The rule of law is the core technology / Sheng Hong


The rule of law is the core technology

Sheng Hong

 The US allegations against Meng Wanzhou and the entire Huawei Company are a major blow to Huawei. But its nature should not be exaggerated. For example, some people say that this is a “technical war” between China and the United States. Because Americans do not want to see China’s high-tech surpassing the United States, it is against China’s most successful high-tech enterprise, Huawei. If you think about it, if all these “crimes” of Huawei are established, the most serious consequence is that the sale of Huawei products is prohibited in the United States and some of its allies, but it does not prevent Huawei from being in China – this is the world’s largest market, and others, to sells products. If you say that this breaks the path of Huawei’s research and development, it is even more bizarre. Is Huawei’s technology really stolen from the United States? Can it be a world-leading company by “stealing”? Conversely, if the purpose of the Americans is to suppress China’s high-tech development by suppressing Huawei, it seems to be very It is ridiculous. This is to assume that Americans also believe that by stealing technology, they can become the world’s leading technology power. If the Americans really think so, there will be no American technology today; if the Chinese think that the Americans think so, then China has indeed no hope to catch up.

The development of science and technology is not based on stealing, which is very clear. Because stealing always has something to steal, it is original. So original things are better than stealing things, and the way to create original things is better than that of stealing. The reason why original science and technology can develop rely on the environment for growing. This mainly refers to the institutional environment. For a society, this includes universities and research institutions for free discussion, fair debate and open communication, including the sharing and dissemination of public knowledge, as well as the intellectual property system. For an enterprise, it is in this institutional environment to establish a R&D team, which is called “going concern” by Commons. For this concept, I said in an article entitled “Intel’s Success and Operational Institutions”, “It seems to be more appropriate to use it to describe a steady stream of ‘production’ knowledge…. The production of knowledge is a dynamic tradition is like a river that stays up all night and flows. It must exist for a long time, and there will be enough opportunities to try and error; it must have a tradition of accumulation, in exchange for the fruits of knowledge by the cost of trial and error, and avoid the try and error from scratch again; it must be open to the future, and there will be constant innovation.”

If the team that produces knowledge and its mechanism is a big river, “relative to this constantly flowing tradition, any so-called knowledge product, whether it is academic writing, drug formulation, software source code, or computer microprocessor, is nothing but like a freezed cross section of the river; any individual with innovative ability is just a wave in the river; and the production process of knowledge is just a by-product of the existence of the river, much like a ditch excavated by a large river. “So, the true technological ability or source of innovation is this “in-service organization”, and the knowledge products that have been formed are actually only the most end of this technological capability. If you steal technology, you can only steal the last thing, but you can’t steal the “running organization” and its scientific research capabilities. This will not only form your own R&D team and its mechanism, but it will never be able to go ahead. Because it is inevitable that it can be stolen, it is already outdated. The individuals in this team are not that important. Even the best people, if they leave the team and the mechanism, lack the knowledge to complement and promote them, and the probability of success will decrease.

Therefore, between enterprises and between countries, the competition of science and technology ultimately depends on institutional competition. In this case, the most important thing for a company or country is to refine its internal strength, that is, the establishment and improvement of own institutional environment and of scientific research organizations. In this way, external pressure is not worth mentioning. The question is, is Huawei a company like this? Is China such a country? If so, the US government said that Huawei and other Chinese companies are mainly relying on stealing technology to develop it. Is it not a dirty lie? It should be said that the problem is more complicated. Since the reform and opening up, China has been fully open in the fields of thought, scholarship and culture. It has established a system of university and scientific research institutions that have exempted from political interference, and has gradually established an intellectual property system. This provides a preliminary institutional framework for China’s knowledge “production”, including public knowledge and system-protected knowledge, and is also the main cause of China’s science and technology development. In 2017, the number of patent applications in China ranked first in the world, accounting for 40% of the world. Huawei is developing in such a big environment. That year, its number of invention patents authorized was second in China, reaching 3,293.What is superior to other Chinese companies is that Huawei has created its own excellent R&D team. It is a “going concern” with its own rules, traditions and people, so that new technologies can flow out continually.

However, while the new institutional framework for knowledge “production” was formed, the old system of our country did not withdraw. It redistributes the wealth that flows out of the market through financial means, and transfers a large amount of funds that have been used in the market to non-marketized uses. This is the distribution system of scientific research funds in China. Originally, basic research produced public knowledge and required a certain degree of funding from the state. Countries around the world have similar mechanisms. European countries established the National Academy of Sciences in the 17th and 18th centuries, and now countries such as the United States also have National Science Foundations. Then there is the application research with strong externalities, and sometimes it needs state funding. For example, the British Parliament has offered a reward for determining the longitude technology. The Internet is also developed on the basis of the US military network. The problem is that China’s distribution system of scientific research fund  is not only ultra-large-scale, with more than 800 billion yuan per year (compared to about 200 billion yuan in the United States); and the direction is wrong, China’s national research fund uses only 11.6% for basic research (2017, According to the Ministry of Science and Technology data estimates), while 90% of the National Science Foundation of the US federal government is used in basic research.

Even the part used in basic research has a relatively low efficiency in input and output because there is no good identification and evaluation mechanism. Because the distribution of such huge amounts of money is not based on academic rules, market rules or intellectual property systems, but on the distribution rules of administrative agencies. The procedure is that the fund is applied by various research organizations or personnel and is determined by the judging committee. Due to the lack of constraint on power of the authorities in charge of the fund, the judging committees are mostly furnishings, and the competing research organizations and personnel do not rely solely on the superiority of their own research projects to obtain funds, but more to rely on their own resources in the officialdom. Prof. Rao Yi of Peking University and Professor Shi Yigong of Tsinghua University criticized that “doing good research is not as important as having good relationship with officials and experts they appreciate”. Some researchers have analyzed the scientific research situation of colleges and universities in China, and the conclusion is that, overall, “the scientific research performance of colleges and universities is not ideal, only 38.7% of the regions have reached the best state, and most of the rest are in the stage of diminishing returns.” (Zhong Jie, Chen Jingwei, “Empirical Research on the Output Efficiency of University Scientific Research Inputs”, China Science and Technology Resources Guide, January 2016).

On the surface, the number of papers in China in 2016 has surpassed that of the United States, ranking first in the world. But Professor Shi Yigong warned that there are too many “garbage” papers in China. The reason is that China’s scientific research system relies on government funds and uses quantitative indicators as evaluation criteria. As Professor Steven Cheung proposed “the law of fulfillment”, when the unit of measurement of the price is determined, the seller will try to fulfill the requirements of the unit of measurement, ignoring other aspects. For example, if the diamond is priced only in carats, the seller will not pay attention to color, cut, and flaws. If you only use the number of papers as the standard of hero, there is definitely a problem with quality. The evaluation system can of course be further evaluated by the “impact factor” of the publication, but this is just another “pricing standard” and a new round of “law of fulfillment” effect will emerge. Not only can a large number of academic journals in China be able to cite each other to improve the “impact factor”, but it will also damage international journals. Since publishing a paper in an international academic journal is an evaluation criterion, it can bring bonuses as well as job title evaluation, as well as research funds. The idea of playing international journals is a natural result.

Mu Yunqiu and Jiang Xiaoyuan pointed out that the trend of “open access” in academic journals that has emerged in recent years is essentially a benefit of academics. Although it cannot be completely denied, it is combined with China’s scientific research system, but it has formed a cycle of “willing of both.” Under this trend, international journals such as Nature, Scientific Data, Science Report, Lancet and Cell have also created “Open Access” sub-publishes to absorb silver of low-quality papers can be as high as $5,000 each. The biggest source of funding is China. It is estimated that “Chinese authors published a total of 69,051 open access papers in 2017, … the total cost of contribution is about 760 million yuan.” They pointed out that the proportion of Chinese papers in the notorious Tunor Biology is as high as 65.5%. Oncotarget is as high as 80.3%, and the International Journal of Clinical and Experimental Medicine has reached an astonishing 95.3%. It is simply a US journal tailored for Chinese authors!” (“Science Publishing Utopia: From Open Access to Predatory Journals (Second), “Reading”, No. 10, 2018)

If the national research fund for basic research is not ideal, then it will be even worse for commercial purposes. This is because basic research has theoretical ambiguity and uncertainty, and it is difficult to judge the advantages or disadvantages of scientific research. Commercial research has a clear purpose, and it is easy to evaluate from the market point of view. However, if it is distributed mainly with power and relationship, it will deviate more from the optimal configuration. According to the National Bureau of Statistics, in 2017, the government research funds of China’s scientific research institutions were about 202.6 billion yuan, accounting for 83% of all their expenditures; the government research funding of universities was about 80.5 billion, accounting for 63%.Due to a large part of government funds, 82% of research institutions and 33% of universities are used for applied research and product testing, but adopt a attitude toward basic research, that is, no practical effect, resulting in people after the publication of a paper or patent application. , no longer care; and because of the lack of market linkages between scientific research institutions and enterprises, a large number of scientific research results are more hidden behind the surface of the results, and cannot enter the enterprise and the market. Therefore, the problem of transformation of results has always been a difficult problem for scientific research institutions within the system of China. According to the “China Patent Investigation Report 2017” issued by the State Intellectual Property Office, the patent application rate of scientific research institutions in China is about 35.4%, and the ratio of colleges and universities is only 22.6%.

Enterprises are directly facing the market, and should rely more on the intellectual property system. In this respect, the performance of state-owned enterprises is far less than that of private enterprises. In 2016, although the original value of fixed assets of state-owned and state holding industrial enterprises accounted for 45% of all industrial enterprises above designated size, the human resources and funds invested in research and development accounted for only 7.4% and 2.6% respectively. What is even more shocking is that in the context of the growing R&D investment of most Chinese companies, the R&D investment of state-owned enterprises has been significantly reduced year by year. From 2011 to 2017, the manpower input decreased from 148,871 person-times to 55,692 person-years (see chart below); R&D expenditure decreased from 467,934,400 yuan to 213,367,000 yuan. The reason that can be guessed is that, first, state-owned enterprises rely more on the research and development of state-owned scientific research institutions. Second, state-owned enterprises have no incentive to research and develop. In other words, state-owned enterprises do not rely on the intellectual property system and market. According to the National Bureau of Statistics, in 2016, state-owned enterprises only accounted for 3% of all valid patents. That is to say, non-state-owned enterprises are the main force in using the intellectual property system. In 2017, the turnover of China’s technology market was 1342.4 billion yuan. The funds from the market far exceeded the funds from the government. According to the above ratio, these funds mainly support the research and development of non-state-owned enterprises.

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Source: National Bureau of Statistics website.

But this does not mean that state-owned enterprises are more suitable to use government funds. In an article entitled “Does government subsidies promote the improvement of corporate patent quality?”, the author concludes that “government subsidies have a significant role in promoting the quality of private enterprise patents” but “failed to effectively upgrade the quality of the patent of state-owned enterprises, on the contrary, has a certain inhibitory effect.” This is because “state-owned enterprises and the government have a natural connection”. Because “the government controls the pricing and distributing power of key elements such as land, capital, labor, etc., state-owned enterprises are more inclined to choose to establish rent-seeking links with the government to obtain excess profits. Or rent-seeking income.” The authors also found that “in areas where intellectual property protection is more perfect, government subsidies have a more significant effect on the improvement of corporate patent quality; on the contrary, in areas where intellectual property protection is less perfect, government subsidies have an inhibitory effect on corporate patent quality” (Kang Zhiyong, Science Research, No. 1 of 2018).This conclusion can also be applied to different types of businesses. Compared with private enterprises, state-owned enterprises are less dependent on the intellectual property system, and there is also no incentive mechanism for technological innovation within them. A large number of inventions are regarded as service inventions, and only a small number of rewards are given.

This seems to be different from people’s impressions. Isn’t there a lot of state-owned enterprises that have created leading technology? State-owned enterprises have an advantage, that is, monopoly power to the domestic market. When foreign companies want to enter the Chinese market, these monopolistic state-owned enterprises use the huge domestic market as a bargaining chip to force foreign companies to submit. The key is that when they acquired foreign technology at low prices, they claimed that this was a technology of “independent innovation”. One of the most typical examples is high-speed rail technology. On the Internet in China, it is full of words that “high-speed rail is China’s independent innovation technology”, but an article entitled “On the promotion in independent innovation of China’s high-speed rail technology by government procurement  ” said, “the railway department represents the government as the procurement entity. China’s huge railway equipment procurement market and railway sector are the largest and most powerful single consumers in the domestic market. These factors have strong attractions and competition to Western companies such as Siemens, Bombardier and Alstom”, “finally led to the introduction of advanced high-speed rail technology at a lower price” (Xu Wei, Pan Lei, “Kehai Story Expo Science and Education Forum”, 2011).Among them, “single consumer” “introducing advanced technology” seems to have explained the issue.

It can be argued that the claim that a certain imported technology is China’s independent innovation technology is the greed of the relevant administrative departments or state-owned enterprises in the absence of innovative capabilities. According to industry insiders, in the presence of national leaders and foreign experts (he can’t understand Chinese),the former railway minister Liu Zhijun announced that China’s high-speed rail technology is independent innovation .However, after Liu Zhijun’s fall, there was a controversy over his approach. Regardless of the pros and cons, it is acknowledged that the high-speed rail technology was introduced from Germany, France, Japan and other countries, but the pro-Liu faction affirmed his introduction, while the anti-Liu faction slammed him for suppressing domestic independent research and development for the purpose of introduction. Pro-Liu faction said, “In order to obtain more orders, Japanese, French, Germans and Canadians are competing to push prices down.”The price is lower and lower.” “After three years, the Ministry of Railways bids for  trains with true speed of 350 kilometers per hour, the price quoted by Siemens is cheaper than the 250-kilometer train three years ago, and promised to sell the whole vehicle manufacturing technology for 80 million euros, so that Liu Zhijun can announce ‘having independent intellectual property rights’ to the media.” (Kato Kato, “How does Liu Zhijun succeeded a high-speed railway in China?”) If we understand the institutional background of state-owned enterprises in technological innovation, know that they can neither effectively use the intellectual property system nor even effectively use government subsidies. The probability of introducing technology called “independent innovation” is great.

If the above discussion is correct, we can know that the development of science and technology in China over the past few decades has mainly relied on the promotion of private enterprises in the context of the intellectual property system and the market system; and the technological Innovation of the state-owned sector in our impression is more likely to be the result of “low-cost introduction of foreign technology” + “propaganda for independent innovation”. The reason why they do this is to maintain the traditional scientific research system. It consumes more than 800 billion yuan of national financial resources each year. The actual effect is very poor, but it is the cake of interest groups. Although this phenomenon has been noticed by the scientific and technological circles and the government, and it is said that the national research fund is like “Tang Seng meat”, there have been some minor reforms, but this system still stands, perhaps the result of such false propaganda. However, although this has deceived society and the people for quite a long time, it happened to give foreigners a strong impression that China’s technological development mainly relies on government subsidies and uses the Chinese market as a bait to force foreign companies to transfer technology at low prices. Take a look, this is one reason why the United States complains about China’s “unfair trade”.

However, the issues of the intellectual property rights and government subsidies presented by the Sino-US trade war can make us think about what is the problem of the government-led research system. In short, that is that it needs the result without the process, the end product without the mother machine, and the short-term visible results without long-term institutional basis. Under this dominant concept, apart from the achievements based on statistics and self-propaganda, China will never be able to advance to the forefront of science and technology; on the contrary, it will be criticized by other countries on the basis of misunderstanding. The solution is to reverse the concept of putting the cart before the horse. This is a traditional Chinese view. There is an old saying in China that “it is better to teach fishing than to give a fish.” This sentence can also be said in reverse. “It is better to learn fishing than to eat a fish.” Fish is only the result of fishing, and intellectual property is only the result of the institutional structure that makes it. Broadly speaking, this “institutional structure” is the rule of law. Why? Because it provides all the institutional conditions for knowledge production and intellectual property. Such as personal freedom, freedom of expression, freedom of communication, property security, judicial justice, academic tolerance, open information, free enterprise operation and intellectual property protection.

The most characteristic of the “all institutional conditions” of the rule of law is that it has nothing to do with any particular purpose, and it is naturally seems that it is not directly related to technological innovation. However, this is the biggest advantage of it. As Hayek said, the core of the rule of law is a set of “rules of just conduct”. One of the conditions for the working of this set of rules is that it does not target any specific purpose, so it is abstract, universal, and generally fair, and can also become an environment of environment for technological innovation .He said, “The ‘values’ which the rules of just conduct serve will thus not be particular but abstract features of an existing factual order which men will wish to enhance because they have found  them to be conditions of the effective pursuit of a multiplicity of various, divergent, and unpredictable purposes.” It is precisely because of this characteristic that the function of the rule of law, in the overall and long-term perspective, is the nature that best promotes all aspects of humanity’s purpose, and easy to be ignored by the utilitarian. To compete in science and technology by means of violating the rule of law is to win small games at the expense of losing big games. It is their violation of the rule of law that makes our science and technology will never lead. If the human wise man has already told us this connection, if we are still dull and ignorant, then we cannot always blame the ancestors.

Law in English means natural law, including the rules of nature, as well as the rules of human society. Scientific and technological innovation must also follow natural law, otherwise it will be inefficient. In short, the basic resource of technological innovation is the human brain, and the most fundamental mode of technological innovation is to form an institutional structure that can maximize the spark of wisdom in the human brain. The human brain is the most unpredictable resource. We don’t know what kind of whimsy it inspires from whose head. However, this is the original intention of “innovation.” If this is the case, this institutional structure must be the most inclusive, allowing exploration in all directions; the most impartial, the most accurate match to the contribution; the most efficient, all potential brains have the opportunity to burst inspiration. This is an academic system with fair exchange and without restriction on discussion, a market system that allows innovators to work according to usefulness, and an intellectual property system that allows innovators to get a fair return. Under this institutional structure, people don’t know who will be the next Newton or Einstein, Edison or Jobs; but people are convinced that the innovators emerging under this institutional structure will certainly go far beyond the imagination of planers based on existing knowledge.

However, as mentioned above, the problem of China’s science and technology innovation system is precisely that there are too many resources allocated by the government, and too few resources are allocated by means of academic rules, markets and intellectual property systems. This is not only a problem of inefficient resource allocation, but also corrupts scientific research groups, allowing them to focus more on power and relationships than on scientific research itself. One more problem is that the system itself becomes a cake for those who have the power to decide. They may know from the beginning that it is ineffective, but it will bring huge benefits to themselves. These people are the ones who have power. They will not only promote the reform of this system, but also reduce the proportion of resources allocated by power, but will continue to expand it. If there is no restriction on power, and power itself is naturally expansive, this distorted scientific research system will be difficult to reform, because once the size of the national research fund is to be reduced, the power role in the science and technology evaluation system will be constrained. The boycott of the relevant power department. The rule of law is intended to limit power. Because “rule of law” is the rule of law, and rule by men, that is, everyone, including the most powerful, must obey the law, and the rule of law is the panacea for healing this ailment.

To rule the rule of law, it should not be used as a tool to achieve the current purpose, but to pay attention to the generality of the rule of law, the impartiality guaranteed by legal due process, and the predictable long-term stability. The so-called “general” refers to the full exercise of intellectual property rights, relying on the complete system and comprehensive environment related to the protection of intellectual property rights. This is the institutional structure covering all aspects of society. This is because a citizen or enterprise is the main body of intellectual property. If the personal safety of the citizen or the property rights of the enterprise are not protected, the benefits of invention and innovation will not be protected. If we see that personal freedom or corporate property rights are not protected, we also think that intellectual property is virtually unprotected. Even accidentally, this lack of protection of human rights and property rights directly hurts the scientific research itself. For example, Li Ning, an academician of the Chinese Academy of Engineering, is suspected of embezzling public funds. No matter how the judicial decision is made, the most important thing is that the case has been dragged on for a long time. Since 2014, Li Ning has been detained and has not been released on bail according to law, so that the defendant can bear the cost of judicial inefficiency. It is a violation of personal freedom. Therefore, when we saw that the Chinese government responded to the Meng Wanzhou case and the two Canadians arrested were not on bail pending trial, they must think that this is actually the same as Li Ning’s experience and damaging China’s technological innovation.

Second, the purpose of the rule of law is a fair ruling. Although the Coase Theorem assumes that when the transaction cost is zero, the judge’s arbitrary ruling will lead to the optimal allocation of resources, but Coase pointed out in his famous paper “Social Cost Issues” that in the real world where the transaction costs are positive, the fair ruling by the judge has an important impact on resource allocation. Thus, a fair ruling is also an important factor in ensuring the optimal allocation of research resources.T o ensure a fair judgment, the most important thing is to ensure that the legal due process is followed. In China’s reality, these due process are often not implemented. If the court ruling is often made in advance by the “Political and Legal Committee”, it violates the principle of the judge’s independent and unintervined trial (Article 113 of the Constitution); and as the “TV confession” that is not uncommon in China, it violates the principle of  “no forcing any person’s self-incrimination” (Article 50 of the Criminal Procedure Law).Article 33 of China’s Criminal Procedure Law stipulates that criminal suspects “have the right to appoint defenders” from the very beginning, but after the Chinese government detains two Canadians, for a long time their family members have not  been allowed to visit them and they are not allowed to hire lawyers. In connection with the case, that the outstanding scientists and technology entrepreneurs, Chu Jian, he was in the detention house for nine months, “it is stipulated that he cannot meet anyone, including lawyers”, we can know that this is just a part of violation of the general phenomenon of legal due process, this is the harm to the Chinese people through hurting foreigners. It goes without saying that this includes the destruction of China’s technological innovation and its environment.

Third, the rule of law needs to give people long-term and stable expectations. Only making people believe that law is still valid in the future, people will use it as the standard to decide the current action. Some economic historians attribute one of the reasons for modern economic development to “detour production”, that is, the cycle of production becomes longer, including the innovation cycle, which requires longer-term investment decisions. The significance of statute law lies in the fact that the basic rules are announced in advance, giving people a general expectation. In our courts, people can’t sue for unconstitutional behavior, and the Constitution cannot support everyone’s long-term expectations of the Chinese legal environment. Article 35 of the Constitution stipulates freedom of expression, but in reality the creation and publication of academic journals are severely restricted, and the book box is still subject to review and licensing. Article 41 of the Constitution stipulates freedom of communication, but unconstitutional Internet firewalls block platforms like Google Scholar. Academic journals that I have subscribed to abroad have also been lost for four consecutive issues. Therefore, not only the written Constitution can not give people a stable expectation, but also directly damages the information environment of scientific research. The government often replaces the law with opaque policies for the current purpose, regardless of the long-term stability of the law, thereby making things that undermine the expectations of the law. When we see such problems as pointed out by the US Government’s Article 301 Investigation Report, we will not be unfamiliar for its involving infringement only to US companies, Chinese companies also seem to have known the case.

With such an understanding of the Meng Wanzhou and Huawei cases, the correct approach should be to fight under the rule of law. We must strive for the rights of Huawei and China, while we must respect the principle of the rule of law. The so-called “rule of law” refers not only to the principles of common law, but also to the principles of Chinese law. From the point of view of the text, there is no big difference between the two. The only difference is the implementation aspect. On the principle of bigness, there are independent trials, presumption of innocence, no doubts, no self-incrimination and other principles. In the procedural, there are defendants who have the right to hire defenders, have the right to be released on bail, and so on. However, the Chinese government’s move is basically an action outside the legal due process, attempting to win a single game through extra-legal pressure; and the Canadian and American governments’ moves are within the legal due process, which will experience procedure verification and win a long-time victory. The results will be very different. The so-called “technical war” in the way of violating the rule of law actually destroys the basic environment for the development of science and technology, and ultimately leads to the failure of the “technical war.” Therefore, putting Huawei’s efforts into the legal due process will not only increase Huawei’s chances of winning, but also improve the institutional environment for China’s technological development. We have seen that Huawei has taken actions within the legal process, including accusing the “political motives” of the Meng Wanzhou case, including counterclaims against the Canadian government and the US government, which are all worthy of recognition.

When people say that Huawei is facing a “technical war” between China and the United States, it seems to pay more attention to the end products of the intellectual property system called “core technology”, and seriously underestimates the intellectual property system and the rule of law itself which guarantees the system effectiveness. .Lao Tzu said, “The great way is the simplest”; the same, the great way will be obvious. Paradoxically, the end products of knowledge are often secretive, with a wide variety of categories, and require payment of fees; and the most important institutional conditions – the rule of law, is clear and open to the world, the rules are simple, and can be given free of charge. However, the fact in China is that the rule of law knowledge without patent protection is full of houses, but people do not want to implement it; and the end-knowledge products with intellectual property protection are fascinating for people to catch. In fact, if you want core technology, the key is outside the core technology. Although China has established an intellectual property system and made great progress, in 2017, core patents only accounted for 1.6% of the total authorized amount, equivalent to 9.76% of the US core patents (China Merchants Securities, “Comparison of Chinese and American patents in all aspects: Chinese patents are catching up, July 23, 2018).The gap should lie more in the rule of law environment. Some people may say that in the initial stage of China’s technological development, the best strategy is to use ready-made technology. Even so, China is now at a turning point – are they to continue picking the fruits of other people’s trees, or planting trees by themselves?It’s happened that stupid Americans are forcing the Chinese to plant trees. Let us turn their trick to our own use.


March 22, 2019, at Fivewoods Bookroom

March 29, 2019 published firstly in FT Chinese and China-review Weekly



The Causes, Behaviors, and Termination of Administrative Monopoly in China / Sheng Hong et al

Note: Recently, the authorities is talking about “anti-monopoly”, but the target is not real monopoly, that is, monopoly created by the administrative departments of the government. On administrative monopoly, we have done in-depth research in 2013, and updated the data and revised it in 2015. The title of the research report is “the cause, behavior and elimination of China’s administrative monopoly” (Second Edition). Now I issue the abstract of the report again. ( December 19, 2020)


The Causes, Behaviors, and Termination of Administrative Monopoly in China (Second Edition)

by Sheng Hong, Zhao Nong, Yang Junfeng
May 10, 2016

In short, the “administrative monopoly” is a kind of monopolies established by the administrative departments. The definition of Administrative monopoly is that an administrative department, through issuing administrative documents (such as regulations, statutes or suggestions), grants the monopolistic power(s) to business agents–enterprises or profit-making administrative bodies, which are realized as accessing to exceptional facilities and advantages, forming different degrees of monopolistic forces and the status of the situation by setting of barriers to entry and regulating prices.

Granting the monopolistic powers to en is important economic decisions and a change of basic economic institutions (the “socialist market economy”). Under the Law of Legislation, monopolies shall be established by the legislature. According to the principle of law reservation, monopolies, without establishments of legislature, are the damages to economic freedoms of potential competitors and choosing rights of consumers. In practice in China, most of administrative monopolies are established by formal files of administrations. This situation is a kind of self-granted. The monopolistic powers established by the administrative public powers are unconstitutional and illegal at some level.

Broadly, the Administrative departments use their superiority over drafting legislative acts to establish monopolistic powers in favor of some enterprises through a weak legislature, also regarded as administrative monopoly. Since reform and openness, China’s constitution has been amending several times. There are great changes in its fundamental principles, such as adding principle of “socialist market economy”, and that of “that the state encourages, supports and conducts non-public economy”. The laws including content of administrative monopolies are violated from the principles of constitutions.

Almost all of the main administrative monopoly industries discussed in this study is evolved from the complete planned economy. After years of fiscal system reform, the Central Government’s main sources of revenue have become taxable income. Central Government has incentive to reform state-owned enterprises but no incentive to abolish the monopolistic powers. Instead, granting administrative monopolies as preferential policies to State-owned enterprises could be a way to reduce the fiscal burden from State-owned enterprises.

With the success of China’s economic reform, huge domestic markets came to the fore, which in turn highlighted the value of monopolies on these markets. Because the enterprises with monopolistic powers do not need to hand in profits, and have no ceilings on the level of wages and bonuses, they keep all the profit due to administrative monopolies. As interest groups, they have sufficient motivation to strive for greater administrative monopolies.

“In-house Lobbying” refers to the behavior that top managements of State-owned enterprises get administrative monopolies through lobbying administration officials. One of the factors is that industry officials and executives in firms can transform identities; mutual access to each other’s serving area. This is an important indicator of the administrative monopolies of industries. It appears in several industries in our research.

The above “In-house Lobbying” successes because of the existence of “departmental legislation.” The existence of “departmental legislation” is because under the political structure of China, the lacking of practical constraints for administrations leads to the administrative departments, beyond their authorities, influence legislation both directly and indirectly. The so-called “departmental legislation” is administrative-led or even manipulated legislation. Broadly, “departmental legislation” also means that the administrative departments practically make or amend the laws.

The administrative monopolies perform as setting barriers to entry and regulating prices, while the latter can be divided into two categories. One is sellers’ price- regulating; the other one is buyers’ price-regulating, leading to the owners of administrative monopolies may obtain resources and other inputs at discounted even zero prices.

As long as the institutional barriers to entry exist, even if the other conditions are the same as perfect competition, under some level of demand, administrative monopolies may lead to high prices, low production and welfare losses.

Monopolistic, high prices caused by administration’s setting barriers to entry redistribute the original consumer surplus to corporate profits. It is an unfair distribution of income distortions. If using the monopolistic profits as the way which market decided, they can produce a certain number of products. The value of these products (in broad terms, can also be combined with consumer surplus) is the opportunity loss caused by administrative monopolistic (distribution of distorted part), known as social welfare losses.

Buyer’s price regulating (low or zero factor prices) is a serious distortion of income distribution. It transfers huge wealth which originally belonged to the State or other economic agents to the State-owned enterprises. It is clearly unfair. We assume administrative monopolies use the rents that they miss to pay to occupy more factors of production such as labor, land and capital. If these rents were used in other ways that determined by the market, they can produce more products. The value of these products (can also be combined with consumer surplus) is opportunity losses caused by distortions, also known as social welfare losses.

Administrative monopolies transfer wealth in the form of currency from consumers to the monopolistic companies (including their management and staff), which did not use these monetary resources to produce a quantity of products they should do. Take the perspective of society, a large sum of money does not have corresponding product, which will inevitably promote inflation.

In recent years, adjusting the deposit reserve ratio, rather than adjusting interest rates, increasingly becomes the primary means of implementing monetary policy. Frequency of adjusting is very high. It is up to 10 times a year (in 2007). Adjustment range is up to 14%, so that the highest rate is 21.5%. This is “unusual”. From the point of view of bank, adjusting the reserve requirement ratio and interest rates has a noticeable difference. In particular when implementing tightening policies, increasing reserve ratios will enable banks to avoid the huge costs of raising interest rates.

Because public powers are integral factor of administrative monopolies, and impetus of governmental departments in the formation, maintenance and strengthening of administrative monopolies, credibility and authority of the relevant administrative departments were considerably weaken and undermined, while administrative monopolies damage economic efficiency and social justice. Therefore, state-owned enterprises and their control over the national economy (in fact, is the administrative monopolies) is the real “threat to ruling” rather than “ruling basis”.

Figure of welfare loss and distribution distortions caused by administrative monopoly

FigureThe deep grey part in the figure is the net loss of social welfare caused by administrative monopolies, we called it “social welfare loss I“; The light grey part in the figure is distribution distortion cause by sellers’ monopolistic (regulating) prices, we called it “social welfare loss II“; the grey part in the figure is distribution distortion caused by buyers’ monopolistic (regulating) prices (lower or zero resources prices), we called it “social welfare loss III“.

Estimation of Social welfare loss I: the net social welfare losses of China Telecom, China Mobile and China Unicom from 2003~2013 is about 93 billion RMB. From 2003 to2013 the cap of net welfare loss of telecom industry is about 573.6 billion RMB, and the net social welfare losses of oil industry is about 1969.6 billion RMB.

Estimation of Social welfare loss II: The annual administrative monopoly rent of telecommunication industry is about RMB 22.3 billion on average. It is also the amount of transferred consumer surplus. Oil industy of monopolistic profit brought about by high monopolistic prices is about 1328.9 billion RMB. Salt industry monopolistic profit is as high as RMB 17.7 billion per year. This also is the loss of consumers each year. These numbers are the amount of social welfare losses.

Estimation of Social welfare loss III: From 2001 to 2013, the amount of land (for industrial use) rent which CNPC miss to pay is about RMB 250 billion; the amount of land (for gas station use) rent which CNPC and Sinopec miss to pay is about RMB 273.8 billion; the oil royalty they miss to pay is about 560.4 billion RMB; the financing costs which the big three in oil industry together miss to pay is about 392.6 billion RMB. These numbers are also the amount of social welfare losses.

The mean of difference between deposit interest rate and loan interest rate in most market economy countries is in 1%~2%, but the difference between one-year loan and deposit rates is3% over several years in China. This is achieved by lowering 1.5% to the deposit rate. According to average balance of the 2013 national deposit which is about RMB 98.06 trillion, the estimation of the individuals and institutions nationwide interest loss is as high as RMB 1.4709 trillion. It is equal to 2.5% of GDP that year.

Generally, it is still very difficult to purchase train tickets. It implicates there is a general supply shortage on ordinary train. From Beijing-Tibet Expressway and Qingdao-Yinchuan Expressway, we can tell the supply shortage of general railway freight. Especially since 2010, there are frequent traffic jams in Beijing-Tibet Expressway which are over 100 km and up to 10 days. Number of trains on the high-speed railway is lower than designed normal levels, which means the high-speed railway resources cannot be fully utilized. This suggests that on the ratio of investment in high-speed railway to ordinary railway is severely misallocated.

Report estimates that when the number of the high-speed railway trains departed is up to 187 pairs daily, the utility created by unit cost of high-speed railway is equal to ordinary railway. As we know, the busiest Beijing-Shanghai high-speed railway depart only 90-105 pairs of train daily. This means that the decrease in the construction of normal railways, caused by every kilometer high-speed railway constructed, will lead to a net social loss. In accordance with the relevant data, the amount of welfare losses caused by the misallocated resources between high-speed and conventional railway is about RMB 89.7 billion per year.

The total amount of social welfare loss I(including the loss caused by resources misallocation in railway), social welfare loss Ⅱ and social welfare loss Ⅲ caused by administrative monopolies is RMB 2273 trillion in 2013, while the amount of latter two is RMB 1.9911 trillion, which is such a quantity of money without corresponding products and services, and inevitably brings about inflation pressure. Specifically, it will cause inflation by 2.5%, equivalent to 250% of commodity-retail-prices-index inflation that year.

Taking adjustment of reserve requirement ratio as an alternative means of adjustment of interest rates, the Central Bank raised deposit reserve ratios by 0.5% (as of June 20, 2011). The equivalent interest rate change is 0.375%. It can save the banks from paying interest on deposits of RMB 321.7 billion.

Taking adjustment of reserve requirement ratio as an alternative means of adjustment of interest rates, the Central Bank raised reserve ratios six times in 2011, each time by 0.5%. It is equivalent to reduce the interest expense by RMB 1.5623 trillion for banks or their main borrowers.

Although there are some shortcomings in current Anti-Unfair Competition Law and Anti-monopoly Law, there are still some normal content to constraint behaviors of administrative monopoly. The monopolistic behaviors the Anti-monopoly Law defines include achieving monopolistic agreements between business agents, abusing monopolistic positions, concentrating firms for purpose of excluding, limiting competitors. There is a certain chapter in the law to state forbidding “abuse of administrative powers to exclude and to limit competition.”

It should establish “legislation evaded rule” for drafts of making or amending laws to establish specific monopolies. In other words, the administrative departments that related to specific monopolies should not draft Bills. At least it should be drafted by a neutral agent(s) that authorized by legislature. Moreover, the legislature should organize the Committee of experts to consult about the drafts establishing of monopolies for specific industries. Furthermore, the establishing of a specific monopoly should be treated as a single monopoly, that is, we cannot use “category” as the unit to create a monopoly. For instance, it cannot set “national economy related” as a category.

Administrative departments do not have the power to establish specific monopolies. Any administrative department establishes monopoly through regulations or statutes is illegal. Setting up the rules that related administrative departments should evade the drafting of related “implementation details” or “regulations”; or strengthen the reviewing on drafting of “implementation rules” of specific laws to prevent adding the articles related to establishing or expanding of specific monopolies.

The power that administrative departments can regulate the market price should be empowered by the legislature. When an administrative department using its price regulating power, it should be bound by the Price Law, going through fair hearings. In particular, it should differentiate between adjustments of interest rate to implement monetary policy by the central bank and the interest rates of commercial banks, for avoiding regulation of commercial bank interest rates in the name of implementation of monetary policy.

The Constitutional resource of public-owned economy and state-owned sector could be used to monitor and constraint the managements of state-owned companies more effectively. Because public resources and assets should be owned by all people, the supervision of these resources and assets should be strengthened. It must be assured that these assets should not be controlled by managements of state-owned companies. Because it is difficult to monitor public resources and assets on institutional and technological term, it should be emphasized in Constitution, and establish corresponding institutions and rules in laws.

Standing Committee of the National People’s Congress, as a specialized constitutional supervisory authority, can and should review and terminate suspected unconstitutional establishment of administrative monopolies. It should declare unconstitutional and terminate unconstitutional ones in accordance with the current Constitution. At the same time, based on the provisions of existing constitutional law, the Law of Legislation, empowered authorities (mainly as Standing Committee of the National People’s Congress or the State Council) terminate, revoke the existing, various administrative files for establishment of administrative monopolies respectively.

The judicial reform proposals of breaking administrative monopolies including: first of all, allow clients (but is not limited to enterprises) directly sue the enterprises suspected of administrative monopoly; at the same time, prosecution is not limited to request monopolistic enterprises to bear civil liability, but also have the right to request the Court to review the legality of monopoly.

Secondly, emend the relevant legislation, so that courts could have the substantive power to review the cases of administrative monopoly and to dispose monopolistic status.

Thirdly, renovate existing antitrust administrative enforcement mechanisms. The keys are to consolidate on institutions and functions, improve authority (for example, it cannot rely on “recommendations to the superior authority”), and legitimate the process (the core is to ensure a fair, transparent and participatory, not internal operations).

Fourthly, it should establish the public prosecution system to administrative monopolies.

Reformation of breaking administrative monopolies at the administrative level as below:

Firstly, directly encourage enterprises, including private enterprises and state-owned enterprises, enter to the areas which absence of legal provisions of monopolies. For instance, in the petroleum industry, there are only the administrative files, but no legal restrictions to enter. The administrative departments that impede enterprises to entry the industries mentioned above should be imposed administrative penalties.

Secondly, abolition and prohibit self-granted monopolies of administrative departments (or industrial associations controlled by them) by executive orders.

Thirdly, require the Ministry of Finance, the Ministry of Land Resource and other related departments to set up specialized agencies to verify the number of public natural resources  (including land, licenses of mining, etc) occupied by enterprises, and charge rents from resources holders at market prices.

Fourthly, require State-owned Assets Supervision and Administration Commission of the State Council to set a reasonable state-owned enterprises ‘ wage ceiling according to the levels of average wage in society, and punish the people who get wage above the bound.

Fifthly, request the Ministry of Finance to establish specialized agencies to monitor state-owned enterprises, particularly central state-owned enterprises, to give recommendations on the distribution of profit to the State Council, to strict implement the profits surrender, and to supervise reinvested part of profit.

Lastly, promote the state-owned enterprise to withdraw from the profit-making area in the long run.

Power is Short, Dao is Eternal / Sheng Hong


According to the media, the Ministry of Public Security issued the “Regulations on Public Security Organs’ Maintenance of Civilian Police Law Enforcement Authority” (hereinafter referred to as the “Regulations”).It includes such content that “the police perform their duties in accordance with the statutory conditions and procedures, exercise their powers, and cause damage to the legitimate rights and interests of citizens, legal persons or other organizations,  the individual police officers shall not bear legal liabilities, and the public security organs to which they belong shall be given damages according to relevant state regulations. This content expands the power of the public security organs and their personnel, and reduces and invades the rights of citizens. According to Article 82 of China’s “Legislative Law”, “without basis on the law or the administrative regulations, decisions, and orders of the State Council, departmental rules may not set norms that derogate the  rights from citizens, legal persons, and other organizations or increase their obligations, and may not increase the power of the department or the reduction of the statutory duties of the department”, the Ministry of Public Security is clearly a self-authorization of abusing legislative power.

It has been argued that the “performance of duties and exercise of powers in accordance with statutory conditions and procedures” as described here can be interpreted as “performance in accordance with the law.” So, what is the meaning of “law” here? According to common sense, the law is first of all the law of heaven or the law of nature. A country has its reason and legitimacy only because it protects the rights of citizens. This law of heaven is basically embodied in the written Constitution. The core part is the determination of the constitutional rights of citizens, including personal freedom (Article 37), personal dignity (Article 38), expression Freedom (art. 35), freedom of belief (art. 36), the right to inviolability of private property (article 13), the right to inviolability of dwellings (art. 39), freedom of communication and Secrets (art. 40), enjoy fair justice and basic human rights (article 33), criticize the rights of the government and its staff (art. 41), legal rights of the non-public economy (art. 11) ,and many more. The reason why the public security department was established was to protect the constitutional rights of these citizens. The “law” it relied on was first and foremost the constitution. The “Police Law” regards “supporting the Constitution of the People’s Republic of China” as a primary condition for a policeman. Therefore, the “job” of “executing a job according to law” is a duty to protect citizens’ constitutional rights from infringement.

Since “performing duties according to law” is to protect citizens’ constitutional rights, how policemen can “damage to the legitimate rights and interests of citizens, legal persons or other organizations” as the Ministry of Public Security says? This is obviously a constitutional paradox. Being able to “damage the legitimate rights and interests of citizens, legal persons or other organizations” must be a violation of the Constitution and related laws, rather than “performing duties according to law.” “Performing duties according to law” can only make citizens’ constitutional rights safer. Because these “legitimate rights” are protected by the Constitution and laws. Article 21 of the “Police Law” stipulates that “the people’s police shall immediately rescue the citizens if their personal and property safety is violated or in other dangerous situations.” In other words, when policemen see the act of “damaging the legitimate rights and interests of citizens, legal persons or other organizations”, they should be afraid of that they cannot stop it in time, should they also “perform their duties according to law” and “damage the legitimate rights and interests of citizens, legal persons or other organizations”? “If you string together the substantive meaning of the new regulations of the Ministry of Public Security, is it not that when policemen “damage to the legitimate rights and interests of citizens, legal persons or other organizations”, “they personally not responsible for the law”?

According to this reasoning, the “law” mentioned by the Ministry of Public Security in this “Regulations” is not a constitution or a law that conforms to the Constitution, but is otherwise referred to. In reality, we often see police officers calling “law enforcement”, but doing things that violate the Constitution and the Police Law. Once the parties want to protect their civil rights, they say “obstructing official duties”, which has become a routine. There are cases such as, the police breaking through the door in the middle of the night, restricting without reason on the personal freedom of citizens, and damaging to the property rights of citizens; the tens of thousands of mass conflicts caused by a large number of demolitions each year happened mostly under involvement of the police. None of the civil rights stipulated in the aforementioned Constitution is not damaged. Most of these unconstitutional violations have not been punished and corrected, and they also regard these acts as normal. In fact, as a group, the Chinese police have long neglected constitutional education. It is difficult for policemen to consciously implement the vocation of protecting the constitutional rights of citizens, and they more often regard the orders of superiors as “laws.” For example, when a female police officer in Chongqing recalled the days when she was in labor camp innocently, the police of the task group also knew that it was a wrong case, but they said that “the leaders demand that this be done, so what we can only do is doing the wrong case.” It is dangerous to tell the police that they can damage the rights and interests of citizens when they are unable to discern what the “law” they are relying on is, or they know that the leadership order is wrong but they must be enforced.

In the “Regulations” of the Ministry of Public Security, the reason for proposing its new regulations is that “in the past 40 years of reform and opening up, more than 13,000 public security policemen have died for public.” If they are sacrificed to protect the constitutional rights of citizens, we should mourn for them, but this does not mean that we should conclude that if the rights and interests of citizens are damaged, the “personal police officers do not bear legal responsibility” conclusions. Because this is only a unilateral statistic. In the past few years, how many citizens have lost their lives because of the police? The major vicious cases disclosed by the media include the case of that several police officers plotted to kill people in Fuzhou, Fujian Province in 2001, and the case of the killing by 6 police officers in Zhoukou City, Henan Province in 2004. In 2009, the Mengzi County police murder case in Yunnan, the case of police shooting two people in Guanling County, Guizhou Province in 2010, the police shooting the three-person case in Taipu Temple in Inner Mongolia in 2010, the police shooting in Panjin City, Liaoning Province in 2012, Pingnan County, Guangxi in 2013, the police shot the pregnant women, the 2013 Anshun police murder case, the 2015 Inner Mongolia Public Security Director murder case, the 2017 Xinhua County police shooting and killing case, and so on. The most shocking thing is the Lei Yang case. A person passing by the foot washing shop was unexpectedly died, and no police officer was legally responsible for it.

Some of these police murders are in the name of “performing duties according to law.” For example, the Lei Yang case was due to “catching the prostitution”, and the Panjin police murder case was for demolitions, and it was the “law” of leadership. There is also a wider range of police violations of citizens’ constitutional rights. It is carried out under the name of the so-called “legal”. For example, in the period of Bo Xilai’s administration, Chongqing was arrested in the name of “black society”. As many as 4,000 people. Chongqing police abused torture in illegally established “black bases”, including “tiger benches”, “tables”, “duck floating”, “Su Qin back sword”, etc., as well as mental torture, such as the so-called “politics returns to zero” , “economy returns to zero” and “emotion returns to zero”. Many people were sentenced to death without legal due process and 13 people were executed. When some local governments and their officials forced the peasant land, the police were often used to suppress land-losing peasants, causing a large number of casualties, such as the Panjin land acquisition police murdered one person. According to media reports, we have done an incomplete statistics. From 2003 to August 2014, there were 182 demolitions of malignant incidents, resulting in 484 casualties on both sides of the demolitions, 162 deaths and 322 injuries. More vicious incidents have not been reported.

Some people will say that the example I gave is only an individual phenomenon. Bo Xilai is just an accidental situation and cannot represent the mainstream and the overall situation, actually not. All people are mortal. In the absence of institutional constraints, good people will also become bad. What’s more, the facts show that Bo Xilai is not a only bad leader. Zhou Yongkang is another example. He was the main leader of the armed police. From 2012 to 2016, 23 public security system officials were dismissed, including 5 deputy ministerial and above officials. Someone listed a “list of chilling”, ranking 100 senior officials of Public Security System starting from Zhou Yongkang. Despite this, the Central Commission for Discipline Inspection still believes that the Ministry of Public Security’s anti-corruption efforts are insufficient. The key is not whether the leaders of these public security systems are corrupt, but as a mortal, as long as there is no strong restraint on the system, whether they will consciously be loyal to the constitutional spirit and take the protecting constitutional rights of citizens as their top priority. On the other hand, if our police group only regards the superior order as a “law”, it will inevitably lead to violations of the Constitution and harm to the legitimate rights and interests of citizens. And when they follow the orders of the superiors to “execute their duties according to law” and “do not bear legal responsibility”, can it not cause more harm to civil rights?

The new regulations of the Ministry of Public Security also propose that, in the case that the police individual does not bear the legal responsibility of “damaging the legitimate rights and interests of citizens, legal persons or other organizations”, “the public security organs under their jurisdiction shall compensate the damage caused according to relevant state regulations” .This is even more an embarrassing request. Where does “compensation” come from? Is it not the state finance? Where does the national finance come from? Is it not the money of the people? The logic becomes like this, for the damage to the legitimate rights and interests of citizens, the harming person does not have to bear legal responsibility and compensation, but the citizens must compensate themselves. In a society, if the victims themselves compensate their own losses, how can they stop the perpetrators? Can the victims survive if the perpetrators are encouraged? The contracting three rules issued by the first Emperor of Han Dynasty,  “Killer should be die, hurter and theft should be punished according to criminal “The reason why this three rules can stabilize the hearts of people in troubled times is to say the most simple rules: the damager bears the blame. This is the most basic civilized rule in ancient and modern China and foreign countries. The failure of the planned economy tells us how low the efficiency can be when individuals do not bear the consequences of their actions; when the individual does not bear the consequences of harming the legitimate rights and interests of others, the social damage will be unimaginable. What’s more, the police are not ordinary people. They have violent tools in their hands. Once they are allowed not to bear the consequences of damage, policemen will not be controlled by the public security department; the public security department will also not be controlled by the society.

Finally, we must see that this new regulation of the Ministry of Public Security seems to protect the interests of the police. In fact, it is not the case, but the police are placed in a more dangerous situation. If the police do not protect the constitutional rights of the citizens, but execute the order of the superior leadership to deviate from the constitutional spirit, and do not need to bear legal responsibility, it will inevitably aggravate the tension and opposition between the police and the people. When the consequences are caused, the executer is either a scapegoat for the leader or protected by the leader but revenged privately. The facts also tell us that those police officers who execute wrong orders are not good at the end. For example, Chongqing’s “fighting black heroes” in the Bo Xilai period, Wang Lijun did not have to say, Zhou Hao, who was awarded the “Chongqing May 1st Labor Medal”, committed suicide in 2014. “First-class hero”, Tang Jianhua was arrested and imprisoned, and “first-class hero” Guo Weiguo was awarded 11 years of his sentence, Wang Zhi was sentenced to 5 years in prison, Zheng Xiaolin, Yan Hongbo, but Bo was convicted of conviction for extorting a confession by torture. Some people will say, isn’t it because Bo Xilai’s downfall? But isn’t Bo’s downfall just because he issued a sinful killing order? Moreover, if the constitutional rights of citizens cannot be protected, the police’s own constitutional rights will not be available first. Such as the prelude to Chongqing’s fighting black society, is the cleaning of the police force. More than 900 police officers have suffered from it.

Power is short, and Dao is eternal. In fact, for any police or official, the wrong order to refuse the superior leadership’s violation of the constitutional rights of citizens is the safest option for himself. Many criminal police officers always excused themselves by “executing superior orders.” They expect that superior powers will cover them with impunity, but the result is still the punishment that cannot escape the law. It should be understood that their superiors will eventually lose power because they execute the wrong order themselves. Conversely, refusing to execute the wrong command of the superior is a “care” for the superior. In fact, the execution of the wrong command is a kind of sin, which is called “the mediocrity of sin” by Hannah Arendt. She said that this kind of sin is unforgivable because all people can “obey orders” as an excuse to get rid of their responsibilities, so a society is devastated without any personal responsibility. Most societies have rules in place to avoid this. Article 33 of China’s “Police Law” stipulates that “the people’s police have the right to refuse to execute orders that exceed the scope of the people’s police duties stipulated by laws and regulations, and at the same time report to the higher authorities.” I hope that our police brothers will the rights provisions in the Constitution and Article 33 of the Police Act serve as the golden rule and amulet.

Even if you really perform your duties in accordance with the Constitution and the law, you can’t do it casually and you can’t take legal responsibility. Law enforcement also has procedural and methodological issues. From time to time, we have seen cases of violent law enforcement. For example, on May 17, 2016, a college student in Lanzhou was beaten by the police for shooting police brutal law enforcement; on April 17, 2017, four police officers in Shenyang did not show their documents when they arrested suspects without identified the very person. The police beat the person, then found to have caught the wrong person. On September 1, 2017, the Shanghai police tried to stop a woman’s illegal parking and pushed the woman holding the child to the ground and pressed it. And injured the child; on May 27, 2018, Anhui Lu’an teachers demonstrated for salaries and were beaten by the police; and so on. In a nutshell, there is also a question of how to enforce the law. Correcting a traffic violation error, or arresting a suspect is for public safety, if cause unnecessary harm to citizens during the execution process, it violates the original intention of setting up the police. The so-called law enforcement, which does not follow due process and does not take appropriate measures, is still in violation of the constitutional spirit and has caused damage to civil rights. Therefore, this should not be “not legally responsible”.

Finally, what is caused by this “Regulations” of the Ministry of Public Security is actually a constitutional issue. If this “Regulations” can really be established, the Constitution should be amended. This “Regulations” only talks about the rights of the police, and does not mention the constitutional rights of citizens that the police should protect. When there is only one mention about the constitutional rights of citizens, it is assumed that if the damage is done, how the police cannot be held liable. It seems that the police group is a special group that is external to citizens and society. Among other provisions, the “Regulations” extend the scope of application to “being maliciously complained, hype”, and “mistaken accountability or unfair disposition” and so on. What is “malicious”, what is “goodwill”; what is “public opinion supervision”, what is “hype”, not the public security department itself can say the final, but to go through a legal due process to discern the facts. In the reality of our country, having power, the public security department has a practical advantage over other citizens regardless of the law. Therefore, this “Regulations” actually makes the balance slope more to the party that has the advantage. In view of this, the public security department as a department has a very different nature from other departments. The departmental regulations it formulates are not a regulation of the internal affairs of the management department, but have strong external effects. The “Regulations” with such content should not be formulated by the public security department.

If this “Regulations” is practiced, the violation of citizens’ constitutional rights will be several times and dozens of times more than the present. For the ruling party and the government, this is also extremely negative. Because although the policemen are at low position, their behavior and attitude represent the image of the government. Once the government tells the police that they may harm the “legitimate rights and interests” of the people and are not responsible, they will despise the government because of the palliative that even they themselves feel too broad and arrogant, and they may actively abuse the people and cause trouble. Erasmus once said, “Even the most powerful monarch can’t bear the price of anger or contempt for even the most humble enemy.” If the ruling party wants to use such a method to “maintain stability,” it may be counterproductive and further shake the political legitimacy of the ruling party. Therefore, the ruling party and our society still have to correct this wrong “Regulations” in time. Because it has serious content violations of the spirit of the Constitution, I suggest that the State Council can determine that the Provisions “exceed the authority” and “the lower law violate the provisions of the superior law” in accordance with Article 96 of the Legislative Law; And according to the Article 97 of the Legislative Law, the State Council has the power “to change or revoke inappropriate departmental regulations”, and revoke the Regulations. The Standing Committee of the National People’s Congress may also conduct a constitutional review and revoke the Regulations on the grounds of unconstitutionality.

Xunzi said, “God creates people not for kings; but God establishes kings for people.” This tells the source of the power of “king”: Following the Dao for people. Here, “Dao” is the way of heaven, “people” is the public, and “king” is the government. The reason why the policemen exist is because the people need them; if they put themselves in front of people, they need not to exist. This is the law of heaven. The law of heaven is not artificially changeable. If someone think he can change, it is the arrogance of power. The greatest effort of mankind is to bring the artificial law closer to the law of heaven. However, no matter what, human beings have to follow the law of heaven. When the law of man-made approaches the law of heaven, they follow the law of heaven; when the law of man-made departs from the law of heaven, they will be punished by the law of heaven, and eventually return to the law of heaven. The difference is that the former is actively followed, only a small cost; the latter is passively followed, and it has to pay a high price. How much is it depends on when it is corrected.


February 5, 2019 in Fivewoods Bookroom

March 11, 2019 published firstly in FT Chinese and China-review Weekly









据哈耶克,对民主失灵的解决方法是法治,即法的统治(rule of law),而不是人的统治(rule by men)。法治的极致形式就是宪政,就是通过宪法对权力进行制约。然而,法的统治仍然要由人来执行(rule of law by men)。悖论在于,如果要约束权力,尤其是占据权力顶峰的权力,或实际上的最大权力(如军权),是否要有更大的权力?如果没有的话,依据经济人假设,掌握权力的人怎么可能自觉地约束自己?如果有的话,这个更大的权力谁来约束?


实际上,经济学家们已经发现了这个问题。如桑塔费学派已经指出,如果仅有自利的经济人,一个社会只能走向崩溃;即使加上弱互惠者,也避免不了这样的命运,因为他们无法阻止自利者违约以自肥的行为。只有演化出强互惠者,即一些不惜付出额外成本以维护市场秩序和契约原则的人,才可能使社会生存和发展(Bowlesand Gintis,2004)。然而,这些强互惠者是如何演化出来的,却没有答案。






















T.W.B.:“我恢复知觉时,自己正跪着,不是为自己祈祷,而是为他人祈祷。…… 我对自己的关怀似乎完全丧失,让位于对他人的关怀。”(詹姆斯,2012,第157页)

阿兰:“我渴望成就基督的事业,…… 。我对世俗的快乐、世俗的伴侣,完全失去兴趣,因而能够远离它们。”(詹姆斯,2012,第216页)















1.  感觉过着一种更为广阔的生活,超越尘世微末的私利,……

2.  感觉理想力量与我们自己的生活是连续的,……

3.  极度的兴奋与自由,好象约束自我的界限熔化了。

4.  有关非我的要求,情绪中心转向慈爱与和谐,……(詹姆斯,2012,第267~268页)









第二个故事是说,独立战争结束后,1783年,有一批青年军官因军晌未兑现而企图发动兵变,推翻大陆议会。华盛顿知道此事,就到军营中去说服他们放弃哗变。军官们听从了华盛顿的劝告。从此美国就形成了一个重要传统,即军队要在文官政体的控制之下(themilitary serves under civilian control)。就在同一年年底,居功至伟的华盛顿就将军队的指挥权交回大陆议会,从而创造了一个宪政先例,即美国军队从属于文官政权(America’smilitary is subordinate to civilian authority)。不能不说,这是宪政制度的最重要原则。因为掌握了军队,就掌握了实际使用公共暴力的权力,一旦为一已之私而利用,无人能挡,宪政结构也就毫无保障。

不能不说,华盛顿的行为对美国宪政制度做出了关键性的贡献。因为“一个在华盛顿位置上的得胜将军满可以借此攫取权力,但华盛顿回到了他的私人生活中。”(A triumphant general in Washington’s position might have tried to seize power, but Washington returned to private life.)(美国国家历史博物馆)是什么力量让他放弃了在经济人看来的一个巨大诱惑?显然,是他内心的自律的道德力量。那么,这一道德力量是从哪来的呢?




























Bowles,2004, Samuel, and Gintis, Herbert, The evolution of strong reciprocity: cooperation inheterogeneous populations, Theoretical Population Biology 65.1(February 2004). 中译文载汪丁丁等主编,2005,《走向统一的社会科学:来自桑塔费学派的看法》,上海世纪出版集团。










盛 洪





在公安部该《规定》中,提出它的新规定的理由是,“改革开放40年来,全国共有1.3万余名公安民警因公牺牲”。如果他们是为了维护公民宪法权利而牺牲,我们应该为他们哀悼,但这不意味着应该由此得出,如果损害了公民的权益,“民警个人不承担法律责任”的结论来。因为这只是单方面的统计数字。在这些年,又有多少公民因警察的原因而命丧黄泉呢?由传媒披露的重大恶性案件就有,2001年福建福州市数名警察设局杀人案,2004年河南周口市6警察杀人案,2009年云南蒙自县警察杀人案, 2010年贵州关岭县的警察枪杀两人的案件,2010年内蒙古太仆寺警察枪杀三人案,2012年在辽宁盘锦市发生的警察枪击案,2013年广西平南县发生的警察枪杀孕妇案,2013年贵州安顺警察杀人案,2015年内蒙古公安厅长杀人案,2017年湖南新化县的警察开枪杀人案,等等。最令人震惊的还是雷洋案,一个从洗脚店经过的人竟遭不测,而没有一个警察为此负法律责任。

而其中的一些警察杀人行为,是以“依法履职”为名义的。如雷洋案是因“抓嫖娼”,盘锦警察杀人案是为了强拆,所依是领导之“法”。还有更大范围的警察侵害公民宪法权利的事件,是在所谓“依法”的名义下进行,如薄熙来主政时期的重庆,在“打黑”的名义下滥抓无辜,被抓捕的多达4000多人。重庆警方在非法设立的“打黑基地”中滥施酷刑,包括“老虎凳”,“打表”,“鸭儿浮水”,“苏秦背剑”等,还有精神折磨,如所谓“政治归零”,“经济归零”和“情感归零”等。很多人不经法律正当程序而被判处死刑,有13人被执行死刑。而当一些地方政府及其官员强征农民土地时,警察经常被用来压制失地农民,造成大量人员伤亡的恶性事件,如盘锦征地警察杀人案。我们曾根据传媒报道,做过一个不完全统计,2003 年到2014年8月间共有182件强拆恶性事件,共造成强拆双方的人员伤亡484人,死亡人数162人,受伤人数322人。而没有被报道的恶性事件就更多。







如果这个《规定》落地,对公民宪法权利的侵害行为将会数倍、数十倍于现在。对于执政党和政府来讲,这也是极为负面的。因为警察之位虽低,他们的行为和态度却代表政府的形象。一旦政府告诉警察可以损害民众的“合法权益”而不承担责任,他们会因连他们自己都觉得过于宽纵的这种姑息而蔑视政府,遑论公民权利,可能会主动侵害民众而惹出事端。伊拉斯谟曾说,“即使是最强大的君主,也不能承担激怒或藐视哪怕最卑贱敌人的代价。”执政党如果设想用这样的方法来“维稳”,可能会适得其反,进一步动摇执政党的政治合法性。所以执政党和我们的社会还是要及时纠正这一错误的《规定》。由于它存在着严重违反《宪法》精神的内容,我建议国务院可以根据《立法法》第96条 判定该《规定》“超越权限”和“下位法违反上位法规定”;根据97条规定的“国务院有权改变或者撤销不适当的部门规章”,撤销该《规定》。人大常委会也可进行合宪性审查,以违宪为由撤销该《规定》。

















How to Reverse the Economic Downturn? / Sheng Hong


How to Reverse the Economic Downturn?

Sheng Hong

It seems that there is no objection to whether the Chinese economy is seriously declining. What is the economic growth in 2018? There are still many judgments. For example, the National Bureau of Statistics says it is 6.5%, Xiang Songzuo said that the estimate of an institution is 1.67%.The “Keqiang index” I calculated (Note 1) is 3.6%; and after correcting the power generation of an important component of the “Keqiang Index” (Note 2), the “Keqiang Index” is about -1%. .The task now is to reverse the economic downturn. The policy for the right medicine should obviously be based on correct diagnosis. I have always stressed that because China’s urbanization process has not been completed, because China has a “major country effect” in international trade, we still have 15 to 20 years of rapid economic growth. These two advantages have always been the basis for our economic growth, bringing about an annual growth of 5 to 6%.Since there is such a growth base, why is China’s economy going down in 2018?

In my opinion, there are mainly four factors. The first is that the tax burden is too heavy, the second is the unfriendly to private enterprises, the third is the anti-urbanization policy (such as limiting the size of the city), and the fourth is the violation and restriction of the network economy. For the first point, I have discussed in detail in the article “The government share is expanding, the profit margin will be exhausted”. On the second point, I also discussed in the article “How to let private entrepreneurs believe in the government”; on the reverse urbanization policy, I also discussed in the article “The livelihood of the ordinary people, the foundation of big countries”; regarding the restrictions on the network economy, I discussed the positive impact of the new economy in the article “Two Kinds of Economy in China”. I will write an article devoted to the negative impact of limiting the new economy. In addition, there are two very important factors, one is the problem of state-owned enterprises, and the other is the issue of land system. The solution of these two problems will bring about a growth rate of more than one percentage point of GDP, but these two are long-term unresolved issues, not the main reason for the economic downturn in 2018.

It is clear what kind of policy should be adopted for these four major issues. In view of the problem of excessive tax burden, large-scale tax reduction is required. For the problem of private enterprises, it is necessary to improve the judicial system so that it can truly protect the legitimate rights of private enterprises. Regarding to anti-urbanization, it should stop restricting the size of the city, this is a policy that directly offsets the positive impact of the urbanization process; let the city open to all, and adopt other specific methods to solve the problem of insufficient single resources in the city. As to the limits to new economy, it should be realized that the property rights formed by the network economy are also property rights. It is also necessary for it to obtain protection as property rights do, and to protect the network market as well as protecting the physical market.

However, not all economists now agree with these four points, and the resulting policy recommendations are very different. There are two very different views on the excessive tax burden. One is to acknowledge that it is heavier than the Laffer Curve’s best tax rate, but it is not a big problem, not the main reason for the recession. The result of heavy tax burden is only to make the income of enterprises and residents less, which leads to weak consumption, but this can be compensated or replaced by expansionary macro policies. The other, my opinion, is that the tax burden is too heavy, not only above the optimal tax rate, but also to the point where companies can no longer survive. That is, companies have no profit margins. These two different views on tax burden have also led to different judgments on the nature of the economic downturn. The view that tax burden is not the main reason for the economic downturn argues that this economic downturn is similar to a cyclical recession, so it can be mitigated and hedged by counter-cyclical macroeconomic policy. The view that tax burden squeezes out profit margins argues that enterprises will shut down or evacuated in a short period of time, leading to an avalanche-type economic downturn, rather than a cyclical problem, so tax cuts must be taken. See the figure below for specific logic.

Figure 1 Schematic diagram of the tax rate affecting the economy


Description: This picture is only a schematic diagram. The horizontal axis represents time and the unit can be 1 year. Assume that over time, the tax rate is gradually increasing (measured by the right-hand coordinates). For a long time, although the government’s income is increasing, the income of enterprises and residents is decreasing, but it does not affect the total social income. But after a certain high tax rate (16% here), the company began to shut down or evacuate, and showed acceleration, while the total social income fell like an avalanche.

In the absence of profit margins, if only adopting an expansionary macro policy, adding a counter-cyclical demand increase based on the total demand determined by the market will only partially increase the company’s orders, but due to the high tax rate, there is still no profit margin. If an enterprise increases the output of one unit, it can only increase one unit of loss. The enterprise still has no incentive to expand production, and it cannot boost the economy from a macro level. Because the expansionary macro policy has not changed the distribution structure between the government and the corporate residents, the enterprise is still in a situation where there is no money to make. Others would say that the new demand from expansionary macroeconomic policies will reduce equipment idle rates and thus reduce average fix costs. In fact, since macroeconomic policy is only a countercyclical policy and is only adopted during a recession, the demand growth brought by this policy will not bring more demand than normal, and it will only reduce the equipment idle rate of the enterprise to normal status. The chart below shows the situation of the capital “deserved income” (no risk interest rate + reasonable risk premium) of private manufacturing listed companies. The chart shows that since 2012, the income of the capital of these enterprises has not cover the loss, and the length of time is close to a medium cycle. The loss that we see in the sense of capital “deserved income” is the loss under normal conditions, so expansionary macroeconomic policies cannot fundamentally change the company’s loss expectations.

Figure 2  The part of the private equity manufacturing listed company’s return on net assets minus the “deserved income” from 2009 to 2016

deserved income

Explanation: This picture is a picture I used in my article, “Government’s share expanding, profit margin will be exhausted”. This is the net return on equity of privately companies in manufacturing minus the risk-free rate, minus the reasonable risk premium. The implication is that when this number is negative, the return on net assets is already lower than the reasonable return of capital. It should be noted that this data have been negative for many years since 2012. If the economy declines severely in 2018, it may be a larger negative number. From 2012 to 2016, we should also regard it as “normal years”, so the expansionary macro policy can only pull the situation of the enterprise back to the “normal year” and cannot eliminate their losses.

A more detailed analysis is that the expansionary macro policy will increase the supplementary demand when the demand shrinks, and mitigate the impact of the recession, but only reduce the fixed cost allocation, but cannot fully offset the fixed cost (depreciation + capital cost + management fee) ) the apportionment. Because as mentioned above, capital has no reasonable return. At this time, although the company can regard the fixed cost already invested as the sunk cost, do not care, as long as the current price can make up for the variable expenses, it can continue production. But entrepreneurs will not make new investments because capital is unprofitable. This macroscopically shows that expansionary macroeconomic policies can stimulate short-term production growth, but cannot stimulate long-term production capacity increase, which cannot fundamentally solve the economic downturn. What’s more, according to the theory of rational expectations, macroeconomic policies can only be “unexpected” and only work if the enterprises and residents cannot foresee. If the government claims to adopt an expanded macro policy in advance, the enterprise will not be bewildered by additional demand, and rashly take the decision to increase production capacity and investment, but raise prices. As a result, the economy has not grown, and prices have gone up. This is stagflation.

Regarding the expansionary macro policy, when the economy is seriously declining, macro monetary policy will not actually have much effect. Because the money supply depends on the base currency and currency turnover rate. The central bank can only affect the issuance of the base currency, and the speed of currency turnover depends on the efficiency of the market system and people’s expectations. When people are generally pessimistic, the currency turnover rate will slow down, thus offsetting the effect of the central bank’s expansion policy. What’s more, when the market system is weakened, the currency turnover rate will also slowdown. In addition to this, it is the macro fiscal policy. We know that this is even more problematic. The first is that adopting an expansionary fiscal policy requires more financial resources, which greatly reduces the incentives for tax cuts. Second, as we saw in 2008, the expansionary fiscal policy only emphasizes Increase demand without paying attention to the investment of financial resources and related efficiency. On the one hand, financial resources will rely on the channels of state-owned enterprises, while the efficiency of state-owned enterprises is relatively low; on the other hand, in the context of government decision-making and emergency response, financial resources are more likely to invest in the wrong direction or industry, resulting in further distortion of production structure.

Some people will say that didn’t the “four trillion” expansionary fiscal policy in 2008 avoid China’s economic recession?Why can’t it be done now? If “four trillion” still has the right place, then the timing is right. .Because it is only based on general budgetary expenditures, China’s macro tax rate is 6.2 percentage points lower in 2008 than it is now.(In this paper, the “macro tax rate” includes general budgetary expenditures, government fund expenditures, state-owned enterprise opportunity income, and social security. Here, we assume that the proportion of latter three parts in GDP is not changed, and treat the changes in general fiscal budget expenditures as Changes in macro tax rates.) Going back 10 years, the macro tax rate from 1999 to 2006 is 5 to 7 percentage points lower than the macro tax rate from 2009 to 2016.See Figure 3.Therefore, at that time, the capital gains of manufacturing enterprises were still above the “deserved income”, capital was profitable, and enterprises were willing to expand production and investment.

Figure 3 General Budgetary Expenditure/GDP from 1999 to 2006 and 2009~2016


Note:Going back 10 years, the company has additional profit margin   which amounts to between the above two lines, about 5~7%.In this picture, I put the general budgetary expenditure/GDP from 1999 to 2006 in the same period as the general budgetary expenditure/GDP from 2009 to 2016. We can visually see the gap in the macro tax rate over the past 10 years.

Under such a tax rate, the company’s capital “deserved income” is met. Most of the data in Figure 4 is the same as Figure 2, except that the tax rate 10 years ago was adopted .Therefore, the adoption of expansionary macroeconomic policies 10 years ago not only increased orders, but also increased profits, and also prompted enterprises to increase investment and production capacity, thus enabling China to avoid the economic recession in the context of the global economic crisis. However, today, when the macro tax rate is 5-7 percentage points higher than 10 years ago, the so-called “four trillion” policy will no longer have the original effect. We can also consider the data in Figures 2 and 4 as the basis for calculations when entrepreneurs make decisions, and they calculate the expected return on their investment by the average. The actual income is fluctuating around the expected value. When the expected value is lower than the capital “deserved income” (Figure 2), they will not invest.

Figure 4 The portion of the private manufacturing listed company’s return on net assets from 2009 to 2016 calculated according to the macro tax rate from 1999 to 2006 is higher than the “deserved income”

deserved income2

Note: All the data in this figure are the same as in Figure 2, except correcting them by the difference between the existing macro tax rate and the macro tax rate 10 years ago.

Of course, many people have pointed out that the “four trillion” policy still has many drawbacks. Most people regard expansionary policies as demand policies. There has never been an isolated demand side policy or a supply side policy. The expansionary fiscal policy is mainly achieved by increasing government expenditures, including public works expenditures, and increasing the investment of state-owned enterprises. Therefore, the first is the impact on supply. Focusing on the stimulus to demand, because of the classic metaphor of Keynes’s “pit-digging and filling”, people generally don’t care what the government or state-owned companies are spending. In the implementation of expansionary fiscal policy, the government and state-owned enterprises are less concerned about whether the investment projects are economically reasonable, and they do not care whether they make money, so it is obviously much less efficient than the market-determined investment, resulting in resource misplacement. .Once the direction and industry were misdirected, it was difficult for the government and state-owned enterprises to withdraw easily. This caused a serious imbalance in the supply structure and the so-called “overcapacity.” This is not only a domestic economic issue today, but even an international economic issue. Obviously, adopting an expansionary fiscal policy will not only cannot solve the supply structure problem, but will worsen it.

Another view is to reduce taxes while adopting an expansionary fiscal policy. The problem is that tax cuts require a reduction in fiscal revenues, while expansionary fiscal policies require increased government spending; this will increase the fiscal deficit. This in itself will contain the tax cuts, making the tax cuts less than they should be. Even if the deficit is increased and the large-scale tax cuts and expansionary fiscal policies are implemented at the same time, the large deficit itself will bring new problems, which will not only offset the benefits of the two measures, but also bring about other damages. For example, there are two ways to hedge a deficit. One is borrowing, and the other is issuing money. For the government to borrow, there is a “Ricardo equivalent” proof that borrowing is only a delayed tax, and its effect is equivalent to taxation. Buchanan admits that there is still a difference between “taxation” and “deferred taxation”. This is because modern people borrow money and let it is returned by future generations, which will give people a “financial illusion” and think that public goods are cheaper. But the result is that the government will be levied more taxes. What’s more, the government’s increase in borrowing has squeezed the resources of the money market, which has led to an increase in interest rates, which has led to an increase in the financial costs of enterprises. Therefore, borrowing debt to expand fiscal policy will eventually offset the benefits of tax cuts.

The so-called “increasing currency” is the issuance of the base currency above the reasonable rate of money growth, and the result is inflation. As mentioned earlier, in the early stages of the recession, due to widespread pessimism, the base currency issued could not effectively increase the money supply. This has been proved by the facts of our country in 2018.From 2018 to the present, the central bank has reduced the deposit reserve ratio four times. By the end of the year, the loan balance increased by 13.5% from the end of the previous year, an increase of 2.6 trillion yuan over the previous year, but the money supply (m1) increased only 0.005% by the end of November. On this basis, the continued issuance of currency will not have a significant effect in the short term. But these additional currencies will lurk, and jump out when the economy turns around and the currency turnover speeds up, bringing inflation. The depreciation of the currency brought about by inflation is equivalent to imposing an inflation tax on businesses and residents. Nominal income appears to have increased, but production costs and consumer goods prices have increased year-on-year and will be completely offset. Since there is a time lag between the issuance of money and inflation, since the issued currency flows from the government to the society through state-owned enterprises, the government and state-owned enterprises will eat most of the inflation tax, and the private enterprises will increase the tax burden. .So choosing an inflation policy does not make a company enjoy a lower tax burden.

The most important issue of the expansionary macro policy is that it is only a countercyclical policy. What we are facing now is not a cyclical recession, that is, the adjustment caused by some investment mistakes brought about by the economic upswing, but a big problem that most companies have no profit margins. Therefore, our current task is not to counter-cyclical, but to curb the economic collapse. If we can’t prescribe the right medicine, we can’t stop the economy from continuing to decline. And as mentioned above, it may bring stagflation, further worsen the macroeconomic situation, and then when we want to go back and implement tax cuts, it has delayed the timing and will have to pay a higher price if it is to be corrected. Because it is followed by a crisis in the financial market due to problems in the real economy, leading to the break of the creditor’s debt chain, and the rapid contraction of the money supply, which in turn will hurt the real economy, and the real estate market will also have a crisis, leading to a rapid economic contraction. Finally, it is the employment problem. In the past, China has to provide 10 million new jobs every year. If the economy is seriously declining, the employment problem is a very serious problem. And these problems have begun to appear now. Therefore, policy choices should not allow to be wrong.

Therefore, only large-scale tax cuts can really reverse the economic downturn. The so-called large-scale, I have proposed that the value-added tax should be reduced by more than 3 percentage points, and the corporate income tax should be reduced by more than 5 percentage points; overall, the macro tax rate should be reduced by more than 4 percentage points. This is equivalent to 4 trillion yuan. It can’t be called “mass tax cuts” if it is reduced by several hundred billion yuan. The core role of large-scale tax cuts is to give enterprises and residents a clear profit margin by giving a strong signal, so that they have incentive to invest. This is an action to expand long-term effective production capacity. Tax cuts themselves will increase the current income of enterprises and residents by changing the distribution ratio, thereby increasing the current total demand, but the greater demand brought by tax cuts is actually the investment demand brought by the optimistic expectations of such enterprises, and the recovery from the market transactions and the increase in revenue generated from the market. This kind of income is the healthiest, most mainstream, largest, and most market-dependent income, because it shows that the company’s products are marketable products that meet the real needs of the market. It is a reward for making the right decisions about production and investment.

As mentioned earlier, tax cuts, although referred to as “supply policies”, actually bring about an increase in the total health demand. Say said that “supply itself brings demand”, and Steven Cheung goes further and says “people supply for their demand” , this relies on an effective and mature market. Only when the transaction is voluntary, the price signals formed by many transactions are not distorted, enterprises and residents make production and consumption decisions based on price signals, and supply will directly become income, and income will directly become demand. Therefore, as a supply policy, tax reduction requires simultaneous market-oriented reforms and reduced government intervention. Another self-evident consequence of tax cuts is the need to streamline government institutions. The main reason why China is currently weakening the market system, distorting the price signal, and intervening in the behavior of market entities is that the government departments are too large. If we streamline 90% of the administrative permissions, streamline those government departments that have a negative effect on the market, and streamline the overly bloated administrative agencies, we can greatly reduce intervention to market, and threats to and violations of corporate property rights. At the same time, solve the problem of being unfriendly to private enterprises.

Tax cuts will not bring about fiscal deficits caused by expansionary policies, inflation, and crowding out money resources, so it is a policy with little side effects, health and cleanliness. It will also significantly speed up the economy, so the tax cut is lower than the tax-rate cut (ie, lower than the aforementioned 4 trillion yuan).It has only one weakness, that is, the government administration may not like it. Because tax cuts are a reduction in the amount of resources that government administrations may control, this is at least intuitively detrimental to these sectors. The expansionary fiscal policy requires increasing the resources that the government’s administrative departments must control, and at the same time increasing their power and interests. As a result, expansionary fiscal policy is more likely to be a substitute for tax cuts for macro decision makers. But the hope that the expansionary macro policy works will only be a desire. What is actually going to happen is likely to be as described in this article, which will quickly lead to a deterioration of the situation. Only those who have a vision beyond the immediate interests of the executive branch, and who have the mind and foresight, can take drastic tax cuts. At the end of last year, the Politburo of the Communist Party of China proposed to “reducing taxes and reducing fees on a larger scale.” We will see what “larger scale” means.


Note 1: The three components of the “Keqiang Index” in this paper are: by November 2018, the growth rate of cargo turnover (3.4%, weight 25%), the growth rate of money supply (m1) (0.005%, Weight 35%), power generation growth rate (6.9%, weight 40%).

Note 2: This is a correction based on data provided by my authoritative friend. The corrected power generation growth rate is -4.7%.


January 5, 2019 in Fivewoods house

Published on January 22, 2019 firstly in FT Chinese and China-review Weekly

Trade and Civilization/Sheng Hong


Trade and civilization

Speech at the “2018 Good Book Awards Ceremony” on January 9, 2019

Sheng Hong

Trade and civilization, these two themes are very important. We are now in the context of trade war. The US trade negotiating delegation has just arrived in Beijing recently. Everyone is concerned about whether we can reach an agreement that both parties are satisfied with.

Why is “civilization” very important? Because human civilization is hard to come by. As we all know, humans evolved from chimpanzees, and we have very cruel genes. After tens of thousands of years, especially in recent thousands of years, human beings have gradually developed a culture to overcome the cruel genes similar to chimpanzees in our human beings. When one person has another conflict of interest with another, we often Will tend to use violence.

But civilization is not like this. About 20 years ago, I wrote an article called “What is Civilization?” I made a definition of “civilization” at the time: civilization is a peaceful way to resolve the conflicts between people we used to solve by force. I think this is a very important change, although this sentence is very simple.

In the early days of mankind, the human violent death rate was about 15%, which is very high; after entering civilized society, it dropped to 3% to 5%; to this day, human violent death rate is relatively low, at 1 %the following. Why? It is humanity who has discovered some rules of civilization.

One of the most important rules of civilization is transaction, which is trade. So what is trade? Trade is not to fight for wealth with others through violence, but through peaceful means. In a violent way, on the one hand, it is a zero-sum game. The result of this game does not increase the wealth of whole society. On the other hand, some of them suffer losses or even lose their lives. But the trade is very great. The great thing about trade is that the two sides of the trade negotiate peacefully in a peaceful manner and finally reach a satisfactory result. Its follow-up results are more than that, because the achievement of this transaction will make people beyond a fauna and bring about a wider relationship between people, which forms a division of labor between human societies. Today is the global division of labor – this is not a division of labor for a small group, it is a global division of labor.

Today, we don’t know where the clothes or other products we wear made from; or one other person on the other side of the earth may have something to do with us, but we don’t know. But everyone knows that a chimpanzee and other chimpanzees do not have a relationship beyond a natural group. So this is a very, very big difference.

As a result, trade has brought about the growth of human wealth. This kind of growth is through the division of labor, through specialization, through the cooperation between people to promote technological innovation, institutional innovation, and the emergence of huge wealth. Trade is actually a basic civilized rule. Because of this rule, human beings have come to this day, and they will not use the cruel means of the past to achieve their goals because they want to have more wealth, but they can completely adopt peaceful means. In this sense, trade is a very important rule of civilization.

The history of mankind, these thousands of years, especially in recent centuries, due to the development of trade, the globalization of trade, the growing wealth of human beings, our lives are getting better and better, and we live happier than before. This is a very important aspect.

Therefore, we cherish this rule very much. This rule is the market rule that both China and the United States emphasize. It is the equal negotiation between people, the voluntary achievement of the transaction, and the last faithful performance of the contract. This kind of rule has almost become the golden rule, and it has been summarized by economics textbooks.

Economists are convinced of this: as long as people are free, then equal negotiations between people, and voluntary transactions, we will have a better result, we will also get more wealth in peace.

But it should be said that this rule is not perfect. Everyone needs to know that when economics discusses free trade, it actually makes a lot of assumptions. One hypothesis is that there is basically no big difference between people, and there is not much difference between countries; the second assumption is that free trade must include other conditions. For example, there must be free flow of capital and free movement of the population. Free trade can achieve the desired results only if you have these three freedoms at the same time. But in fact, in the real world, these assumptions do not necessarily exist at the same time. Economics assumes that when people and people trade, people are basically the same; but in reality, people and people still have differences – people have different resources in terms of resource endowment, strength and so on. To give the simplest example: men and women are different.

Later, economic liberals also noticed this: if we simply talk about economic liberalism and simply assume that everyone is equal, that is not enough – if we only assume this, then we only have to do one thing. It is enough to strive for the best interests of yourself. But many people find that this is not the case. There is a school in economics called the Santa Fe School, which has done a computer simulation of human society: If this society is the kind of “economic man” that economics assumes, then it will eventually collapse. Therefore, they found a problem: this society also needs a class of people who not only proceed from their own interests, but also from the perspective of the whole society, from the perspective of maintaining the civilized rules of the whole society when the rules are violated. You need to stand up and defend this rule, and you will not hesitate to sacrifice your personal interests.

The Santa Fe School manages this kind of person as a “strong reciprocator”. In fact, this is the elite of society. The reason why any society is condensed into society and formed into a structure is related to the social elite. A society must have such people: on the one hand, as an “economic man”, and strive to fight for their own interests; on the other hand, they must stand up and work hard for this society, and strive to maintain the civilized rules that make this society more affluent. .At the same time, there is another characteristic. He is not necessarily an “economic man”. He may have to restrain himself. This is very important.

Hu Shi has a very good sentence: “Afraid of his wife is a man’s civilization symbol.” Why? I have said that men and women are different. Men have an advantage over women in violent resources. But if he does not restrain himself, he may often beat his wife. This is not the rules of civilization that enable a family to exist, a marriage to exist, or a society to exist, so he must restrain himself, so “afraid wife” is the symbol of men’s civilization.

Teacher Mao Yushi is an economist and later he founded the Humanities Economics Association. This is very strange to everyone. Later, I carefully observed his transformation. I found a problem: Teacher Mao was originally an engineer. His mathematics, physics, chemistry are better. He can enter economics from a mathematical point of view, but then he went to the Humanities Economics. Why? Because he found a problem – the same as the one I just discovered: if you assume that each number is followed by a unit without a soul, then as a mathematical economist, you may be heading towards a constructivist Direction, then you really don’t understand this society. This made him understand that there are many different people in this society. These different people are not equal as economics assumes.

After discovering this, Teacher Mao said a very important statement: “Liberalism is a kind of personal cultivation, and it is self-discipline that does not interfere with others’ freedom.” That is to say, liberalism is self-disciplined, then this It is a moral cultivation. Just as Hu Shi said just now, “Afraid of Wife” is the same reason – “Afraid of Wife” is the self-discipline of men. So, I said this is the second rule of civilization. The second rule of civilization, I have a summary: “The true meaning of civilization is not the superiority of the technology as a production tool, but the moral power that does not abuse people’s advantages when they have the advantages of resources, of technology, and of institutions.” This second rule of civilization really makes our society and our world move toward civilization.

Putting this topic a little further is between countries. People are not the same, so countries are even more different. In economics, there are many dogmas about free trade, but there are actually big problems. One dogma is that equalization of factor income can be achieved through free trade; in other words, as long as we pass free trade, we can make the wages of all countries equal and the people of all countries have the same income level. This sentence should be wrong. Why? Just said, because international trade is different from domestic trade. International trade has borders between countries. There is an obstacle to the border between countries, which cannot be overcome: people cannot flow freely and cannot immigrant freely. The market economy within a country is effective because it is free to immigrate at home.

We can recall the situation in China: Why has China changed so dramatically in 40 years, but there is no regional contradiction? Because if there is a rich place, people from other places can go there to work. We have experienced a very significant urbanization these years. What is “urbanization”? It is the moving of people in low-income places toward places with high incomes. If China is divided into two parts, one is the west and the other is the east, then we will find that the border between the east and the west will be like the US and Mexico borders. This kind of national border restrictions on free immigration makes free trade impossible to achieve the results of the joys of all peoples.

This conclusion is also emphasized by another economist, Krugman. He is the winner of the 2008 Nobel Prize in Economics and his contribution is the “New Trade Theory.” He has a very simple theory: “If two countries are big and small, and other conditions are the same, then the big country will have an advantage in free trade.” Of course, there is a very complicated theory behind this theory. I only want to say that the big congress has a larger market, and the larger market will have more demand, and then it will bring larger enterprises, larger industries, will bring about a kind of “scale economy”, which will bring about the decline of average cost, which will bring advantages in the international market competition.

From this theory, the world has large and small, all kinds of countries. According to this theory, the competitiveness of different countries will certainly not be the same. What’s more, there are other differences between countries and countries, some are more developed, some are not developed enough, and so on.

Therefore, in this sense, when we talk about free trade, we must pay attention to it. Until today, the world has not reached what economists call “the result of ideal free trade” because there are many specific situations. Therefore, free trade will lead to some countries gain more income, some countries may get less income, and there will be no results to make everybody’s happy. We should pay special attention to this.

However, it should be said that human beings have been developing for thousands of years. The pattern of international trade that we have seen today is actually not seen in history. It can be found that there are many times historically, for unbalance of trade, that people use national power, use violence and force, and even create war between nations, .As long as we look back over the past few hundred years, we can see that many wars are caused by trade, because they compete for trade monopolies, compete for control over trade routes, or trade imbalances. For example, China’s past Silk Road is a very wealthy road, but it is often robbed by robbers, so this road needs to be protected. Then this road may also be placed under the control of certain military groups, which are all to compete with each other.

In the West in modern times, many wars have also started because of trade. The hegemony of Western countries such as Spain, the Netherlands and the United Kingdom at sea is actually the control of trade monopoly  and trade routes. Between the East and the West, the use of state power to influence trade, and even the war between East and West countries, are actually related to trade imbalances.

The Chinese are very smart and have a long tradition of doing business. Our very early ancestor was called “Yin Shang”. At that time, the people of the time called “Businessman”, the word was passed down. Why are they called “businessmen” because they do trade, we actually have a very long history of trade. China is very special in history and is indeed the “biggest country” with a vast territory. In the historical development process of Zhou, Han, Tang and Song, it became a place where production was relatively leading and the country was relatively rich. So in the 16th to 18th centuries, China’s trade has actually been in surplus. At the time, there were no products in the West that could rival large-volume products such as silk, tea, and porcelain. It was not available before the Industrial Revolution. So from the 16th to the 18th century, China had always had a very large trade surplus. The main product that the West could trade with China at the time was silver. This is because the Europeans discovered the Americas and developed silver in the Americas. At that time, about half of silver in the international trade went to China.

However, in the era of precious metals, this situation has brought a lot of negative impacts on other countries, because the trade deficit has brought about currency outflows and deflation, which has limited economic development. For example, the United Kingdom, because the United Kingdom does not have silver, at most relying on pirate ships to grab the silver of Spanish merchant ships, but they found something – opium. Everyone knows about the Opium War. The British say this is a trade war. In this sense, it is also true. Because opium has caused the UK to reverse the trade deficit, China’s surplus has turned. In short, there have been many wars in history due to trade.

In this sense, we look back, human beings have been going to the 20th century, and today’s WTO system is indeed more civilized than before. We must cherish such a civilized system.

There is a special phenomenon in the history of trade. Some countries with relatively advanced, rich, or large-scal, may at some time, for some reason, use the domestic market as a market for other emerging countries. These countries, including China and India in the 18th and 19th centuries, were like this, and their markets nurtured the industrial countries of the time. Of course, it is only a kind of nurturing under the conditions of violent means to lower tariffs.

Of course, this matter is not good for China. On the other hand, it is unfavorable for a country to have too much deficit of trade. Such a country not only loses the development of many enterprises, but also loses its currency. As I said earlier, in the past international trade, precious metals as a currency, if it flowed out of China, then China reduced the money supply – an important point of economic development is the increase in money supply – if the precious metals flow out, then the country It is going to fall into deflation. This is also a contradiction.

So how to solve this problem? In the 20th century, it should be said that there is still a solution, that is, the American approach. The US approach is very interesting. The United States is in this era. This era is no longer the era of precious metals as a currency, so it uses paper money to pay for the trade deficit. Everyone knows that the modern currency has finally become a banknote. This banknote is of course issued by the central bank. It controls the interest rate and controls the quantity issued to ensure the stability of the currency value. This is exactly the same as the precious metal, just because it brings you some kind of trust. But at the same time, this is also very good – in this way, the country can withstand more trade deficits. Everyone needs to know that the United States has been a trade deficit since the 1960s, and it has been more than half a century. It should be said that this on one hand has provided a market for China’s rise, and on the other hand has not caused the US economy to decline. So, in this sense, it should be said that this is a very good model. But this model still has problems: the Sino-US trade war we see today is such a problem.

We humans must continue to move toward civilization, how to solve the problems in international trade – that is, such an uneven international trade, the advantages and disadvantages of different countries in international trade, it need indeed  these new rising countries think about. One of the important points is the second rule of civilization that I just emphasized – you can’t just decide your behavior with your own interests, you must jump out of the unilateral interests, and you must consider issues from protecting the rules which make all human beings better, and from a global perspective. At this time, it is impossible to simply be as an “economic man” and only follow the current trade rules; but should become a very responsible country that advances the development of human civilization. If doing this, it will make a new contribution to human civilization.

(This article is the author’s speech on January 9th, 2019 in the “Economic Observer Report on the 2018 Good Book Awards”, which was edited by the author.)

The Nature, Performance, and Reform Of the State-owned Enterprises


The Nature, Performance, and Reform Of the State-owned Enterprises

Second Edition

By the Unirule Institute of Economics


The state-owned and state-holding industrial enterprises made a total profit of 12002.7 billion yuan from 2001 to 2013, with the total book profit of 2013 increased by 5.36 times over that of 2001. The total net profit amounted to 8608.6 billion yuan, with the total book net profit of 2013 increased by 6.12 times over that of 2001.

From 2001 to 2013, the average return on equity of state-owned and state-holding industrial enterprises was 9.08%, while that of industrial enterprises above designated size was 15.67%. 2013,that of the former is 8.73%, while that of the latter is 15.64%. Therefore, the nominal performance of state-owned and state-holding enterprises was not high enough.

Even the performance of state-owned enterprises is not their real performance, but one after enjoying various preferential policies and under such a management environment which is unfair to non-stated-owned enterprises. The unfairness is mainly embodied in fiscal subsidy by the government, financing cost, and land and resource rent, and so on.

If we compute the industrial land rent at 3% of the price of the industrial land, state-owned and state-holding industrial enterprises should pay a total rent of 6424.0 billion yuan from 2001 to 2013, accounting for 53.5% of the total nominal profits made by state-owned and state-holding enterprises. Only in 2013, the state-owned enterprises should pay 1240.9 billion yuan rent for the land if we add the land for commercial and service use into the whole amount.

The real interest rate for state-owned and state-holding enterprises is 1.6%, while that market interest rate is 4.68%. If we recount the interests which should paid by state-owned and state-holding industrial enterprises with the market interest rate, the total interest difference will be 5712.4 billion yuan from 2001 to 2013, accounting for 47.59% of the total nominal profits made by state-owned and state-holding enterprises.

The resource tax of oil is average only 26 yuan per ton. The resource compensation fee is merely 1% of sales revenue. Therefore, the real royalty of oil in China is less than 2% of its price, far below the ratio of 12.5% which is imposed on the capital venture in China. Even collection proportion for special oil gain levy below 40 dollars is too low to fully realize interests of resource owners. From 2001 to 2013, the state-owned and state-holding industrial enterprises lack to pay 560.3 billion yuan of the oil royalty. Together with those of coal and natural gas, the state-owned and state-holding industrial enterprises lack to pay 1113.8 billion yuan of royalty of resources..

From 1994 to 2006, the state fiscal subsidy for the losses of state-owned enterprises accumulated to 365.3 billion yuan. According to incomplete data, from 2007 to 2013, the state-owned and state-holding industrial enterprises received fiscal subsidy is about 274.1 billion yuan.

The real performance of state-owned enterprises can be estimated through deducting those costs without paid but should be paid and governmental subsidies, together achieving about 14975.4 billion yuans, from nominal profit of the state-owned enterprises. According to our estimation, the average real return on equity of state-owned and state-holding enterprises from 2001 to 2013 is-3.67%.

Real return of net assets

In 2013, the average staff wage of state-owned enterprises was 3% higher than that of other organizations, the average labor income of state-owned enterprises is 24% higher than that of private enterprises and 234% higher than that of non-state-owned enterprises. There is a big difference between the industries. 2008, the average income per year of employees in monopolistic industries reached 128.5 thousand yuan, which is about 7 times as that of the employees in the whole country. The ratio of the state-owned enterprises in 5 industries with highest income is highest, while that in 5 industries with lowest income is lowest.

According to regulations of existing housing provident fund system, the housing provident fund deposit ratio paid and deposited by staff themselves as well as that paid and deposited by units should be no less than 5% of the staff’s average monthly salary of the previous year, and no more than 12% in principle. A large number of state-owned enterprises and institutions of monopoly industries, however, raise this ratio to 20%. China Netcom Operations Limited once accrued 4.142 billion yuan at total amount as lump-sum cash housing allowance. State-owned enterprises also conduct residential building construction with raised funds on gratis land from free allocation by the state. In addition, some enterprises purchase commercial residential buildings and sell them to their own staff and workers at low price.

From 2007 to 2009, the average tax burden of 992 state-owned enterprises was 10%, while that of private enterprises was as high as 24%.

State-owned enterprises did not turn over any profits from 1994 to 2007. In 2009, only 6% of state-owned enterprises’ profits were turned over, and the rest was all distributed within enterprises. In 2010, it decreases to 2.2%, and then increases to 5.36 in 2013. Moreover, dividend turnover by central enterprises mainly transfers within the central enterprise system. Their significance in benefiting the common people has not been embodied yet.

Structural “Guo Jin Min Tui” phenomenon currently exists in our country. In terms of capital, the proportion of state-owned enterprises in electric power, steam, and hot water production and supply industries rose from 85.8% in 2005 to 90.3% in 2012. In terms of gross industrial output value, the proportion of state-owned enterprises in electric power, steam, and hot water production and supply industries increased from 89.3% in 2005 to 93% in 2008. The proportion of state-owned enterprises in oil and gas industry increased from 90.5% in 2005 to 98.9% in 2006, it decreases to 92.1% in 2011.

The quantitive analysis with the term, market power, on the monopolistic levels of industries shows that colored metal smelting and pressing industry, tobacco industry, oil processing industry, coking industry, nuclear fuel industry, and electric machinery industry, and so on, the monopolistic level in 2007 is higher than that in 2002. These industries are overlapped very much with those with higher ratio of the state-owned enterprises.

A resume survey of officials of ministries and commissions under the State Council shows that among 183 officials above vice ministerial level of 19 ministries and commissions, 56 people have working experiences in state-owned enterprises, the proportion for which is as high as 30.6%. In addition, a resume survey of senior executives of 123 central enterprises shows that 115 senior administrators of 47 enterprises with information disclosure have government working background, that is, each enterprise has an average of 2.45 people with such background. Therefore, identity exchange exists between management staff of state-owned enterprises and government officials.

Enterprise senior executives enter the government for policies and resources, while governmental officials enter enterprises to materialize their economic profits earned while in the position.

Administrative departments have rights to formulate regulations on the implementation of laws, instruction opinions, and departmental regulations, i.e. In other words, administrative legislation exists. Enterprise management needs to lobby the administrative departments instead of the legislature. In other words, there are “lobbying within the house.”

State-owned enterprises should have a rather clear boundary that they are suitable for production of public goods and quasi public goods in which market mechanism could not be brought into full play. Products which are purchased solely by governments or which should be stringently controlled during production progress should be supplied by state-owned enterprises, while other products should be supplied by private economy. The condition for existence of state-owned enterprises is when they supply public goods and the financing stage and can not be separated from the production stage.

The state-owned enterprise is a public organization different from ordinary governments or enterprises, whose aim is to realize public good of society rather than to make profits.

The nature of China’s current state-owned enterprise reform is capitalization of state-owned assets, that is, making profits through management of state-owned assets. Therefore, the government gradually turns into personalized or institutionalized capital when state-owned assets constantly show the attributes of capital.

As the main content of China’s market-oriented reform, the reform orientation choice of state-owned assets capitalization had both logical inevitability and historical progressiveness especially at the primary stage of China’s economic transition. However, with the establishment of market economy in our country, the historical mission of state-owned enterprise reform characterized by state-owned assets capitalization is about to come to an end. 

We should design the short-term reform plan for state-owned enterprises based on two major objectives, namely, breaking the administrative monopoly by state-owned enterprises, and regulating state-owned enterprises’ behaviors. The significance lies in that this will promote different economic main bodies to carry out adequate and fair economic competition, thus better realizing social justice and improving economic efficiency.

State-owned enterprise reform has two ultimate goals. The first goal is to change state-owned enterprises into non-profit public law enterprises, and the second one is to build up the constitutional governance framework for state-owned assets.

To realize the ultimate goal of reform, state-owned enterprises have to gradually retreat from the profit-making fields (rather than merely the competitive fields).





盛 洪










A Theoretical Analysis, Performance Evaluation, And Reform Solution on Health Care System in China


A Theoretical Analysis, Performance Evaluation,
And Reform Solution on Health Care System in China


Research Team of Unirule Institute of Economics


● The market for healthcare features uncertainty, lack of price elasticity, and information asymmetric, besides other market characteristics.

● The purpose of medical insurance is to eradicate uncertainty and bring about the utility of certainty by transforming the uncertainty of personal medical affairs into predictable risks through integration and professionalization.

● People tend to “buy more” and “buy the expensive” as insurances lower the part of the medical expenses borne by the individuals, which in effect pushes up the prices of health care, and the demand for medical services and goods. The overall effect is an increase of health care expenditure.

● Insurances pushes up 89% of the prices of China’s medical services and goods, leading to an over-expenditure of 16% of all the medical services and goods by consumers, which further increases the healthcare expenditure per capita to 119% of that without these insurances .

● Even though insurances bring about an increase of welfare by 2.25% of the GDP, compared to the loss caused by it, a net loss of some 0.46% of the GDP, that is some RMB264 billion, is caused by insurances.

● By 2013, a total of some RMB45.7 billion has been wasted by the public healthcare system.

● The managerial cost of healthcare institutions, i.e., expenditure by healthcare administrations and cost of managing the healthcare insurances, skyrocketed year on year, and reached RMB 43.7 billion in 2014.

● Per capita medical expenses are rising, from 4.03% in 2008 to 5.22% in 2015. In 2015, the national total health expenditure accounted for 6.05% of GDP.

● Therefore, it is not enough to criticize only the use of healthcare insurances. See below:

Weighing the Gains and Losses of Insurance. Unit: Percentage of GDP per capita(%)


● Quality medical resources concentrate disproportionately in big cities and big hospitals, which causes insensible spatial allocation causing an overly high time cost and other indirect medical cost. In 2013, if we put together the overspent cost and time for local and cross-region healthcare services and goods, it equaled to a total waste of resources that priced some RMB445.2 billion a year.
● The growth of labor costs for doctors is lower than that of the per capita GDP. The proportion of labor costs for doctors in per capita GDP fell from 11.7% in 2002 to 3.3% in 2015.
● In an aggregate sense, the demand for healthcare increased 40 times from 1980 to 2014, while the number of licensed doctors only increased 1.51 times. Demand surpassed supply by a large margin.

● Average healthcare resources are distributed in a balanced manner across regions. It coincides with the resource allocation planning approach based on population taken by the Chinese government.

● Quality healthcare resources are distributed in a very imbalanced term with more resources concentrated in administrative centre. And this situation is exacerbating.

● Beijing is the “utmost unfair benefactor” of this distributional system of healthcare finance, while the “unfair victims” include provinces such as Henan, Anhui, Hebei, Hunan, Jiangxi, Guizhou and Shandong.

● The unfairness index of the financial distribution system in the healthcare system is 0.344. According to our evaluation standard, this score is interpreted as intermediate.

● Civil servants are the “utmost unfair benefactor” in the current healthcare financial distribution system, while the “unfair victims” include farmers, urban residents, and urban workers.

● This research proposes the basic principles for institutional healthcare reform is taking the market institution as the basis, and government regulations as complement.

1. To increase the self-pay ratio and its scope, to enlarge the function of the market;
2. To facilitate the market competition for healthcare;
3. To let the market make the price for healthcare services under the market mechanism;
4. To let the price of medicines fluctuate when the market makes prices for healthcare services;
5. To abandon compulsory social insurance and rely more on commercial insurance institutions;
6. The government should subsidize the medicine fees for the poorest people.

● The main measures proposed by this research include:

1. Canceling the insurance covering out-patient medical services: the fee inflicted by out-patient medical treatment can be paid either by the patients or by the individual account;
2. Canceling the threshold for insurance coverage and raise the self-pay ratio for in-patients to 70%;
3. Setting up a national severe disease charity fund to subsidize those whose self-pay portion exceeds their yearly income’s 40%.

● Estimated according to the model in this research, setting 2014 as the baseline, the proposal of this research should be able to hold back a 75% increase of the price, which would save RMB 1,294.7 billion, 2% of the GDP.

● It would hold back some 13.2% of healthcare overuse, which would save up to RMB 217.8 billion, about 0.34% of the GDP.

● Some RMB1,12.1 per person would be saved for healthcare, about 2.37% of GDP per capita, which rounds up to some RMB1,237.6 billion nationwide.

● Those whose self-pay proportion exceeds their yearly income’s 40% constitute about 2.25% of the total population. If a severe disease fund is set up with a scale of about RMB 200 billion, it will be only about 0.3% of the GDP.

● If the monopoly is eliminated and competition is promoted, then everyone would be able to save about RMB 7.3 for healthcare, a total RMB10 billion nationwide.

● Healthcare resources will be better allocated in space. If the distance and waiting time for medical treatment is shortened by half, that is the 4 hours needed for local treatment is shortened to 2 hours, then a total value of time amounting to about RMB 266.2billion will be saved; if the distance and waiting time for cross region treatment is shortened from 12.5 days to 6days and 6 hours, when a total value of time amounting to about RMB 29 billion will be saved. Putting them together, a total waste of time estimated for the value of RMB 295.2 billion will be avoided.

● Canceling out-patient (small illness) insurance would reduce 2/3 of the current insurance-related managerial operations, saving a total of RMB16.9 billion according to the current administrative fees of insurance agencies that is RMB 25.4 billion.

● When the increase of healthcare expenditures is contained, a huge amount of resources are saved, which will bring back the advantages of insurances. See blow.

Situation after the Reform Unit: Percentage of GDP per capita(%)


● In summary, this reform proposal will reduce per capita medical expenses from 5.08% to 2.71% of the per capita GDP, a decrease of 46.7%.

● This reform proposal will also reduce the per capita medical expenses originally covered by insurance from 3.1% to 1% of the per capita GDP, a decrease of 68.5%.

● If it is shown by the deduction of healthcare insurance fees for urban workers, the deduction from their monthly wage will be decreased from 9.5% to 3% of their monthly wage, which would also lower the burden for enterprises.

● Even though the self-pay fees account for a higher ratio than before, as the healthcare expenditure decreased in general, patients pay 86.2% of that they paid for their medical treatments before the reform.