and Rules for Determining Whether Imported Automotive Parts and Components Constitute Complete Vehicles (Customs Announcement No. 4), also issued in 2004, specified that in order to be taxed at the completely knocked down (CKD) subassembly rate, four out of seven categories (totaling 57 percent) of a completely built up (CBU) vehicle, exceeding the original 40 percent local content requirement, must contain local contents. These rules required every CBU to pay a deposit and register sensitive information until submission of proof that the complete vehicle contained the mandated level of local content.94

The international community rose in uproar in response to the 2004 measures. They claimed that these regulations breached WTO rules prohibiting discriminatory taxation and subsidies contingent on local content. A 2006 request for consultation with China filed by Canada, the European Community, and the United States, and joined by Australia, Brazil, Mexico, Japan, Thailand, and Argentina, eventuated in the WTO Appellate Body issuing a ruling in the claimants’ favor on December 15, 2008.95 The Appellate Body “recommends that the [Dispute Settlement (p.221) Body] request China to bring its measures into conformity” with its General Agreement on Tariffs and Trade (GATT) and WTO obligations.

Whispers among foreign investors and along the halls of the newly created Ministry of Industry and Information Technology, which the State Council assigned to regulate the automotive industry, indicated that in light of the WTO ruling, the Chinese government planned to revise Order No. 8.96 The revised policy would eliminate Decree 125 but create new rules to maximize technology and knowledge transfers and encourage industrial upgrading. For example, the two-plus-two rule would be loosened, but the JV rule would stay in place. Permitting more JVs would increase technology transfers and continue local oversight of daily operations. In 2007, the NDRC linked subsidies for entry into high-tech, value-added areas, such as alternative fuel vehicles, to a local procurement requirement.97

The Planning on Restructuring and Revitalization of Auto Industry issued in March 2009 by the State Council and the Opinion on Promoting Auto Consumption jointly issued by the MOFCOM and the MIIT, among other government agencies, stated the government’s intent to promote domestic demand through a variety of methods, such as the elimination of a tax loophole that benefited importers, the enactment of new traffic laws by local governments, and the development of legal and financial support systems for consumption; encourage industry consolidation by domestic automakers, including identifying potential mergers and acquisitions, setting an investment floor for new entrants, and restricting the acquisition of failing producers; and promote the development of high-tech and environmentally friendly cars through subsidies to taxi fleets and local governments and directions to state electricity grids to establish electric car charging stations.

In addition to rules on market entry and exit and local content policies, the central government employed company-level intervention, the nature of which varied across subsectors according to a strategic value logic. To promote technological upgrading in passenger cars, the government regularly participated in negotiations with foreign automakers on behalf of domestic partners. For example, in 2006, a senior Chinese Communist party official on the legal team of the National People’s Congress participated in contract negotiations with DaimlerChrysler and BMW on behalf of Lifan Group, a quasi-private producer of motorcycles and passenger cars. Lifan had sought to purchase the Campo Largo factory in Brazil, which combined the latest U.S. and German technology to produce the 1.6-liter, 16-valve Tritec engine. It planned to “take it apart, piece by piece, transport it halfway around the globe and put it back together again” in China.98 Despite initial reluctance to issue (p.222) another production license, the Ministry of Commerce granted Lifan a license after Bo Xilai, then commerce minister and, beginning in 2007, the general secretary of the CCP in Chongqing, visited Lifan’s new Chongqing factory.99 Moreover, despite strict controls on FDI entry and exit, the government willingly struck company-level bargains with FDI in exchange for terms that increased its strategic goals. It relaxed the 50 percent ownership threshold when it permitted Honda to own two-thirds of its assembly plant in Guangzhou after Honda promised to export production to Europe.100

In contrast, the central government delayed or resisted cracking down on the counterfeiting of vehicles and automotive parts. For example, in an old Volkswagen factory purchased from a Mexican group, Chery, a subsidiary of Shanghai Automotive Industry Corporation (SAIC), VW’s domestic partner, copied VW’s Jetta model in 2000 and priced the counterfeits 20 percent cheaper. VW’s Chinese parts partners supplied some of the components, and the high tolerances and quality of the new car surprised even VW. The central government’s promises to VW to intervene went unrealized even while Chery increased its production volume and launched another counterfeit modeled after a design of GM, another of SAIC’s foreign partners.101 In two other cases in 2007, China National Machinery & Equipment Import & Export Corporation and Shuanghuan Automobile introduced Electric City and Noble, respectively, both extremely sophisticated copies of Daimler’s smart fortwo car. “Though the new IPR [intellectual property rights] law is quite good, implementation has been very slow,” explained Constanze Picking, the government relations officer for Daimler in Beijing.102

All the same, Picking worried more about the Chinese government’s technology transfer policy than counterfeits. Despite lenient IPR enforcement, the government did not actively support fakes. However, the difficulty of enforcing patents in China augmented “the requirement that FDI give away technology.” Yet, foreign automakers feel “obliged to open R&D centers” to signal their commitment to share technology and innovate based on Chinese consumer needs.103 Moreover, eager to gain market share, they continued to aggressively expand production despite barriers on market entry, business scope, and operations.

(p.223) Automotive Components

The production of automotive components contributed less to the industrial base for an indigenous automotives industry, which is considered critical for China’s technology infrastructure. Thus, less concerned about the competitiveness of domestic players, the government did not directly control market entry, business scope, and production volume in automotive parts. The government lifted a JV requirement for FDI in the late 1990s and relinquished regulatory authority of this subsector to lower levels of government in early rounds of reform. All the same, local content policies in automobile assembly promoted and sustained the development of domestic capacity in automotive components. Though domestic production relied on imports of high-strength grades of steel and manufacturing equipment, which increased the costs of locally produced components, local content policies and tariff regimes in vehicle production and assembly guaranteed ready markets. Moreover, localization rules also governed components production. In a 2006 study on policy choices, the State Council incorporated the strategic utilization of FDI in auto parts as part of an industrial policy in automotives.104 That the automotives industry accounted for half of the output value and profit of equipment manufacturing in China revealed the impact of such localization policies.105 By 2006, close to 70 percent of the world’s top one hundred suppliers of automotive parts and components had invested in manufacturing capacity in China, and the number of foreign-funded production enterprises on the mainland exceeded twelve hundred.106

Mechanisms of control in auto parts typified those in other less strategic subsectors of strategic industries. Trade regulations typically combined cumbersome certification procedures and China-specific standards to limit imports. Although no industry-specific ministry supervised standards development, and foreign-invested companies participated in technical standards committees on a case-by-case basis, standards and certification processes and procedures favored the domestic sector. The government published the First Catalogue of Import Commodities subject to the Safety License System in automotives in 1989, but this was poorly enforced throughout the 1990s. Beginning in 2000, immediately before WTO accession, the central government began to enforce related laws and integrate enforcement into the customs system. In 2002, the Chinese government centralized the certification process with a new system, which required manufacturers in 132 product categories, many of which are automotives, to obtain the China Compulsory Certification (p.224) Mark before entering Chinese markets.107 Moreover, as in telecommunications equipment, central-level government bodies collaborated with sector associations, which replaced former state-or provincial-level offices and competed with each other to set technical standards. Through standards committees, quasi-government bodies attempted to internationalize China-specific standards via active involvement in international standards and sector associations. Rockwell Automation, a U.S. manufacturer of automotive engines and parts, and a leader in standards setting globally, regularly confronted Chinese standards setting efforts in the automotive and electronics sectors. To expand its influence and protect its global standards, Rockwell successfully secured seats on technical standards committees by “exploiting the Chinese desire to learn from foreigners.”108

The relinquishing of more regulatory control in automotive parts meant foreign market entrants interacted regularly with local authorities possessing discretionary authority. Whether enforcing national laws or local ones, local authorities worked to benefit local interests. In an example involving labor protests at Honda-invested parts factories in 2010, industry insiders suspected that mediation by local authorities, including the local All-China Federation of Trade Unions, to stem further unrest had led to wage increases and arrests of protest leaders. The labor disputes did not reach the arbitration committees or courts guaranteed by the 2007 Labor Contract Law. The investment trajectory of Cummins Inc., a U.S.-based company, also exemplifies local governance at work. In 1995, Cummins established a 50–50 JV with Chongqing Heavy-Duty Truck Corporation (CHTC).109 Between the JV’s inception and 1999, Cummins and CHTC struggled in their collaboration to manufacture heavy-duty and HHP diesel engines. When the central government lifted the JV requirement in 1999 and profit was at zero for the JV, Cummins debated exiting the partnership. Cummins retained the JV after workforce cuts, and the reduction of Chongqing Cummins’s social responsibilities, including the operation of a restaurant and school, and Western corporate governance standards helped bring the JV to profitability. Retaining the JV structure had its costs, however. Because Cummins chose to remain in collaboration with CHTC, the Chinese partner had to review and approve each introduction of technology and product mix before Chongqing Cummins could amend its business license. This process entailed obtaining final approval from Chongqing’s vice mayor, the head of the local State-owned Assets Supervision and Administration Commission, which owned CHTC. Moreover, Chongqing (p.225) Cummins reported to the local CCP central committee and operated an active party branch and labor union.110

Briggs & Stratton (B&S), a maker of motorcycle engines, also retained its JV partnership in Chongqing, though it established a wholly foreign-owned factory in Shanghai’s Qingpu Industrial Zone when it became legal to do so.111 Despite B&S’s 95 percent stake, its Chinese partner held jurisdiction and approval rights over four key issues: changes in registered capital, business license, sale of assets, and dissolution of business. According to Jeff Albright, B&S’s general manager in China, even while connections to distribution networks skewed its short list of benefits, the decentralized nature of machinery sectors and the central government’s unwillingness and lack of capacity to enforce juridical rules inadvertently promoted local protectionism and exacerbated logistical problems for FDI. For example, when B&S caught a Chongqing-based supplier selling component parts with its logo, Chongqing authorities refused to enforce B&S’s intellectual property because the sale occurred in Sichuan Province. As a solution to such counterfeiting, B&S molded its logo so suppliers could not easily ship components out the backdoor.112 In another case related to B&S’s WFOE, in 2006 the safety bureau in Qingpu contradicted policy by initially holding B&S responsible for the death of its subcontractor’s employee despite evidence showing the contractor’s negligence. Furthermore, B&S regularly faced district bureaus whose decisions conflicted with one another. In 2006, the Chongqing factory could not issue VAT invoices and bills because one district refused to transfer taxes out of its jurisdiction.

Conclusion

The industries surveyed in this chapter are critical for China’s national security broadly defined and contribute greatly to the national technology base and the competitiveness of other sectors in the economy. The deliberate orientation taken by the state in their reregulation upon market liberalization explains similarities in government goals, state-industry relations, and methods of state control exhibited across these industries. Table 8.1 shows how financial services, energy, and automotives fit into the broad pattern of state control in strategic industries.

The details of reregulation in these industries and subsectors were shaped by their varying strategic value, sector-specific characteristics, and the organization of state institutions. The Chinese government courted nonstate investment and FDI to develop infrastructure but restricted their ownership share and/or their business (p.226)

Table 8.1. Deliberate Reinforcement in Strategic Sectors

Dominant Pattern of State Control

Deliberate Reinforcement

Financial Services

Energy

Automotives

State goals

Enhance state control of money supply and modernize and diversify financial services

Modernize energy infrastructure and control the utilization and management of raw material resources

Create indigenous automotive industry and promote domestic manufacturing capacity

State-industry relations

Enhanced state control with central ministry, subsector regulators, and state ownership of banks but liberalized calibrated private entry of financial value-added services

Enhanced state control with state ownership and control of oil and petrochemical monopolies and transmission grids; liberalization of private and foreign entry in power generation and equipment

Enhanced central control of industrial developments but decentralized regulatory enforcement and ownership of automobile manufacturers; liberalization of entry in automotive parts

State methods

Sector-specific rules, regulations, and technical standards; restrictions on FDI ownership and business scope; macroeconomic measures and economy-wide rules

Sector-specific rules, regulations, and technical standards; restrictions on FDI ownership and business scope; macroeconomic measures and economy-wide rules

Sector-specific rules, regulations, and technical standards; restrictions on FDI ownership and business scope; macroeconomic levers and economy-wide rules

scope to control the industrial base and market developments. It also took steps to reform regulatory institutions and restructure SOEs to create competitive national champions. Nonstate enterprises enjoyed market share in less strategic subsectors, though the state managed the number of new entrants and calibrated their business scope to benefit the development of new technologies and markets and promote domestic industry. The state delegated regulatory control of these subsectors and issue areas to lower levels of government.

The developmental state in East Asia also took a deliberate approach to develop high-tech, capital-intensive industries that tended to have complex transactions. Rather than calibrating the extent and manner of state control according to a strategic value logic, however, the Japanese, Korean, and Taiwanese governments mobilized investment and industrial coordination through a much closer relationship with domestic private industry, promoting their development to achieve industrialization and global integration.

Notes:

(1.) In addition to the Big Four, the State Development Bank of China, Agricultural Development Bank of China, and China Import and Export Bank were created to finance policy initiatives.

(2.) See Zheng (2004), 121–28, for a history of banking restructuring from 1979 through 1998.

(3.) Remarks by David Wu, a partner at PriceWaterhouseCoopers Beijing and participant of the recapitalization and IPO of the Bank of China, at a UC Berkeley workshop on February 21, 2007.

(4.) Marechal, Tekin, and Guliyeva (2009) presented data that suggest that banks lend more to small and medium enterprises in the post–Property Rights Law era.

(5.) See Tsai (2002) for more on the informal financial sector.

(6.) See Xu (1998) for a discussion of China’s financial reforms between 1979 and 1991.

(7.) See Walter and Howie (2001) for a history of the Chinese securities industry.

(8.) Interview on September 22, 2008, in Beijing with Joshua Kurtzig, director, DAC Management Ltd.

(9.) The central bank governor served as deputy secretary of the CFWC.

(10.) The creation of the CFWC represented the CCP’s attempt to arrest the breakdown of hierarchies in financial services and restore central policy decisiveness (Heilmann 2005). Some believe that centralization failed because it constrained inflation but precluded fundamental banking reform (Shih 2008).

(11.) Administrative reforms in financial services varied subtly from telecommunications. One central ministry, but not an independent regulator, consolidated state control of subsectors in telecommunications.

(12.) Interview on September 23, 2008, in Beijing.

(13.) Government estimates placed bad debts at 25 percent of total loans, but private estimates doubled that amount and placed bailout costs at almost 25 percent of China’s 2003 GDP (Lo 2004). Another estimate placed NPLs at 50 percent of GDP in 2001 (Shih 2008).

(14.) Huijin’s board members included officials from the Ministry of Finance, the State Administration of Foreign Exchange (SAFE), and the central bank.

(15.) The ABC went public in July 2010, the last of the Big Four to do so. The state retained overall control of these banks’ listed arms through Huijin.

(16.) To name some of the more high-profile acquisitions, ICBC invested 20 percent in Standard Bank of South Africa and Minsheng invested 10 percent in Overseas Chinese Bank.

(17.) Conversation on March 12, 2007, in San Francisco with Jack Wadsworth, the brainchild behind China International Capital Corporation, a JV between Morgan Stanley and CCB.

(18.) See “Special Report: Global Financial Outlook: Economic Stimulus a Mixed Blessing for China,” New York Times (January 21, 2010).

(19.) Working capital requirements exceeded EU requirements by fifteen times. See “White Paper: Coming of Age Multinational Companies in China,” Economist Intelligence Unit (June 2004), 70.

(21.) Only domestic investors, foreign financial firms with qualified foreign institutional investor status, and foreign strategic investors were permitted to invest in RMB-denominated A shares. Investment parameters for foreign-currency-denominated B shares and Hong Kong-listed H shares were less restrictive.

(22.) See McGregor (2005), chapter 2.

(23.) Interview on September 22, 2008, in Beijing.

(24.) See “China Looks to Stamp Duty Cut,” Asia Times (March 7, 2008).

(25.) “Chinese Business Mogul Sentenced to Prison,” New York Times (May 18, 2010).

(26.) See “Gome Affair Shows Risks of Wealth,” Financial Times (November 24, 2008).

(27.) “UBS May Be First Allowed to Buy Out China Brokerage,” International Herald Tribune (March 6, 2007).

(28.) See “Beijing Casts Cloud on Carlyle’s China Deal,” International Herald Tribune (June 30, 2006), and “China’s Xugong Drops Equity Sale to Carlyle,” China Daily (July 23, 2008).

(29.) An investment of 300 million RMB or more required central government approval; for investments of 100 million RMB or less, local governments had final approval authority. In September 2008, several government agencies circulated a draft of the Anti-Trust Law to a select group of foreign companies.

(30.) Interview on September 28, 2008, in Beijing with Zhou Bing, government relations, GE Capital.

(31.) Chapters 4 and 5 on state control of telecommunications examine the “Sina.com Model” in detail.

(32.) The 1994 General Principle of Understanding banned companies from lending to each other. Tsai (2002) finds that Maoist legacies and entrepreneurs’ identities affected how informal finance varied across localities.

(33.) “The PRC State Administration of Foreign Exchange Issues Circular No. 75—A New Chapter Begins?” Lovells Beijing Corporate Bulletin (October 2005). See also footnote 20 in chapter 6.

(34.) Conversations between October and December 2005 in Beijing with Rocky Lee, DLA Piper UK LLP.

(35.) Interview on October 10, 2005, in Beijing with Mary Yu, general manager, Walden International China.

(36.) Zhou interview (September 18, 2008). See also “Beijing to Legalize Private Lenders,” South China Morning Post (November 18, 2008).

(37.) “China Allows Lending by Informal Bankers,” International Herald Tribune (November 24, 2008).

(38.) See Tsai (2002) on the development of informal banking in Fujian, Wenzhou, and Henan.

(39.) November 25, 2008, electronic mail comments by a China-based banker, who spoke with finance industry experts, practitioners engaged in underground lending in Zhejiang, and NGOs promoting microfinance.

(40.) Interview on November 1, 2005, in Beijing with Holger Hanisch, GIC Beijing.

(41.) See “Special Report: Global Financial Outlook: Economic Stimulus a Mixed Blessing for China,” New York Times (January 21, 2010).

(42.) Interview with Kurtzig (September 22, 2008).

(43.) After the state dismantled the Ministry of Energy, it established subsector-specific ministries. For a review of administrative restructuring in 1993 and 1998, see Zheng (2004). Zheng interprets the 1993 creation of separate ministries as an expansion of the political power of Li Peng, viewed as the patron of the energy industry. For pre-1993 developments, see Wirtshafter and Shih (1990), 505–12.

(44.) Related bureaucracies included the Ministry of Water Resources, Ministry of Land and Resources, and the State Administration of Coal Mine Safety, an office under the State Administration of Work Safety.

(45.) See “Energy Bureau Gets Nod to Increase Size,” Xinhua (June 28, 2008).

(47.) “Security Tops the Environment in China’s Energy Plan,” New York Times (June 17, 2010).

(48.) See Lin (2006 and 2008) for details of this process in oil and petrochemicals. The SASAC managed assets of state-owned power and energy companies.

(49.) The national oil corporations operated as functional monopolies: upstream (China National Petroleum Corporation), refineries (China Petroleum and Chemical Corporation, also known as Sinopec), offshore (China National Offshore Oil Corporation), and international trading (Sinochem).

(50.) For example, CNPC became dominant in northern and western China and Sinopec in the east and south. CNPC retained more than two thirds of China’s crude oil production capacity, while Sinopec controlled more than half of the refining capacity and crude oil imports.

(51.) Interview on September 22, 2009, in Beijing with Isikeli Taureka, president of Chevron Asia Pacific Exploration and Production.

(52.) They were the China National Chemical Import and Export Co., China International United Petroleum and Chemicals Co., China National United Oil Co., and Zhuhai Zhenrong Co.

(53.) See “China Buys 1.6 Percent Stake in Total,” Financial Times (April 3, 2008), for more on SAFE’s investment in Total, the world’s fourth largest oil group.

(54.) Chevron operated a lubricant WFOE and a JV with a small Chinese company to engage in retail operations in Macau, Guangdong, and Hong Kong.

(55.) The State Administration of Petroleum and Chemical Industries under the SETC became the China Petroleum and Chemical Industry Association in 2001.

(57.) See Yan and Yu (1996), 735–57, for the state’s management of the power industry between 1988 and the mid-1990s and figure 3 for an organization chart of the Ministry of Electric Power.

(58.) In 2002, the State Power Corporation separated into eleven regional transmission and distribution companies and five power generators, which managed more than 80 percent of China’s power generation. See Pearson (2005).

(59.) Between 2002 and 2003, the Circular on Promulgation of the Plan for Electric Power System Reform and Circular on Promulgation of the Electric Power Tariff Reform Plan presented reregulation plans.

(60.) The government aimed for an integrated national electricity grid by 2020. In 2005, the State Grid Corporation covered most of the country, and the Southern Power Grid Corporation covered the rest. China had previously relied upon local and regional grids. See Wirtshafter and Shih (1990), 505–12.

(61.) Interview on April 10, 2006, in Chongqing with Alan Chan, financial controller, ABB Transformer Co.

(62.) See “Grid United,” ABB Review (2003), 22–24, for more on the collaboration between ABB’s corporate research center and the Tsinghua-run State Key Lab of Power Systems.

(63.) The Catalogue of Foreign Investment encouraged investment in coal-gas–integrated gasification combined cycle plant technology and equipment and the construction and management of power stations.

(64.) See “Foreign Firms Feel Left Out in Cold,” South China Morning Post (November 7, 2005).

(65.) The 2005 NDRC Circular No. 514 presented base prices for three stages of power. In the first stage, the set price, which was applied to every generator in the same region, reflected the generators’ average fixed cost and market demand. In the second, the state permitted distribution and transmission companies to incorporate more of the electricity cost into their pricing. In the third, the NDRC set electricity prices based on an undisclosed mechanism to ensure that the end user price floated with what grid companies paid to generators.

(66.) According to Cunningham (2007), decentralization and partial deregulation created independent corporate actors unknown and unguided by central regulators; they operated obscured from official view and selectively tapped state resources to pursue energy provision.

(67.) Interview on September 18, 2008, in Beijing with Troels Beltoft, senior strategy manager, Vestas Corp.

(68.) “In Crackdown on Energy Use, China to Shut 2,000 Factories,” New York Times (August 9, 2010).

(69.) A 2008 study found new coal plants had been built to high technical standards, using the most modern technologies available. Rather, the type and quality of coal consumed and interactions between new market forces, commercial pressures, and regulation proved problematic. See Steinfeld, Lester, and Cunningham (2008).

(70.) “Despite Its Problems, Coal Is Here to Stay,” South China Morning Post (November 4–7, 2005).

(71.) “Foreign Firms Quit Power Sector,” China Daily (January 20, 2005).

(72.) Most industry analysts attributed the state’s unwillingness to intervene to Li Peng’s efforts to restrict FDI in power generation. Interview on October 10, 2005, in Shanghai with Bill Savadove, journalist, South China Morning Post, and on October 30, 2005, in Beijing with Patrick Powers, U. S.-China Business Council.

(73.) “Foreign Power Firms Leaving China,” Agence France-Presse (February 1, 2005).

(74.) In the mid-2000s, 20 to 25 percent of installed wind power infrastructure never connected to a grid.

(75.) Beltoft interview (September 18, 2008).

(76.) Conversations on October 11 and December 13, 2005, in Beijing with Eugenia Katsigris, consultant on energy projects between the World Bank and the NDRC.

(77.) Conversations in October and November 2005 and September 2006 in Beijing with Lilli-Anne Suzuki, sales and marketing manager, Vestas China.

(78.) ABB previously owned a 49 percent share in ABB Chongqing, the largest of its twenty-seven companies in China. Subsequent capital infusions raised ABB’s share to 62 percent.

(79.) Interview on April 10, 2006, in Chongqing with Charlie Yang, director of supply management, ABB CQ. For example, the Chinese government imposed import duties on grain-oriented flat-rolled electrical steel (GOES) used in transformers, reactors, and other large electrical equipment. Beginning in April 2010 it imposed antidumping and countervailing duties, alleging that subsidized American steel was being dumped in the Chinese market. Five months later, the U.S. government requested dispute settlement consultations by filing a case against China at the WTO. The U.S. government, for its part, also imposed high tariffs on steel products from China on the grounds that unfair pricing and subsidies received by Chinese counterparts harmed U.S. steelmakers.

(80.) Chan interview (April 10, 2006).

(81.) China’s wind turbine market has exploded so much that foreign equipment makers experience growth even as the domestic sector dominates “more than 85 percent” of the market. See “China Wins in Wind Power, by Its Own Rules,” New York Times (December 14, 2010).

(82.) Interview with Zhou (September 28, 2008). The development of a coherent renewable energy agenda and policy regime in wind power, moving away from bureaucratic fragmentation, is consistent with the strategic value framework introduced in this book as well as with the findings of Lema and Ruby (2007).

(83.) The U.S. government took action in response to a petition filed by the United Steelworkers, which also cited other support programs that China has since discontinued. “WTO Wind Industry Throwdown: U.S. vs. China: The U.S. Trade Representative Cries Foul on China’s Wind Subsidies,” Greentech Media (December 28, 2010).

(84.) See “China Could Learn from Henry Ford,” New York Times (January 20, 2010).

(85.) For regional variation in development outcomes and local state-industry relations in the automotive industry, see Thun (2004 and 2006) and Segal and Thun (2001). For firm-level variation in state-FDI bargains in the 1980s, see Harwit (1992).

(86.) See Harwit (1992), 142–44, for historical background on the Chinese automotive industry.

(87.) “Car Firms in China Look Locally for Parts,” Nikkei Weekly (September 4, 2006).

(88.) See “White Paper: Coming of Age; Multinational Companies in China,” Economist Intelligence Unit (June 2004), 54–65.

(89.) “China’s Lucky Man Bags Volvo,” Economist (August 7, 2010).

(90.) In 2009, thirteen foreign automakers had Chinese JVs. Most of them had little choice in their partners, and some shared the same Chinese partner.

(91.) Interview on October 13, 2008, in Beijing with Constanze Picking of government relations, Daimler.

(92.) Interview in May 2005 in Shanghai with the manager of a foreign-invested automotive JV.

(93.) The 2009 Planning on Restructuring and Revitalization of Auto Industry eliminated this and other market-share requirements but not without setting new objectives on creating a competitive domestic automotive industry and promoting high-tech and environmental friendly technology.

(94.) Interview on May 22, 2006, in Beijing with Bengti Tan, accountant, Ernst & Young. See also “Customs & Trade Alert: China Automotive Industry,” Ernst & Young Trade Services (March 2005).

(95.) The ruling affirmed a July 18, 2008, report by a WTO panel established by the WTO Dispute Settlement Body. Also see WTO DS339, DS340, and DS342 requests for consultations filed with the WTO Dispute Settlement Body by the European Communities, the United States, and Canada, respectively.

(96.) Interviews in September 2008 with MIIT bureaucrats and China managers of foreign automakers.

(97.) This rule was aimed partly at Toyota, which assembled Prius gasoline-electric hybrid cars in China but shipped critical components in sealed boxes from plants in Japan. “G.M. Will Build Its Own Research Center in China,” New York Times (October 30, 2007).

(98.) See “China Seeking Auto Industry, Piece by Piece,” New York Times (February 16, 2006).

(99.) Interview on April 12, 2006, in Shanghai with Jeff Albright, general manager of Briggs & Stratton China.

(100.) “China Looms as the World’s Next Leading Auto Exporter,” New York Times (April 22, 2005).

(101.) VW and GM were not alone. For similar stories, see “White Paper: Coming of Age; Multinational Companies in China,” Economist Intelligence Unit (June 2004), 51 and 60.

(102.) Picking interview (October 13, 2008).

(103.) Picking interview (October 13, 2008) and “G.M. Will Build Its Own Research Center in China,” New York Times (October 30, 2007).

(106.) This compares to the more than eight thousand domestic enterprises. “Competition Intensifies for Automobile Parts and Components Industry,” China Economic News (September 4, 2006).

(107.) Equipment makers from strategic to nonstrategic industries reported the cumbersome nature of the CCC process, which they viewed as a nontariff barrier to entry.

(108.) Interview on March 9, 2006, in Shanghai with Kaitai Chen, senior consultant, Standards and Technologies, Rockwell Automation, and professor emeritus at Fudan University.

(109.) Cummins also operated WFOEs and JVs in Hubei with Dongfeng, producing heavy-duty machinery, and Beijing with Foton, producing automotive components.

(110.) Factory visit and interviews on May 18, 2006, in Chongqing with Kirpal Singh, the general manager appointed by the foreign partner, and Gang Jin, a Chinese manager of Chongqing Cummins.

(111.) B&S established its JV in Chongqing in the early 1980s to produce for the Philippines market. In 2003, it increased its stake from 52 to 95 percent. Interview with Albright (April 12, 2006).

(112.) In another case, Linhai, Yamaha’s partner in Nanjing, operated a plant in Yangjing, which produced exact replicas of B & S’s products.