On the Song of Beating Soil when Yao Visited to Kang Village / Sheng Hong

To Kang village Yao visited,
For farmers he was too good to be recognized;
They still sang the song of beating soil,
the emperor's force we don't feel.


Song of Beating Soil: Work while sunrise. Sleep while sunset. Dig a well for drink. Farm for eat. Is there Emperor’s force to me?

Note: English is not my mother language. As a practice, this poem is translated from my poem in Chinese: 尧访康庄之《击坑壤歌》。 I hope the experts who master both English and Chinese to offer me some suggestions.

Visit of Musuem of Jin / Sheng Hong

In Xiao mountain Strong Qin feard,
Around palace wall the branched families of King's Family dead;
Poorly Jin State was busy for 600 years,
Wasn't what it did for the three families who made the Jin divided?

Note: English is not my mother language. As a practice, this poem is translated from my poem in Chinese: 观晋博。 I hope the experts who master both English and Chinese to offer me some suggestions.

A Theory of Partial Property Rights and the Illusion of State-Owned Enterprises / Sheng Hong

Abstract: State -Owned Enterprises (SOEs)do not pay profits and rents, they pay much less interest than other types of enterprises, and they have monopolistic power, but they are not subject to restrictions on labor (including management) income, which seems very attractive. Because this very substantial benefit is not transferred to certain individuals, there is competition for this benefit. However, the competition for senior manager positions attracts individuals whose probability of being convicted of a crime is 94 times higher than that of executives of private enterprises; thus, it seems that the position of senior manager in an SOE with very substantial benefits is actually risky, and the expected benefits are much smaller than the intuitive benefits and are not worth fighting for. Once the illusion of SOEs is punctured, SOE leaders with higher education and long-term vision may become the driving force of SOE reform.

1、 Question raised

In the 40 years of China’s reform and opening-up, SOEs have played an important role. In the early stage of the reform, in which SOEs dominated, the reform of SOEs was related to social stability and the rate of economic growth. However, from the late-1980s to the 1990s, under competition from township enterprises, private enterprises and foreign-funded enterprises, SOEs faced a dilemma. Given that SOEs still bore the heavy responsibility of employment and economic development and lacked exit mechanisms, an important task at that time was that “SOEs extricate themselves from difficulties”. Finally, at the end of the 1990s and the beginning of the 21st century, a way out of the difficulties was discovered, which was to use nonmarket forces.

Of course, nonmarket forces are mainly government forces. In China, executives of SOEs and officials of administrative departments belong to the category of government officials, and their status are interchangeable. Thus, they are members of the same interest group. Today’s top executive of a central enterprise may become the vice governor of some province tomorrow. Likewise, administrative officials in charge of SOEs can become senior managers of SOEs one day. However, in China, the formulation of important economic policies and the granting of monopoly power are usually decided by the relevant administrative officials without the approval of the legislature. In the absence of constraints, administrative officials will make policy decisions that are beneficial to themselves but not to society. Although it is not convenient for them to use their power to directly act in their own interests, they can create a kind of “collective welfare” with their power, and each official is a member of the collective. “Making effort for collective welfare” is a virtue in the circle of officials and executives. A person is a hero if he or she strives for more benefits for the group. Therefore, administrative officials use their power to seek welfare for SOEs and thus indirectly pursue their own welfare, which is a behavior that is somewhat concealed.

Their efforts were “successful.” In December 1993, the State Council issued the “Decision on the implementation of the tax-sharing financial management system”, which proposed that “as a transitional measure,” most of the old state-wholly owned enterprises registered before 1993 did not need to hand over their after-tax profits in the near future according to specific conditions. It was not until December 2007 that the Ministry of Finance and the State-owned Assets Supervision and Administration Commission (SASAC) jointly issued the Interim Measures for the Collection and Management of State-owned Capital Gains of Central Enterprises, which stipulate that the SOEs of the central government should turn over their profits pursuant to a three-tier system, with a maximum of 10% and a minimum of zero. In fact, the profits turned over by SOEs are returned to the SOEs in their entirety in the form of investments or subsidies. For example, from 2008 to 2019, SOEs handed over profits of 2248.9 billion yuan, while the investments in or other subsidies to SOEs totaled approximately 1842.1 billion yuan. The difference is 406.8 billion yuan, which is equivalent to 2% of the total net profit of 20584 billion yuan in the same period; this result is not different from what the result would have been if no profit had been handed over. This means that, as a whole, SOEs do not pay in their profits.

Almost all the SOEs established in the period of planned economy use land allocated by the planned authority without charge. Since the reform and opening-up, the land institutions of SOEs have not been marketized, that is, they are still owned and used by the SOEs and can even be rented to obtain rental income. Only when SOEs enter into joint ventures with other enterprises do state-owned lands need to be priced as part of the SOEs’ assets. When SOEs are listed, state-owned lands are priced and become the assets of the listed companies. However, state-owned land is often regarded as a kind of land use right and is evaluated as zero due to the uncertainty of its duration. Another exception is that listed companies can rent land from their state-owned parent companies and pay rent, which is generally much lower than the market rent rate. On the whole, the land rent paid by state-owned listed companies stays within the SOEs. According to our estimation, in 2013, the allocated land occupied by state-owned industrial enterprises totaled approximately 26091 square kilometers, and the corresponding unpaid land rent was 547.9 billion yuan (Unirule Institute of Economics, 2015). Therefore, it can also be said that SOEs do not pay land rent.

As the banking industry is monopolized by SOEs and SOE groups have strong political power, the loans of state-owned banks are mainly to SOEs. According to the relevant statistics, in 2018, the loan balance of SOEs accounted for 85.08% of the total state-owned bank loan balance (Wind Information, quoted from Lujiazui Financial Port, 2018). Since the interest rate of state-owned banks has been the regulated interest rate for a long time, the interest rate difference between deposits and loans is relatively fixed, to the benefit of state-owned banks; the interest rate difference is 1-1.5 percentage points higher than that in market economy countries, that is, 50-100% higher. On the other hand, to take care of the interests of SOEs as borrowers, the deposit interest rate is lowered, which causes huge losses for depositors. Due to the large scale of SOEs, they are in an advantageous position in financial transactions with other enterprises. They often postpone payments to suppliers or ask buyers to pay in advance, so there is a large amount of commercial financing. According to Liu Xiaoxuan and Zhou Xiaoyan (2011), from 2000 to 2007, SOEs were only required to pay 1.6% of the financing rate, while the market interest rate was approximately 4.68%, or 2.92 times greater than the SOE financing interest rate. In other words, SOEs only paid financing costs at 34% of the average market interest rate.

In the banking, oil, telecommunications, railway, power and salt industries, SOEs have monopolistic powers. Most of these monopolistic powers are not granted by the legislature but established by an administrative document of the executive organ. In many cases, the implementation of monopolies depends on the control of price and the entry of government departments. Therefore, monopoly and government regulations are mutually coordinated. In the field of oil products, for example, the National Development Commission sets prices. According to our estimation, in 2013, the pretax price of China’s oil products was 16.7% higher than the average price of oil products in major countries; thus, monopoly enterprises gained monopoly profits of 301.5 billion yuan. Another example is banking. Based on the 50% difference between the normal interest rate and the monopoly regulated interest rate, the monopoly income in 2013 was approximately 483.5 billion yuan. When the losses that we can estimate from the monopolies of the banking, oil, telecommunications, railway and salt industries in 2013 are added up, they total approximately 2273.4 billion yuan (Unirule Institute of Economics, 2015b), or 4.8% of the total operating income of SOEs in that year, which was higher than the SOEs’total profits of 19000 billion yuan in that year. It can be said that SOEs can obtain monopolistic power to increase their income by an amount equivalent to at least 4.8% of their operating income, or 21.8% of the added value of the manufacturing industry calculated by 22% of the added value ratio of the manufacturing industry.

Of course, SOEs still have the advantage of low-cost access to natural resource exploitation rights, they often receive government subsidies even if they make book profits, and they pay enterprise income tax at a rate of approximately 10%, which is significantly lower than the statutory rate of 25%. To simplify the discussion, we will ignore these policies that favor SOEs.

Conversely, the “Opinions on deepening the reform of personnel, labor and distribution systems within SOEs,” issued by the State Economic and Trade Commission in 2001, provides that “under the state’s macrocontrol, the wage level of enterprise staff and workers shall be determined by the enterprise on the basis of the local social average wage and enterprise economic benefits.” The basic meaning of this provision is that the income of the labor force, especially the managerial employees, of SOEs is actually unlimited. Since 2015, the central government has imposed restrictions on the salaries of senior managers of central enterprises, and the upper limit is not more than 8 times the average income; however, this relative proportion restriction can be avoided by raising the salary of management through an increase in the average income and can also be bypassed in the form of nonwage benefits or even noncurrency benefits. Managers can also enjoy benefits through on-the-job consumption and consume rent by reducing their efforts. In short, there is still no real restriction on the income of labor forces.

Thus, we have provided a rough description of SOEs. In summary, an enterprise may not pay land rent or its net profit, may only pay 34% of the market interest rate, and may obtain monopoly income equivalent to 21.8% of the added value, while the income of the enterprise’s labor force is not limited. The problem is, if there is such an enterprise, how will people behave? This is a question of institutional economics. The purpose of this paper is to analyze such an enterprise using the method of institutional economics, verify whether the result is correct, and roughly estimate the kind of behavior this enterprise will lead to and its impact on China’s reform and opening-up and political and social trends.

2. Theory of partial property rights

Imagine an enterprise in a pure market where the prices of its various factors are determined by the market and paid to the factor owners. Now suppose that there is a government that regulates the price of one of the factors; for example, the government sets the rent rate of land as two-thirds of the original rate. This is exactly what Professor Steven Cheung discussed in his book, The Theory of Share Tenancy, that is, the rent reduction of the “three seven five” in Taiwan, through which the land rent rate was reduced from 56.8% to 37.5% (2000, P. 88).

One question is who will obtain the reduced rent. Steven Cheung discussed two situations. The first situation is that a landowner’s land is vacant, and anyone can compete to rent the land to obtain the additional benefits brought about by the rent reduction. In other words, the reduced rent does not belong exclusively to a particular person. In this scenario, to obtain an additional 1/3 of the land rent above the original labor income, more tenants compete to rent the land, and the landowner is willing to increase the number of tenants because of the lack of 1/3 of the land rent. This changes the original optimal allocation of land and labor formed under the market by increasing the amount of labor under the condition of an unchanged amount of land. In this case, the total output will increase, but the marginal productivity of the labor will decrease. On the whole, it will cause a loss of resource allocation. This efficiency loss is equivalent to reduced rent. In other words, the benefits that rent reduction seems to bring to tenant farmers are all dissipated in the competition for rent because rent is not an exclusive interest.

In the second situation, the reduced rent is clearly and exclusively transferred to a specific individual. For example, a landlord clearly transfers this part of the rent to Peter. Regarding this scenario, Steven Cheung stated that if “the portion of rent were assigned exclusively to an individual tenant (tenants), say, through the issuance of stocks against the market value of the given land, joint ownership of the land would be established. With the entire return to the ownership right assigned to private parties, each joint owner would thereby be granted authority to make decisions concerning his share of the resource. “(2000, P. 116) The result is just like a transfer of property rights, which does not weaken the property-rights institution. “Therefore, the use of resources after rent reduction is exactly the same as that before rent reduction.” In other words, the efficiency of the allocation of resources will not be reduced after the transfer of land to specific individuals.

The distinction made by Steven Cheung is actually based on the theory of property rights. In his opinion, if a rent reduction regulated by the government is not transferred to specific individuals, then the interests represented by that part of the rent have no property owner. In this situation, people’s behavior is similar to the competition for ownerless resources, and the rent value of the resources ultimately will be dissipated. If the rent reduction is clearly transferred to specific individuals, then the interests represented by that part of the rent are subject to a clear, exclusive property right, and people will act as they would in a situation with clear property rights. That is, the issue of rent reduction is a property rights issue. However, in this situation, if the income from the property rights is restricted and there is no exclusive right to the restricted income, there will be no rights to a certain proportion of the original property rights. In other words, this is a “partial property rights issue”. According to Steven Cheung, “[a]ttenuating the right to derive income from resource use on a percentage basis will produce the same effects as attenuating the exclusive right to use the resource. “(2000, P. 115)

In another article, “The Structure of a Contract and the Theory of a Non-Exclusive Resource”, Professor Steven Cheung argued that if a bounded resource does not have exclusive property rights, people will freely enter into the market to compete for the rent value until the rent value dissipates to zero (Steven Cheung, 1970). See the figure below.

Figure 1 Process of rent dissipation

Note: Suppose there is a bounded fishing ground where Q/L and ( Q/ L) are the average and marginal income curves, respectively, and W is the market wage rate. When the fishing ground is exclusively owned by one person, the optimal amount of labor input by the fisherperson (α) is L1, which is determined by the point where his or her marginal income curve ( Q/ L) α) is equal to the wage rate (W); the maximum rent obtained is ABCD. However, if the fishery does not have exclusive property rights, anyone can enter freely. When the second fisherperson (β) enters freely, he or she will reduce the rent value of the first fisherperson, and the latter will reduce his or her input. The joint input of the two people is L2, and the rent value of the two people is AEFG, which equals half of the rent for each person. The total rent value and average rent value are significantly lower than those values when there is one person. When the third person, the fourth person, etc. enter, the total rent value and average rent value will gradually decrease until they are completely dissipated (Steven Cheung, 1970).

Obviously, rent reduction can be generalized. “Rent reduction” can be broadly understood as a restriction on the income of resources. Resources can include capital, land, money, natural resources and even labor. The restriction can range from 1% to 100%. Based on this definition, we can analyze all similar phenomena. That is, when a government controls the price of resources formed by a market, a similar phenomenon will appear. For example, in the regulation of the income of capital, the reduced part of the income is equivalent to the restriction of the property rights of the original owner. As the limited part increases gradually from 1% to 100%, the original owner’s property rights gradually decrease proportionally until the property rights are completely lost.

However, whether the reduced part of the rate of return on resources is transferred unexclusively to uncertain competitors or to certain individuals exclusively affects the result of the restriction. These are two extremes. The outcome in the former situation is equivalent to the resources being without property rights; people will rush in for free use, and the resource rent will soon be dissipated. The outcome in the latter situation is equivalent to the resources being subject clear property rights; people will use the resources as if the resources are subject to normal property rights and thus will not cause rent dissipation. Between these extremes, there is a broad, continuous spectrum. People will try to establish a certain degree of exclusiveness to occupy and retain the rent created by the government regulation, thus producing a variety of complex behaviors and consequences. In the extreme situation in which many competitors compete for ownerless resources, the result is that the difference between the regulated price and the market price is completely dissipated; in the extreme situation of the exclusive transfer of the price reduction to specific individuals, there is no efficiency loss. In the situations between the two extremes, part of the rent will dissipate, and some will be retained through various ways or means.

Steven Cheung cited such an example. The British Hong Kong government once regulated the rent of residential buildings to 1/10 of its original value. Steven Cheung predicted that the depressed 9/10 rent value would dissipate but later found that the rent value was still 3/4 of its original value. After investigation, it was found that the owners sublet or built wooden houses on rooftop to retain part of the rent (2000, F25 ~ 28). I call these two ways “neighboring contracts”. That is, besides the object range of the government’s price control, part of the rent was retained by forming a contract. For example, subletting means that a house owner rents the house to a secondary house owner according to the price regulated by the government, and the secondary house owner divides the house into several smaller units for rent, which are not subject to government price control. There is competition between secondary house owners, so they will transfer part of the rent left over to the original house owner in other ways. For example, the original house owner can charge higher fees for furniture in the rental rooms. A wooden rooftop house is a kind of wooden house built on a roof; these houses are not regulated, so they can compensate for the rent loss of the house owner.

In an article entitled “A General Theory of Rent-seeking”, I divided the methods of retaining rent into two general categories. One category is called the “contract mode”; that is, under the premise of price control, two parties agree to retain the rent. Of course, since the price regulations do not allow this kind of situation, it is not protected by law. In addition to the abovementioned subleases and wooden rooftop houses, there are also things such as selling food coupons during the planned economy period, sending red envelopes to doctors, patients in remote areas going to large cities with extensive medical resources, administering college entrance examinations to immigrants, cooperating with monopolistic enterprises, and providing retail or services for monopolistic enterprises. The other category is called the “government mode”, which uses government power to gain certain exclusive power in the competition for rent value; this rent value may be dissipated due to regulation, such that some rent value is retained. For example, officials put their children in famous schools by paying “management fees” or bribing officials and thus obtain part of the rent value by entering the areas controlled by the government (Sheng Hong, 2016).

In fact, there is a wide range between the two extremes, with or without property rights over the regulated part, allowing people to use various means to retain the rent values to be dissipated, which leads to tortuous and complex individual situations. In turn, these complex stories can be logically linked together to provide a powerful explanation. Of course, this includes SOEs.

3. Analysis of SOEs under the theory of partial property rights

According to the logic in the previous section, we will summarize SOEs again. At present, China’s SOEs are described as follows:

1. For the capital factor, the regulated price is zero; that is, the price is reduced by 100%;

2. For land resources, the regulated price is zero; that is, the price is reduced by 100%;

3. For monetary resources, the regulated price is 34%; that is, the price is reduced by 66%;

4. Through monopolization, SOEs increase the price of their products by 4.8%, which is equivalent to 21.8% of the added value;

5. There is no limit on the price of labor (including management).

Professor Steven Cheung’s theory of price control and theory of partial property rights can be applied to this type of enterprise. In other words, what is the result if the prices of capital, land and money are regulated but the price of labor is not regulated?

We first assume that controlling the price of the nonlabor factors is equivalent to increasing the income of the labor factor. Without any barriers to entry, and with free competition of labor, what will happen? According to Steven Cheung’s theory, the extra benefits will be dissipated by the competition.

According to our estimation of the industrial added value of SOEs from 2001 to 2013 (Unirule Institute of Economics, 2015), we convert the income of various factors and the monopoly income into the share of industrial added value, but the income share of the labor factor is the surplus after deducting the income share of all of the other factors. Assuming that the share of income distribution is determined by marginal productivity, then the share of labor may be negative, as shown in the figure below.

Figure 2 The share of labor income after deducting the share of income of various factors and the monopoly income in the added value

Considering the current situation of SOEs, in which the industrial added value remains unchanged, if the shares of business profit (i.e., capital return) and land rent are reduced to zero, the interest is reduced to 34% (that is, 5.2 percentage points), and the monopoly income is reduced to zero, then the share of labor income will increase by 61.2 percentage points to 53.9%. See the figure below. The 61.2 percentage-point-profit is the rent generated by the system of SOEs, so it can be called “SOE rent”.

Figure 3 The share of labor income after reducing the shares of capital, land and monopoly income to zero and the share of monetary income to 34%

We construct a production function of SOEs according to the Cobb-Douglas production function:


We take the total assets of SOEs in 2018 as the base of the fixed amount of capital investment (k) in the above production function. Labor input (L) is a variable.

If SOEs openly recruit according to market rules, people will flood in; “SOE rent” is similar to ownerless property, dissipating in competition, as shown in the figure below.

Figure 4 Schematic diagram of the labor force freely entering state-owned enterprises

Note: The horizontal axis represents the number of workers, and the unit is one million people; the vertical axis represents marginal income or marginal cost, and the unit is 1 trillion yuan. In the absence of these restrictions on the price of nonlabor factors, that is, no “SOE rent”, the number of workers is approximately A; when there is “SOE rent”, if people can freely enter the SOE, the number can be as high as B. In that case, the marginal productivity of labor is reduced by C multiplied by B-A, which is approximately C (B-A). These values have been completely dissipated.

However, SOEs have less open recruitment, so the above assumption does not appear. Therefore, do SOEs have exclusive access to the benefits from the regulation of the prices of capital, land and other factors, as Professor Steven Cheung said? If so, the efficiency of resource allocation will not be reduced.

We find that SOEs are not enterprises into which the labor force can freely enter, nor are they composed of individuals who hold clear exclusive rights; they are in a certain intermediate state. Theoretically, SOEs are enterprises owned by a state, so no one has exclusive property rights. Employees, especially managers, of SOEs are labor factors employed by property owners. None of them will stay permanently in the SOEs. In particular, managers are more mobile. Similarly, SOEs are not allowed to be entered at will, and managers also have a certain term of office, during which they can actually determine the distribution share of income. Therefore, an SOE’s existing employees and managers can obtain part of the “SOE rent”.

Thus, the actual SOEs in the study demonstrate an intermediate state. First, there is a certain degree of redundancy, but it does not affect the amount of the labor force that should be free to enter, such as in the case of B mentioned above. Accordingly, the rent brought about by the price control of the nonlabor factors does not completely dissipate in the competition but is partially retained. This part is approximately equal to the amount by which the average income of employees in SOEs is higher than that in other enterprises. For example, according to our estimation, in 2013, the average income level of employees in SOEs was 330% higher than that of employees in non-SOEs (Unirule Institute of Economics, 2015). In an ideal labor market, the average income of employees in SOEs should be equal to that of employees in other enterprises.

In summary, China’s SOEs are enterprises that can be 100% free of capital costs, be 100% free of land rent, pay only 34% of monetary costs, and obtain a monopoly price 4.8% higher than the market competition price. Such an enterprise has a large “SOE rent” and attracts a large number of people to enter. However, in the existing system, it is impossible to enter completely freely. Therefore, these SOEs are in the intermediate state identified by Professor Steven Cheung. The controlled parts of the factor prices are not subject to ownership, but the competition for them is restricted. As a result, part of the rent created by the regulations is dissipated, and the rest remains and is occupied by the current SOE management and employees, making their average income level significantly higher than that of the average income in other enterprises.

4. Seeking and limiting of “SOE rent”

Since this kind of enterprise has so many advantages, it is natural for people to flock to it. However, newcomers cause the “SOE rent” originally enjoyed by the existing employees or management to be divided, so the existing personnel do not want people to flood into the SOEs without limit. Therefore, SOE employment and personnel systems are formed in the fight between these two forces. On the one hand, the issue of redundant staff in SOEs is serious; the number of technical and managerial-level staff in SOEs obviously exceeds a reasonable number of employees in those positions. On the other hand, the existing management and staff in SOEs resist the employment of a large number of external people.

For the issue of redundant staff, we compared Sinopec with Shell Company, two companies with similar sales volumes. The former has 9.6 times more employees than the latter (Unirule Institute of Economics, 2013). If Shell’s staff size is appropriate, Sinopec’s redundancy is approximately 90%.

In contrast, SOEs consciously control their numbers of employees. For example, the total assets of nonfinancial SOEs was 116.2 trillion yuan in 2014 (Li Yang, 2015) and 210.4 trillion yuan in 2018 (State Council, 2019), which equals an increase of 81%, while the number of employees in nonfinancial SOEs decreased from 45.81 million in 2014 to 38.22 million in 2018, which equals a decrease of 19.8%. In other words, the number of employees per unit of assets decreased from 390 per billion yuan of assets to 180 per billion yuan of assets. This is remarkable.

Therefore, are there redundancies in SOEs or not? Specifically, in light of the very substantial benefits of exempting capital costs and land rent and paying only 34% of loan interest, the management of SOEs can adopt more complicated personnel systems. They should not only retain the very large rents but also let their relatives and friends enter the enterprises to share the benefits and ensure that the SOEs’ work is completed. The observations of some enterprises, such as PetroChina, show that there are three kinds of employment systems, namely, contract employment, market-oriented employment and labor dispatch. So-called contract employment refers to the employment of the original employees and important technical and management personnel of an enterprise, that is, the formal employees of the enterprise; contract employment is actually a special contract deviating from market pricing. So-called market-oriented employment refers to the recruitment of unemployed children and college graduates through talent centers. So-called labor dispatch workers are personnel exported to the oilfields through third-party labor service companies and are mainly recruited from the public. The wages of the latter two kinds of personnel are mainly determined by the market pricing of the labor force. In terms of personnel salary and income, contract employment ranks the highest, and the income in the market-oriented and labor dispatch systems is approximately 1/4 to 1/2 of the income in the contract employment system (Unirule Institute of Economics, 2013).

Although there are people who are employed based on power or relationships, due to the limitation of the number of regular employees, there is no excessive redundancy in the total number of employees. However, these people can actually use those who are employed in the market to perform practical work while enjoying the advantage of SOE rent. Their income includes not only wages and capital but also nonmonetary material income, such as low-cost housing and on-the-job consumption. We take market-oriented employment and labor dispatch as one kind of employment. We assume that the employees’ income is half that of regular employees, or only slightly higher than the market price of the labor force.

Figure 5 The number and income of regular employees and market-recruited employees under the two employment systems of SOEs

Note: In the figure, the marginal labor cost of SOEs refers to the marginal labor cost of people who have the status of formal employees of SOEs. It refers to the income level of SOEs; the marginal cost of labor in the market is the labor price in the market. The equilibrium number of formal employees in SOEs is at point A, where the marginal output of labor intersects the marginal cost of formal employees of SOEs. However, due to the existence of “SOE rent”, people can obtain more income at point A, so there will be a large number of people pouring in, which will make the equilibrium point move in the direction of B. However, the addition of employees will be resisted by the existing employees and will not exceed point B. The equilibrium point should be at point C, between A and B. While full-time employees enjoy the benefits of “SOE rent”, SOEs can also employ workers according to the labor market price. These people, called labor dispatch workers, will decide whether they enter the labor market according to the market price of labor and will not stop entering until equilibrium point D. They do not enjoy the benefit of “SOE rent.”

Therefore, to maintain the maximum interests of its regular employees, an enterprise should control the number of regular employees at point A in the figure above and enjoy the benefit of “SOE rent”, which is equivalent to the dark gray rectangle in Figure 5. However, such substantial interests will attract outsiders to enter. To enter, these outsiders must have the power to make the SOEs obey or have some relations; some people even pay to buy the right to enter an enterprise as regular employees. Therefore, employees in SOEs cannot be controlled within point A but will expand to point B. As the number of people increases, the per capita “SOE rent” will decrease, so within point B, there are two opposing forces. Suppose the final number of regular employees is at point C, between A and B. In this situation, due to the decline in marginal productivity, some “SOE rents” have been eaten up, and the remaining marginal “SOE rents” are reduced. The total amount is shown as the light gray rectangle.

In addition, on the basis of such substantial assets, new labor will bring positive marginal productivity to an SOE and increase the SOE’s total output. Therefore, enterprises will recruit employees at a slightly higher income level than the labor market price. However, these market-oriented employees cannot enjoy the income level of regular employees; that is, they cannot participate in the sharing of “SOE rent” and can only obtain a wage level approximately equal to their marginal productivity. In this case, the number of employees in SOEs can theoretically be increased to point D. Since SOEs generally control quantity even if they recruit in the market, the actual number of SOE employees may be lower than the above estimate. We already know that the number of employees in nonfinancial SOEs is approximately 38.22 million. However, we now know that dispatched workers are not included in the statistics of employees of SOEs. It is said that there are approximately 60 million dispatched workers. These dispatched workers are part of the employees of SOEs who cannot enjoy SOE rent. The two numbers add up to approximately 100 million people. Including these workers is equivalent to extending the number of personnel in SOEs to point D.

5、 The game of management

Among regular employees, there is also a group of people who are the largest beneficiaries of “SOE rent”. They are the managerial employees. They are at the top of the employee hierarchy in SOEs and determine their own income. Even when the central government limits the annual salary level of SOE executives, they can still obtain the benefits of “SOE rent” through nonmonetary income such as housing and on-the-job consumption.

Figure 6 Schematic diagram of SOE management obtaining “SOE rent”

The gray bar at the bottom of the above figure represents the SOE rent obtained by regular employees other than management; the gray box at the top left is the SOE rent obtained by management. Suppose there are 200000 people in management positions in SOEs, and they enjoy SOE rent of 500 billion yuan. This is a very substantial benefit, attracting thousands of people to come in and fight for it. A simple logic is that if you want to enter the management team of an SOE, you have to reduce the number of existing management personnel. There are two ways to achieve this: one way is to change the post in a normal manner, and the other way is to withdraw the existing management staff in an abnormal manner. At present, China’s SOEs have a normal system of turnover of senior managers, whose tenure is generally three years. This length seems to reflect the urgent mood of the people outside the SOEs who want to enter, and it is applied to the political process to form this shorter term. Of course, some executives can hold three consecutive terms in their SOEs. In any case, however, the three-year term gives outsiders a chance to enter. This leads to the frequent replacement of senior managers in SOEs, especially in central enterprises. For example, in 2018, at least 97 heads of central enterprises were transferred. However, there were only 96 central enterprises; thus, the average transfer rate was 100%.

Even so, the term seems too long. Another way to eliminate incumbents, the data suggest, is to impeach them on the basis of corruption or serious mistakes. There are two reasons why this elimination tactic may be successful. First, the executives of SOEs realize that the three-year term is too short, so they may take illegal actions to obtain benefits in addition to their legal income. According to an analysis by the China Entrepreneur Crime Prevention Research Center of Beijing Normal University, corruption crimes of SOEs, including bribery, corruption, misappropriation of public funds, private division of state-owned assets and duty encroachment, account for 81.3% of all kinds of crimes, while the proportion of such crimes committed by private enterprises is 30.7% (Hexun Mingjia, 2018); this difference obviously reflects the property rights characteristics of SOEs. That is, SOE executives will take all kinds of legal or illegal actions to obtain benefits for themselves in the case of the temporary exclusion of outsiders from the rich benefits of “SOE rent”. Because their terms are not long, they often look at the present, underestimate the negative consequences and engage in crime.

Second, their positions are coveted by powerful administrative officials, who use political means to influence the judiciary and frame SOE managers. They do this because SOEs are economic entities with “SOE rent”, and they are eager to squeeze in. There is a possibility that some people will take advantage of their public power to frame the current enterprise leaders in order to seize positions in SOEs with rich interests.

In any case, the result is that executives of SOEs are more likely to be convicted. Moreover, according to the above logic, the richer an enterprise is, the higher the probability of its senior executives being convicted; the higher the position of the executive, the more likely the executive is to fall. For example, because of monopolistic and other preferential policies, the oil industry has a high crime rate. For example, from 2014 to 2015, 12 senior executives of “three barrel oil” companies, including PetroChina, Sinopec and CNOOC, were convicted of crimes (Legal Evening News, 2015). Sinopec has had three consecutive general managers, Chen Tonghai, Wang Tianpu and Su Shulin, who have successively fallen out (Cheng Zhen, Lu Mengjun, Guo Chen, 2015). According to statistics on this issue, from the date of the 18th National Congress of the Communist Party of China to November 2015, a total of 171 senior executives of SOEs were convicted, including the following: 15 chief accountants and office directors, accounting for approximately 9% of the total number; 52 deputies and other team members, accounting for approximately 30%; and 104 presidents, general managers or party secretaries, accounting for 61% (Zhao Zhenyu, 2015). Obviously, the higher the position held by the employee, the higher the probability of being convicted.

Figure 7 Frequency of SOE executive convictions (from the date of the 18th CPC National Congress to November 2015)

According to the statistics of the China Judicial Document Network, from December 1, 2013, to November 30, 2018, 2337 entrepreneurs committed crimes, including 1569 private entrepreneurs and 768 SOE executives (Hexun Mingjia, 2018). In 2017, the number of SOEs was only 1946, while the number of non-SOEs was as high as 371054. Assuming that each enterprise had 10 executives, the probability of being convicted for SOE executives was 0.039, while that for private entrepreneurs was 0.0004. The crime rate of SOE executives was 94 times that of private entrepreneurs. Although the scale of SOEs is relatively large and the number of branches of an enterprise may be several times greater than that of private enterprises, the senior managers of SOEs are not only individuals but also have the characteristics of a “recessive family”. A person’s corruption or collapse often manifests as a “family case”, which involves a group of people. As mentioned above, the higher a person’s position is, the higher the person’s probability of being convicted. As shown in the table above, assuming that an SOE has 10 executives, the top 2 of which are leaders (the president, general manager or secretary of the Party committee), the probability of the top leaders being convicted is 623% greater than that of the other executives and 307% greater than that of the average-level employees.

In this situation, on the one hand, SOE executives should act cautiously; on the other hand, they should take measures to prevent being replaced or framed. There are generally two courses of action. One course is to strive for more political resources because the appointment and removal of SOE executives are not within the SOEs but within the political process. The senior managers of central enterprises are generally appointed and removed by the Organization Department of the CPC Central Committee, and the senior managers of local enterprises are appointed and removed by the organization department of local Party committees. The organization departments’ rules for appointment and removal are not the rules of the enterprise or the market but the political rules. Therefore, it is impossible for an executive of an SOE to believe that his efforts to do well in the enterprise and obtain more profits are the means to keep his position. SOE executives even engage in bribery for political resources or asylum. For example, in the case of Liu Zhijun, Ding Shumiao spent 44 million yuan to be the “rescuing person” for Liu Zhijun and 5 million yuan to serve Liu Zhijun as secretary of the provincial Party committee, and he arranged for a certain person to continue bribing relevant departments (Beijing Morning Post, 2013).

However, in addition to political efforts, the only way to hold a position is to make no or little profit for an enterprise. Only in this way will the enterprise look less attractive to outsiders. A common saying is “to be big and to fail”. It means that if you want an enterprise to look unprofitable and unattractive, you should borrow a large amount of money, raise the enterprise’s asset-liability ratio, and increase the enterprise’s financial risk. High debt will increase financial costs and squeeze out profits, and the projects being invested have risks, all of which will deter those who want to enter the enterprise, thus allowing the existing executives to keep their positions. The high asset-liability ratio of SOEs is confirmed by the data. According to the Ministry of Finance, by December 2018, after two years of “deleveraging”, the asset-liability ratio of SOEs was 64.7%, of which 67.7% was due to central enterprises. According to Gelonghui, at the end of February 2019, the asset-liability ratio of private enterprises was 58.2%. This ratio is significantly higher than the 51.5% asset-liability ratio of private enterprises at the end of 2016 (2019).

Due to excessive borrowing and underestimating the risk of investment, the assets of SOEs grow rapidly. For example, from 2014 to 2019, the average annual growth rate of state-owned assets was 15%, far faster than the growth rate of GDP in the same period and faster than the growth rate of the total assets of private enterprises. According to data from the Dacheng Enterprise Research Institute, from 2015 to 2018, SOE investment increased by 7.8% annually, while that of private enterprises only increased by 2.7% annually (2019). Moreover, the excessive investment of SOEs shows that the return on net assets of SOEs is lower than that of private enterprises even in nominal terms, and the expected return on investment for new projects is more likely to be lower for SOEs. These outcomes are reflected not only in domestic investment projects but also in foreign investment projects. Domestically, SOEs with monopoly power can obtain monopoly income, but in foreign countries, they do not have monopoly power. With the low efficiency of SOEs, their expected income will be lower. However, the foreign investment of SOEs exceeds that of private enterprises. In 2006, SOEs accounted for 81% of the total foreign investment, and they accounted for 51.3% in 2017. In the same period, their domestic investment accounted for less than 40%. In addition to the other reasons for corruption, SOEs are not concerned about high risks of investments.

The high asset-liability ratio of SOEs and the rapid growth of total assets generally prove the existence of the “to be big and to fail” strategy. However, judging from the fact that the crime rate of executives in SOEs is much higher than that of private entrepreneurs, it is not clear whether this strategy works.

6. The fate of state-owned enterprises

Through the above analysis, we find that “beautiful” SOEs are actually an illusion. On the one hand, SOEs do not pay profits, do not pay land rent, only pay 34% of interest, and have a monopoly interest equivalent to 21.8% of the added value, which increases the “SOE rent” accounting for 61.2% of the added value. On the other hand, the senior executives of SOEs have a three-year term limit, and their probability of being convicted of a crime is 94 times greater than that of private entrepreneurs. The two sides may be offset as  being negative.

Assuming that there are 20000 top executives in SOEs, each of them can share approximately 4 million yuan of “SOE rent” every year, and they share approximately 80 billion yuan in interest. Their opportunity cost, i.e., the income they will obtain as executives in private enterprises, was approximately 500000 yuan/year in 2018. The legal income of SOE executives is slightly higher than this amount. Assuming that the average tenure of these executives is five years, they will gain 20 million more yuan than a normal manager. However, once they are convicted, they will not only lose these benefits but also go to prison. Based on the existing sentences of SOE executives, the average sentence is one year for every 500000 yuan obtained illegally; the sentence for obtaining 20 million yuan illegally is 40 years. If we assume that the value of one year of imprisonment is -4 million yuan, then 40 years of imprisonment is valued at -160 million yuan. Regarding the head employees of SOEs, 12% have a probability of losing 160 million yuan of their income, and 88% have a probability of losing 20 million yuan; their expected return is -1.6 million yuan, which is a negative value. Obviously, it is not worth giving up a position in a private enterprise for such an “expected income”. In fact, this calculation is very conservative. Four million yuan a year is far from sufficient to compensate for the prison scenario. If a rational person makes such a calculation, he or she will not rush into an SOE.

However, this is not consistent with what we see. Most people still fly as moths to a fire, one after another into SOEs, and then to prison. Why? It is because people do not calculate rationally. Adam Smith once said that people’s self-love is usually manifested in “overweening conceit which the greater part of men have of their own abilities” and “absurd presumption in their own good fortune” (quoted from Coase, 1994, P. 111). Cognitive psychology tells us that people often make the psychological mistake of “ignoring the basic ratio”. That is, people only see the apparent frequency of occurrence, without considering the basic ratio of these phenomena. For example, a phenomenon that people see is that the frequency of accidents involving red cars is twice that of blue cars; then, without knowing that the number of red cars is twice that of blue cars, they conclude that red cars are more likely than blue cars to be in accidents. In the abovementioned investigative report on entrepreneurs’ crimes, 67.1% of those convicted were private entrepreneurs, while 32.9% were SOE executives. It seems that the latter are less likely to be convicted. However, if we know that the number of private enterprises is 191 times greater than that of SOEs, this view is totally wrong. In relevant psychological experiments, 45% of Harvard students made the mistake of “ignoring the basic ratio” (Eysenck and Keane, 2009, P. 578). If SOE executives assume that SOEs and private enterprises each account for half of the total number of enterprises, they will think that their probability of being convicted is only one-third of that of private entrepreneurs.

Adam Smith also said, “Avarice overrates the difference between poverty and riches; ambition, that between private and public station; vainglory, that between obscurity and extensive reputation. “(Quoted from Coase, 1994, p. 112) This sentence is suitable to describe the scramble for senior management positions in SOEs. These positions can not only bring more economic benefits but also allow service as a public servant belonging to the same group as senior government officials. With money and power, you can gain fame. For example, in recent years, some SOE executives have applied for academician positions in the Academy of Science or Engineering. However, the value of top management positions in SOEs may be greatly overestimated. If SOE executives gain power and reputation in addition to the 4 million yuan a year in rent and regard the value of their positions as 10 million yuan a year, even if there is a 12% probability of being convicted, the expected return will be 24.8 million yuan. In this way, people’s behavior is not likely to depend on rational calculation but is driven by their own psychological weakness, which leads to them making an incorrect estimate.

Furthermore, people’s calculations are limited by their vision of time. Short-sighted people often cannot see long-term results. There is always a first act of illegal gain, followed by the disclosure and punishment of the illegal behavior. Benefits and costs do not occur at the same time. Benefits come first, costs later. Short-sighted people are more likely to calculate only the benefits of taking advantage of SOEs and ignore the cost of being punished later. In my article “Vision and Calculation”, I pointed out that life is made up of a series of games. Big games include small games. When people enter into a game, they are temporarily limited by the boundaries and rules defined by the game. They generally do not consider the world outside the game. However, in fact, various factors in the outside world will affect the real cost-benefit ratio of the game’s results. For example, a person cheated in order to obtain high scores on an exam, but in the person’s actual work, the person was defeated. In other words, he won the small game and lost the big game (Sheng Hong, 2013). This is where many criminals, though “rational”, miscalculate. This is also where many people in the SOE-top-manager and administrative-official interest groups miscalculate. However, it is precisely because of this mistake of the majority that the illusion of SOEs is maintained.

More importantly, people often cannot see the institutional reason for this illusion. Due to the existence of a strong interest group of senior executives in SOEs and administrative officials, these individuals can often carry out their activities “in house” in the absence of institutional structure constraints on the actual “legislation” of the administrative departments; that is, within the administrative departments, they can directly formulate and issue preferential policies or grant monopoly powers in favor of SOEs. However, when they do so, they cannot transfer the benefits of the preferential policies and monopolies to one or more individuals among them. They can only assign the benefits to the SOEs under the label of “bigger and stronger” SOEs and act as the interest group members who are qualified to enter the SOEs as senior executives. This kind of practice creates the problem faced by all SOEs. That is, it constructs a situation described by Steven Cheung. The benefits of nonlabor factors that are controlled to lower prices are not transferred to certain individuals but to a group in which the members can compete with each other for these very substantial benefits. Thus, the members became competitors, or even enemies, with each other. The loss of the loser or the victim of the competition constitutes the negative benefit expectation of the whole group of SOE executives, and it is uncertain who the victim is, such that every senior manager who enters the SOE may lose more than he or she gains.

Specifically, in the stage of setting up rents, due to the lack of respect for and implementation of the legislative authority and due process stipulated in the Constitution and the legislative law, there was a habit in China that the administrative departments stipulated the matters that should have been stipulated by the Constitution or an administrative document. The administrative departments related to SOEs often issued administrative documents and provided preferential policies for SOEs, such as not requiring SOEs to pay profits, not limiting SOE salaries and bonuses, or granting monopolistic powers like those granted to PetroChina and Sinopec through “Document No. 38”. Those who transition from roles as executives in SOEs to roles as officials in administrative departments, as well as those who hope to cash in policy dividends from SOEs in the future, will promote institutions and policies in favor of SOEs. Potential SOE members believe that it is in their own interests to do so. Currently, it is impossible to transfer the rent part of interests to certain individuals because such transfers are a naked abuse of public power and constitute corruption. However, these very substantial benefits can be transferred to a group. In addition, in their culture, it is shameful to seek benefits for individuals, but it is heroic to seek benefits for the collective. Therefore, the abuse of administrative power to set up significant interests for SOEs is inevitable.

As long as the senior executives of SOEs and administrative officials are rational economic persons, they are bound to be tempted by the very substantial benefits of SOEs. They compete for “SOE rent”, which is equal to 61.8% of the added value, as farmers compete for 1/3 of the land rent share. However, competition rules are not market rules but political rules. That is, the Party Organization Department appoints the senior managers of SOEs, while the Organization Department of the CPC Central Committee appoints the senior managers of central enterprises. In the organization department, the real rule is not that an enterprise must select excellent leaders, nor is it that democratic voting is required; rather, it is a rule of power. Therefore, competition for SOE executive positions becomes competition for power. However, in the competition for power, there is also a lack of fair and moderate rules, sometimes even in cases of life and death, so it is impossible to have a stable equilibrium in which SOE executives can stay in office for a long time. Equilibrium can only exist in short periods of time; when political personnel change, the original balance is broken. Moreover, as the benefits of SOEs are very attractive, the impulse of administrative officials to break the existing balance is increased. Therefore, there is no real equilibrium in the appointment of SOE executives. In contrast, the instability of the position of SOE executives is normal under this rule.

As a result, as we have observed, the crime rate of SOE executives is much higher than that of private entrepreneurs, and the average term of office is far lower than that of private entrepreneurs. However, because this information is not very clear and lacks statistical support, people tend to believe the information that is beneficial to them and underestimate the information that is unfavorable to them. For example, they overestimate the benefits obtained from SOE senior executive positions and underestimate the probability that they will be punished as a result of engaging in criminal behavior. SOEs are illusory images representing people’s common interests. They think that it is in their common and greatest interest to deliver benefits to SOEs and defend the interests of SOE executives. Therefore, in various political processes, they put SOEs in a politically correct position and above the interests of all people, which causes public decision-making to deviate, but they themselves are ultimately harmed. This kind of ending is inevitable and tragic. If you enter the top management of an SOE, no matter where you are, you cannot get rid of the negative expectations that this group faces. The tragic fate brought about by the SOE system, which SOE members set up, is that, similar to “natural punishment”, no individual can escape from it.

7. Solutions to the problems of state-owned enterprises

When we say that because of their short-sightedness, SOE executives and administrative officials cannot see the real, tragic fate of SOEs, there is a hidden possibility. That is, if some of them break through this short-sightedness and have long-term vision, they will see the unfortunate results and know that the apparently substantial interests of SOEs are, in fact, the reason that they compete with each other and even act with hostility toward each other. In this competition, they will lose more than they will gain, and they will even suffer from extinction. The bright surface of an SOE is actually an illusory image that is a trap full of bait, and the bait is put out by the SOE executives and administrative officials; they set the trap for themselves. They know that it is a trap, but they scramble for it. When someone proposes dismantling the trap, they stand up to defend the trap; in fact, they are defending their tragic fate.

It is possible to see the true face of SOEs. Studies have shown that people with more education are more patient (Burks, Carpenter, Gotte, and Rustichini, 2012). In other words, they have greater long-term vision, and they calculate not only in terms of immediate interests but also in terms of future interests. In the SOE executive and administrative official group, there are a large number of highly educated intellectual elites. They have long-term vision. They will look at the problem from the perspective of repeated games rather than only seeing the result of one game. Moreover, as mentioned above, the higher an individual’s position is, the greater the individual’s risk and the higher the probability of being convicted. We can more clearly see through the bait nature of “SOE rent”. Therefore, they can see through the illusion of SOEs and put forward reform demands from inside SOEs. In this situation, the political dynamics of SOE reform will develop in a positive direction and ultimately make the reform of SOEs politically feasible. Under this premise, the remaining problem is the reform program.

Since the fatal problem of SOEs is the unclear ownership of the very substantial benefits brought about by the price reduction of nonlabor factors, the solution seems to be to clarify the property rights over this part’s interests. There are two ways to do so. The first way is to cancel the price control of all relevant nonlabor factors, that is, to cancel the favored policies that no profit or land rent need be paid, and the control or monopoly of interest rates and interest rate differences. However, this requires SOEs to pay according to market prices. In this way, there will be no weakening of property rights, as Steven Cheung said. In the market, SOEs will become fair competitors of non-SOEs.

The second way is to clearly assign the interests that have no clear ownership, that is, the nonpayment of profits, the nonpayment of land rent, the underpayment of interest and monopoly income, to specific people or enterprises. In fact, this is the privatization of state-owned capital, state-owned land, part of the property rights of banks, and monopoly interests.

There are two options on this path. One option is to assign this part of the substantial interests to the identified individual SOE executives and administrative officials; however, it seems impossible to do so because it is extremely politically incorrect to assign the property rights of SOEs to those in power without compensation. Of course, this action will also be opposed by the overwhelming majority of people and thus is not feasible politically.

The second option is to sell this part of the interests in the markets, and the persons who offer the highest price may obtain them. For example, the value of the income of state-owned enterprises from free state-owned land and free-to-pay profits of state-owned capital is actually the market value of land and capital, which is equivalent to the privatization of state-owned land and capital. More broadly, it is the privatization of all factors of production, including natural resource exploitation rights and low-interest loans, which is an effective and fair privatization. In this way, the new owners of these factors will demand their rights, and the SOEs will have to pay the market price of these factors. As a result, SOEs will become fair competitors in the markets. Politically, this should be acceptable to most people.

The reason why SOEs have not been effectively reformed is mainly because of the opposition of SOE executives and administrative officials. The reason why they oppose reform, as mentioned in the above sections, is that they are confused by the illusion that SOEs offer very significant benefits, believing that it is good for them to safeguard the beneficial interests of SOEs. When we expose this illusion, this interest group can see that what they are trying to maintain is a trap to capture themselves. However, although others have said they want to abolish this trap, they rise up against reform. If they realize that SOE reform is intended to remove this trap, which is an outcome that is actually good for them, they will stand on the side of SOE reform. Perhaps this will eventually promote the reform of SOEs so that China’s reform and opening-up can cross this seemingly insurmountable obstacle.


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Published firstly in Man and the Economy, 2021, vol. 8, issue 1, 21-45

Why May Unconstrained Power Disrupt the China’s Miracle? /Sheng Hong

It is said that in many cities, such as Suzhou, Taiyuan and Kunming, and so on, house prices fell; the cities where houses prices fell more than 3% includes Kaifeng, Handan, Fushun and Dezhou. As an overall trend, China urban housing price 288 index in August 2021 issued by China Real Estate Evaluation Center shows that the new house price index fell by 0.09% month on month, which is regarded as the first decline after rising for seven consecutive months. This is obviously not accidental. Prior to this, there were precursory data. According to the National Bureau of Statistics, from January to August 2021, the land area and price purchased by the real estate industry continued to decline, with a year-on-year decrease of 10.2% and 6.2% respectively in August. Land is the main “raw material” of real estate. The decline in price and quantity is obviously an important reflection of the decline in demand in the real estate market. This is a major omen for China’s economy.

It’s a long story. Nobel laureate Lewis said that the development of modern economy depends on industrialization and urbanization. Not to say industrialization, only say urbanization, which brings huge demand and power to economic development. Due to the implementation of the planned economy for many years, China’s urbanization rate decreased from 19.8% in 1960 to 17.9% in 1978. After the reform and opening up, especially after the second half of the 1990s, urbanization has made great progress. Urbanization has not only brought huge investment, but also accelerated the expansion of market system and demand due to the improvement of agglomeration degree, greatly improved the efficiency of financial, commercial and other service industries and the industry, greatly increased the income of farmers in cities due to their shift of industries, and permanently increased the demand due to the convenience of shopping, The prosperity of industry and the influx of residents promote the further demand for urbanization, which leads to a virtuous cycle of mutual promotion between urbanization and industrialization. By 2020, the urbanization rate has reached 64%. It can be said that China’s rapid and sustained economic growth after the Reform and Opening Upmainly depends on the process of urbanization.

To realize urbanization, we need to invest in urban infrastructure and urban service functions. This requires huge investment. In this regard, it is a key reform for the urban government to sell the land multi-years use right in the form of lease and marketize the factor of land. After years of evolution, a relatively mature land financing and operation mode has been formed, that is, the government uses land as collateral to obtain bank loans, the bank lends funds based on the appreciation expectation after land urbanization, the government uses loans for primary land development, and then sells land to developers in the form of bidding, auction and listing, so as to obtain appreciation income and repay bank loans, And further land development. Developers can also borrow money from banks with the purchased land as collateral, then carry out secondary development, and finally sell commercial houses, office buildings, commercial facilities or industrial plants to earn income and repay the loan. Ordinary consumers obtain bank loans with their purchased houses as collateral, and then repay the bank loans in installments over the next ten years or decades.

This financing model not only makes the urbanization process smoothly, but also constitutes an important part of the current economy. According to the estimation that the existing urbanization rate increases by an average of 1.4 percentage points per year, China’s new urban population is about 20 million every year. The resulting huge investment in urban municipal infrastructure is about 2.5 trillion yuan in new urban areas every year; if it increases by 5% a year, it will be 6 trillion by 2035. This is obviously the largest single industry investment and is stable and sustainable.

Figure 1 growth of municipal infrastructure investment (100 million yuan)

In a broad sense, in 2017, the total investment in infrastructure around urbanization, including transportation, storage and postal industry, water, electricity and gas production and supply, water conservancy, environment and public facilities management industry, resident services and other services, education, medical treatment, culture and sports, public management and social organizations, and construction industry, was about 21.5 trillion; If commercial supporting urban service functions are considered, including wholesale and retail, accommodation and catering, finance, leasing and business services, the total investment is about 3.7 trillion; The investment in real estate is 14.6 trillion. These investments add up to about 40 trillion yuan. It accounted for 62% of the fixed investment of the whole society in that year. Such huge investment funds, coupled with operating funds, make the demand for urbanization constitute the largest part of the financing of China’s financial system. According to China Financial Yearbook 2019, in 2018, the bank loans of the above industries around urbanization reached 66783.8 billion, accounting for 48.2% of the total loan balance of the year. According to the National Bureau of Statistics, in 2020, the proportion of industries related to generalized urbanization in GDP is conservatively estimated to be about 48%.

Figure 2 infrastructure investment in generalized urbanization in 2017 (100 million yuan)

As mentioned above, the financing mechanism to realize such a huge investment is a financing mechanism based on land mortgage and financial marketization. There are two main points. One is that the land price must continue to rise, and the other is that the financing cost must be determined by the market. Now it seems that the price of the land market has begun to decline, and the first key point no longer exists. For banks, as long as house prices fall, the collateral value of their loans will be lower than the loan amount. Once borrowers default, banks will face losses. For developers, the decline in house prices means that the market prospect is bleak. According to the existing costs, they will reduce profits or losses, and lack the power to continue investment. For local governments, the decline in land prices caused by the decline in house prices will also make them unable to repay bank loans and even bankrupt their finances. Especially in these years, the bank’s estimation of land value is based on the expected appreciation of land. For example, in 2014, the average mortgage loan per mu of land was about 1.4 million yuan, while the price of land sold in the same period was about 1.29 million yuan per mu (calculated according to the data of Yu Jingwen, Wang Min and Guo Kaiming (2019)), and the bank’s valuation of land was higher than the land price in the same period. Once the land appreciation is lower than the loan interest rate, the local government will be unable to repay the loan.

The decline in land prices is due to the reduction in the final demand for real estate, and the most sensitive real estate developers began to have problems. Evergrande real estate, a behemoth, has begun to have a debt crisis. It is said that the debt is as high as 1.9 trillion. In the face of the slowdown of the real estate market in 2021, “commercial bills are overdue every day, bonds are stopped from financing business, and 60% of staff are laid off, The two trusts require early repayment of loans”; Many large developers have also been insolvent, such as Huaxia happiness, “the principal and interest of default debt totaled 87.899 billion yuan”; Xinhualian, “the total book value of assets mortgaged, pledged, sealed up, seized and frozen in case of debt default is 45.458 billion yuan”; Hongkun real estate, “the operating cash flow has been cut back, the financing cost is high, the financing environment continues to deteriorate, and the debt pressure and liquidity problems begin to appear”; Field Real Estate, “large scale commercial bills overdue”; …… There are still about 25 similar-level developers to be insolvent (Longitude and Latitude Observation, 2021). As of July 20, 203 real estate developers had submitted bankruptcy documents. The debt problems of these real estate developers are obviously related to the bleak prospects of the aforementioned real estate market.

This is only the prelude to the decline of the whole land market, leading to the plight of the financial system mortgaged by land. Then there will be many local governments facing debt crisis. In the environment of unrestricted power, their first thought is to cut more income and wealth from enterprises and residents, such as levying taxes in advance, squeezing more funds and assets from private enterprises, forcibly demolishing the so-called “small property right” houses under the banner of “planning”, and then developing and selling the robbed land, Enterprises have no incentive to continue production and investment, and the people have reduced their willingness to buy houses because of the lack of protection of property rights and housing rights; The economy will decline further and the land market will worsen. Financial institutions based on land financing will also have a crisis, a large number of bank loans can not be recovered, and there will be a large number of losses. Due to the chain reaction, a large number of debts cannot be repaid, causing the money supply to contract on a multiplier scale. At this time, the central government has only one way to save the current crisis, which is to print more money, but it will lead to inflation. This, in turn, will hit the real economy, which will eventually disintegrate the strong momentum of China’s economic development since the reform and opening up, resulting in economic recession.

The key to the problem is the decline in land prices. How did this happen? Some people say that China’s urbanization has been nearly completed, and the huge investment demand brought by urbanization has decreased. This may have some impact. However, China’s urbanization rate of 64% is far from reaching the level of 90% in European and American countries. Although China’s actual situation will be higher than the figure according to the degree of population agglomeration, it may be lower than this figure in terms of urban infrastructure construction. There is a serious lack of infrastructure construction in rural and small towns with large population agglomeration in China, so it should be said that there is still a lot of space. Judging from the increase of urbanization rate of 1.4 percentage points per year, the urbanization process should take about 20 years. I once estimated that as long as the urbanization process is not completed, China still has a basic growth rate of 5 ~ 6% per year (Sheng Hong, 2019). So what is the reason for the decline of the land market?

We know that urbanization is not only because there is room for urbanization, but also because of the degree of marketization and the rate of economic growth. In the period of planned economy, China’s urbanization rate is very low, but it continues to decline, because urban development does not rely on the power of market mechanism, but the will of the planning authority. At the same time, it is subject generally to the misallocation of resources and lack of incentive in the planned economy. Urbanization is to realize people’s agglomeration under the market system, and people’s agglomeration brings the externality of the market network, that is, the transaction dividend increases much faster than people’s agglomeration, which is the basic principle of urbanization. Market system is that people’s economic decisions are not subject to external control and made according to their own costs and benefits, which is manifested in the migration of enterprises and residents to the center of agglomeration, so as to further promote urbanization. Professor Krugman, Nobel laureate, pointed out that one of the characteristics of modern industrial development is that large-scale production is manifested in agglomeration in space (M. Fujita, Krugman et al., 2005, page 70), that is, in the form of urban development. Those producer services, such as finance and information, are in the form of urban agglomeration. In other words, industrialization and urbanization promote each other in economic development.

From the first half of this year, the economic data is still good. According to the National Bureau of Statistics, GDP grew by 13.6% in the first half of the year, which also reached 3.4% calculated by Keqiang index. According to the data compiled by Dacheng Research Institute, the operating revenue of national industry increased by 25.6% from January to July; The total investment in China increased by 10.3%, and the total export from January to August increased by 33.7%. Since the economic development situation is so good, how could there be a bleak prospect of the real estate market and a decline in land prices? The problem is that among the variables affecting economic development, some are fast variables and some are slow variables. Now the slow variable changes, but there is no time to show the current results. These slow variables are the basic economic institutions. Basic economic institutions refer to property rights institution, contract system and market rules. Douglass North and other institutional economists have long pointed out that these basic economic institutions are the main reason for economic development since modern times. Mancur Olsen pointed out that “as long as a trusted and strong government exists for a long time in the economy and protects individual property rights and contractual exercise rights from infringement, it will be able to reap all potential benefits from investment and long-term transactions” (2009, P. 409)

As for the property rights institution, in recent years, the property rights of enterprises and residents have been violated from time to time, and there is no channel for legal relief. Even the personal safety of entrepreneurs can not be guaranteed. They are often maliciously trapped by the local government and use judicial means to make unjust cases. For example, the Sun Dawu case was clearly a land dispute between Dawu Group and a nearby state-owned farm, which was first provoked by the state-owned farm. However, he was trapped to various charges and sentenced to 18 years’ imprisonment. Another example is that Hubei Xiangda Group took over a chemical plant on the verge of bankruptcy under the guidance of the local government, but the company’s leadership was labeled as a “underworld” due to employee petition (Si Qipu, 2021), and so on. The property rights of ordinary citizens are posed a serious threat due to the prevalence of illegal demolition. In violation of constitutional principles, some administrative departments improperly elevate the so-called “planning right”, so as to deny the constitutional rights of citizens such as housing right, property right and residence right. In recent years, some local governments ignore the restrictions of the Constitution, do not recognize the policies and commitments made by the central and local governments, violate a series of administrative laws and abuse public violence. In 2019, there was a bad situation of driving out the “low-end population” in Beijing; In recent years, there have been a large number of illegal acts of forcibly demolishing residential houses in suburban districts and counties of Beijing, Hebei, Shandong, Hainan and other provinces and cities.

Property rights not only refer to the material object, but also a group of rights. When the assets as objects are not damaged or less damaged, the restriction and damage to rights are also violations of property rights. For example, Beijing demolishes advertisements on houses in the name of sorting out the skyline, and the greatest damage to advertisers is the forced deprivation of advertising rights. More generally, the interruption of contract execution makes the contractor lose the benefits obtained from the contract, which is equivalent to the infringement of the property rights protected by the contract. For example, the administrative department suddenly closed a large number of farmers’ markets, and the lease of the majority of vendors did not expire; The administrative department suddenly announced that it would not allow out of school training, limit the time of video games, close private primary and secondary schools, and increase the entry requirements of home stay in Beijing. All these are interrupting the performance of the contract of market subjects, which actually infringes on the property rights of these market subjects. If the constitution is regarded as a social contract signed between the people and the government, the administrative departments arbitrarily intervene in the market, infringes on the people’s property rights, and suddenly changes the policy without explanation, it is also a violation of the social contract, resulting in more extensive property rights losses caused by breach of contract.

Of course, administrative departments have their own reasons for intervening in the market, interrupting contracts, and then infringing property rights. For example, for out of school training, they use the excuse of “reducing students’ extracurricular burden”; Limit the time of online games under the pretext of “preventing students from indulging in games”; Stop the enrollment of private primary and secondary schools under the pretext of “adjusting the proportion of private public schools”; Beijing home stays were off from the shelf online, under the pretext of “safety” These excuses seem to have their reasons. However, things in the world are not one side, and any “good” purpose has a price. Therefore, there is what Ronald Coase calls “reciprocal nature of the problem”, that is, “reducing pollution” is a good thing, but in order to reduce pollution, it may increase the cost of production; From a social perspective, both increasing production costs and pollution are social costs, and the choice depends on which is higher or lower. Second, it depends on whether the government should intervene in the solution of these problems. If other methods, such as family, market and non-profit institutions, can be used to solve these problems, it is better than the government’s method, because these alternative methods are non mandatory. Mandatory not only has high implementation cost, but also is easy to go too far due to lack of compromise, resulting in negative results.

Finally, even if it is to be done by the administrative departments, there is a problem of whether they follow the due process of law. First, before issuing a policy or administrative order, the administrative departments should have a constitutional and legal self-examination, and carefully consider whether the policy or order violates the previous policy or commitment. The behavior that causes the losses of economic parties should be avoided, otherwise they should be compensated. When the administrative departments believe that it is really necessary to introduce policies involving the rights of citizens or enterprises, it should fully explain the reasons and obtain the consent of the legislature. In the process of implementation, we should follow the administrative procedures stipulated by law, hold hearings, listen to the opinions of experts and the public, listen to the arguments of the parties, and give buffer time. Only in this way can we ensure that the policies or orders of the departments do not violate the Constitution and laws, do not conflict with their previous policies or orders, ensure the logic and stability of the behavior of the administrative departments, and give people reliable expectations. I am afraid that the abrupt and arbitrary behavior of the administrative departments is the result of listening to the instructions of some individual leaders or simply “guessing the will of leader”. It simply does not take the Constitution, the laws and its own commitments as one thing.

This requirement for the administrative departments is a bottom line requirement. This is true not only in most countries ruled of law in the world, but also in traditional China. If an arbitrary emperor wants to issue an imperial edict, he also need to draw up a draft first, so that the Zhongshu department can draw up an imperial edict. If the Secretary in Zhongshu Department found any problem with the draft, he has the power to put forward modification opinions and return it back, which is called “closing and refuting”. Su Shi did closing and refuting six times when he was a Secretary in Zhongshu Department. Even if it passed the Zhongshu Department, there is still Shangshu Department for inspection. In Song and Ming Dynasties, it needed the Prime Minister or the head of the cabinet to countersign. It is said that the stubborn Zhengde Emperor of Ming was whimsical. Because “pig” and “Zhu” in Chinese were homonymous, he suddenly issued an order not to allow people to eat pork. After Yang Tinghe persuaded him to repent, he didn’t know how to take back his order. Later, it was found that the order was issued not in the name of the Emperor but in the name of “powerful general” because it was unable to obtain the head of cabinet signature, let him get out of the dilemma. Although this system is not perfect, it ensures that absurd and contradictory orders will not appear easily.

According to the Constitution, actions affecting the basic economic system must be approved by the legislature. Infringing on the market field is a move to change the basic economic system, which is a violation of the constitutional principle of “market economy”. The administrative departments of the government attempt to create such a fact by its wanton intervention in the market, it can grant itself the power to violate the Constitution and expand itself without the consent of the legislature. What is even more frightening is that the administrative departments of the government regards this behavior as a matter of course and routine. If they continue to issue the so-called policy of restricting or prohibiting the entry of this or that industry without scruples and constraints, it will destroy industries in the market without warning, and even conduct to stop power in sneak-attack style or similar behavior, which will not only affect the technical reduction of production, but also increases the uncertainty caused by the unpredictable behavior of the government. Because people can’t predict the government’s behavior according to the Constitution, laws or its own commitments, all industries in the market are always under the threat of its willful behavior. There is no stable expectation, which greatly increases the cost of preparedness or suffers losses, resulting in enterprises choosing to reduce production or even stop production.

The uncertainty caused by the government’s failure to comply with the Constitution, laws and previous commitments is a kind of uncertainty of institutional environment and policy environment. On the one hand, it is all-round, including various means of government intervention in the market, such as restricting prices, directly restricting supply, directly restricting demand, restricting income, restricting industrial entry, restricting consumer entry, and even directly confiscating assets; On the other hand, these behaviors are not limited to specific industries, but may cover all industries. In addition, this uncertainty is called “immeasurable uncertainty” by Knight, that is, “uncertainty of unknown probability distribution”, which corresponds to the “uncertainty of known probability distribution” of risk (2005, P. 172). For the latter, people can also adopt “specialization” and “integration” methods to reduce risks (2005, P. 176); There is nothing we can do about the former. Therefore, the uncertainty caused by the lack of rules for government behavior is a general environmental uncertainty. Of course, it will bring losses to people at present. More importantly, it has a possibility of damage to people’s future behavior. Aware that future plans may encounter such damage, people will increase the estimation of costs, resulting in the potential investors stay back and the innovators could not focus. This is a bigger negative factor than direct infringement of property rights.

With regard to the protection of property rights and the maintenance of contractual rights, Olson said, “the court system, independent judicial power, and respect for legal and individual rights are also needed to ensure property and contractual rights.” (2009, P. 409) Therefore, a fair and neutral judicial system is important. However, this is what our society lacks, and it is increasingly lacking. What we see is that the judicial trial of unjust cases of entrepreneurs is obviously unfair and wantonly violates the due process of law. For example, in the trial of Dawu case,  it refused Sun Dawu to obtain a guarantor pending trial without justified reasons, abused residential surveillance, and tortured the parties with various illegal means, so that Sun Dawu described it as “life is worse than death” (Wu Lei, 2021), but refused to exclude these illegally extracted testimony from the evidence in the trial, which seriously violated the “no forced self incrimination” in Chinese legal principle; They also ignored the evidences of the defense and convicted them without solid facts and legal basis. Compared with the unjust cases caused by the carelessness of the court and technical reasons, this malicious framing and unjust imprisonment makes entrepreneurs more afraid, because once they offend the local government, they may suffer such retaliation, which entrepreneurs can’t escape and bear.

For the illegal demolition of residential buildings, when the residents receive the notice of demolition threat, they file an administrative lawsuit or administrative reconsideration with the relevant authorities, but they will not be accepted; The local administrative authorities flagrantly violate the provisions of the administrative enforcement law that “the parties do not apply for administrative reconsideration or bring an administrative lawsuit within the legal time limit and do not dismantle” to allow forced demolition (Article 41), and still illegally demolish after the forcibly demolished residents apply for administrative reconsideration or administrative lawsuit; In addition, in violation of Article 43, “administrative organs shall not enforce administrative enforcement at night or on legal holidays.” in the process of illegal demolition, they abuse police power to threaten the personal freedom and safety of victims, illegally employ demolition elements with financial funds, illegally cut off water and power supply, etc. (Sheng Hong, 2020). After the forced demolition, the relevant administrative departments ignored the huge losses and injuries of the victims, insisted that the forced demolition had “no interest” with the victims (Sheng Hong, 2021), refused to accept the administrative reconsideration or administrative litigation of the victims, and put the injured residential owners in a situation of no legal relief at all.

Some people may say that some cases of infringing on private enterprises account for only a small proportion of private entrepreneurs. Although there are many illegal demolitions in recent years, and the number of houses demolitions is huge, it only accounts for a small proportion of the total. However, an infringement of property rights does not have an impact only on a proportional level. Because property rights are a fundamental economic institution and the most important interest for individuals or enterprises, the infringement of property rights is a fundamental psychological impact. The value of an asset is not only determined by its use value, but also affected by the security of its property rights. For example, there are two physically identical houses, one in New York and one in Gaza, which are different as heaven and earth. I remember that John Commons, the author of Institutional Economics, said that for each individual, only the institutionalized mind can form a judgment on the future (1983, P. 297), which will change with the facts he knows. After Xiangda’s “underworld related” case, the daughter of the chairman issued an open letter asking for the enterprise to be donated to the government (Si Qipu, 2021), which shows that she not only despair that the government can protect property rights, but also regards property rights as negative values. In a questionnaire survey in 2016 / 2017, entrepreneurs believe that they have a 26.8% probability of property safety risk. Now this probability should be higher, the assets will depreciate accordingly, and the land as an integral part of the assets will depreciate equally.

In my article “why the rule of law is a first-order macro policy”, I pointed out that the security of property rights is much more important and more priority than the adjustment of interest rate or tax rate. Generally speaking, the asset value is calculated by discounting the future return of the risk-free interest rate. If the risk-free interest rate is 4%, the asset value is 100%. When the risk of infringement of property rights increases by 10%, it is theoretically equivalent to raising interest rates or tax rates by 10 percentage points. Although the government sometimes introduces new opening policies or expansionary macro policies, both of them are mainly in the form of reducing interest rates or tax rates. As mentioned above, this can not be compared with the threat to the security of property rights and the certainty of institutional-policy environment. Moreover, when the administrative departments interrupt the performance of the market contract, the loss will not only be the benefits covered by the contract at that time, especially when the whole industry is blocked and employees are unemployed, which will cause huge losses to the long-term investment of investors and employees in providing products or services. This kind of investment has what economists call “asset specificity”. Once it cannot be used in the specialized production or service that has always been used, its value will be greatly reduced. For example, once an English teacher can no longer teach English, the value of his or her human capital of English ability will be greatly degraded. If the material or human capital is depreciated, it means that the efficiency of resource allocation is significantly reduced, and the land carrying resource allocation is also depreciated.

The influence process of institutional variables is slow, and there will be no obvious signs in the initial stage. The changes of fast macroeconomic variables, such as interest rate, tax rate and reserve ratio, are relatively clear and directly enter people’s calculation, so the impact is also direct and rapid. For example, the change of interest rate directly affects the financing cost, and then affects the profit. And the policy variable is short-term, it can also change in the opposite direction. The impact of institutional changes on specific individuals or enterprises is only a possibility, but institutional variables will enter people’s judgment of the future in the form of probability and affect their long-term expectations and decisions; And unless there is a major political change, the change of system is usually irreversible, at least it is difficult to change again, so it has a long-term nature, which will affect the estimation of asset value. When there are more and more such cases, people’s evaluation of their own property rights will be reduced, their belief in the performance of the contract will be weakened, and their expectation of obtaining legal relief in case of infringement by the administrative department will be reduced, which will reduce the evaluation of asset value, which is the institutional reason for the reduction of land price. When there are both fast variables and slow variables in a society, the impact of fast variables will appear at the moment, while the impact of slow variables will appear later.

Moreover, due to the control of public opinion, most people know little about those cases of infringement of rights, or think it has nothing to do with themselves. At present, the reason why the macroeconomic data are not bad depends on the institutional foundation laid by Reform and Opening Upand the accidental factors brought by the epidemic. Macroeconomists only see these macro data and put forward policy suggestions based on classical theories. Even if they see some problems, they only suggest adjusting some policy variables, such as interest rate, tax rate, or open market business; If macro decision makers only make macro decisions based on these macro data and accept the suggestions of macro economists, and do not see the situations related to specific individuals such as damage to property rights, forced breach of contract and unemployment reflected in these cases at the micro level, they will continue to ignore the institutional problems reflected in these cases and go towards the coming crisis  in the illusion of “the situation is very good”. These seemingly good macro data are the reason why they make wrong decisions. They continue to believe that it has nothing to do with not restricting power and infringing on the rights of some citizens. They even think that they are right to do so, which can only aggravate the deterioration of institutional variables and worsen the potential recession.

The willful violation or violation of the Constitution or rights begins with individual cases. Any individual or enterprise is weak in front of a strong government. But as Erasmus said, “even the most powerful monarch cannot afford to provoke or despise even the most humble enemy.” (2003, P. 17) the institutional impact of these cases is not individual, but throughout the whole society. As long as such cases continue to increase, the consequences will eventually appear slowly and steadily. Moreover, now it is not only a case, but has been extended to the elimination of one and another whole industries. For example, the ban on out of school training is said to have led to the unemployment of 10 million teachers (small tax, 2021), the closure of private schools has led to the unemployment of more teachers, and the sudden removal of all Beijing home-stay hotels from the shelves has caused significant losses to thousands of home-stay-hotel owners. These situations have a scale that affects macro data. Since the second half of this year, the economic growth rate has decreased month by month; In August, industrial growth decreased by 1.2% month on month (Fan Gang, 2021); GDP grew by 4.9% year-on-year in the third quarter, much lower than 13.6% in the first half of the year. Economic slowdown will directly hinder the process of urbanization and further reduce land prices, thus disintegrating the core mechanism of the existing financial-fiscal mechanism, and the financial crisis is coming. This will have an impact on the real economy and make the whole economy fall into stagflation. The recession won’t be far away. Maybe within two years.

It is right forever that property rights institution, contract rules and rule of law are as the basic institutional structure of economic development. The miracle of China’s 40 years of Reform and Opening Up is mainly the result of establishing and protecting the property rights institution, carrying out market-oriented reform and promoting the rule of law. Until now, the excellent performance of China’s economy has also benefited from the market-oriented reform started in 1978, including the legalization and normalization of government policy-making. Today, the opposite behavior is just under the halo of China’s miracle caused by the above reform, abusing the wealth flow created by Reform and Opening Up and damaging the institutional foundation of reform and opening up, which will eventually make China lose the institutional factors of economic development. The reason why this happens is that power is not constrained. The so-called “unconstrained” means that the administrative department of the government is not bound by China’s existing texts of Constitution and laws. In these texts, there are clearly defined constitutional principles and constitutional rights, and administrative procedures that require administrative departments to strictly follow. As Mr. Liang Zhiping said, the minimum requirement of reform is that the party and government departments follow and implement the Constitution and laws they participate in the formulation. This is to restrict power. Therefore, in order to avoid the collapse of China’s economic development momentum, it is necessary to have a government that abides by the Constitution and laws and whose power is constrained.


Mancur Olsen, “Dictatorship, democracy and development”, Modern Institutional Economics, China Development Press, 2009.

Fan Gang, “Soft landing for reducing risks, increasing supply and restraining house prices”, viewpoint real estate network, September 21, 2021.

Jingwei observation, “Ranking list of thunderstorms of real estate companies in September 2021”, Baidu Real Estate Shantou Station, September 17, 2021.

Commons, Institutional Economics, Commercial Press, 1983.

Knight, Risk, Uncertainty and Profit, People’s University of China Press, 2005.

Sheng Hong, “How to reverse the economic downturn?”, FT Chinese, January 22, 2019.

Sheng Hong, “The judicial process should follow the basic rules of communication”, Professor Sheng Hong, WordPress, August 26, 2021.

Sheng Hong, “The road to evil is illegal”, Professor Sheng Hong, WordPress, September 5, 2020.

Si Qipu, “The first case of voluntary confiscation of private enterprises: where does Xiangda group come from?” Baidu, June 4, 2021.

M. Fujita, Paul Krugman, etc., Spatial Economics, China Renmin University Press, 2005.

Wu Lei, “Briefing on the second day of court trial of Dawu case”, Wechat circle of friends, July 16, 2021.

Xiaoshui, “It has become a trend to ban out of school counseling institutions. Where are the 10 million unemployed?” Tax Saving Network, August 4, 2021.

Erasmus, On the Education of Christian Monarchs, Shanghai People’s publishing house, 2003.

Yin Zhongli, “Turning point signal in the real estate market”, Tencent, September 20, 2021.

Yu Jingwen, Wang Min and Guo Kaiming, “Land finance or land finance?”, economic science, 2019, issue 1.

October 21, 2021 in Fivewoods Study

A Feeling of Visit to Small West / Sheng Hong

The prince was traveling with a bowl for begger,
What he got was body's goldern wrapper;
In the west there are thousends of Buddas,
About true law who could give an answer?

Note: English is not my mother language. As a practice, this poem is translated from my poem in Chinese: 游小西天有感。 I hope the experts who master both English and Chinese to offer me some suggestions.

Clouds and Water in ShenTang Ravine|Sheng Hong

Water is endless along deep ravine,
Clouds are above high mountain;
Water is winding becuase of freedom,
Clouds are amazing while floating.

Note: English is not my mother language. As a practice, this poem is translated from my poem in Chinese: 神堂峪之云和水。 I hope the experts who master both English and Chinese to offer me some suggestions.

A Song of Water When Visiting White Tiger Ravine / Sheng Hong

The great Tao is shapeless,
Water is as if it is;
Its thousands changes are toward kindness,
Conscience is emerging in my mind when facing the falls.

Note: English is not my mother language. As a practice, this poem is translated from my poem in Chinese: 游白虎涧咏水。 I hope the experts who master both English and Chinese to offer me some suggestions.

A Theoretical Analysis, Performance Evaluation,And Reform Solution on Health Care System in China / Sheng, Zhang, Qian

Published by World Scientific Press in 2021, Singapore


A Theoretical Analysis, Performance Evaluation,And Reform Solution on Health Care System in China(Second Version)


● 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 some0.46% 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 62% increase of the price, which would save RMB 964.6 billion, 1.5% of the GDP.

● It would hold back some 17.5% of healthcare overuse, which would save up to RMB 471 billion, about 0.53% of the GDP.

● Some RMB1213 per person would be saved for healthcare, about 2.57% of GDP per capita, which rounds up to some RMB1649.7 billion nationwide.

● Those whose self-pay proportion exceeds their yearly income’s 40% constitute about 2.3% of the total population. If a severe disease fund is set up with a scale of about RMB 190 billion, it will be only about 0.29% of the GDP.

● If the monopoly is eliminated and competition is promoted, that is the slope of the supply function, e, changes from 0.47 to 2, then everyone would be able to save about RMB 112 for healthcare, a total RMB152.3 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 reduceper capita medical expenses from 5.08% to 2.51% of the per capita GDP, a decrease of 50.6%.

● This reform proposal will also reduce the per capita medical expenses originally covered by insurance from 3.1% to 0.9% of the per capita GDP, a decrease of 70.2%.

● 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 2.8% 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 86.6% of that they paid for their medical treatments before the reform.


Chapter I The Economic Subject and Market for Healthcare
Ⅰ. Patients: Before Professional Doctors, and the Basic Features of the Patients

  1. Uncertainty
  2. The Lack of Elasticity of the Demand Price
  3. The Lack of Medical Knowledge and the Inefficiency of Self-Performed Healthcare

Ⅱ.Doctor and Simple Healthcare Market

  1. Doctor in the General Sense: Medical Treatment and Manufacturing of Medicines
  2. The Patients after the Emergence of Professional Doctors
  3. A Market with Only the Patients and the Doctor in the General Sense

Ⅲ.Manufacturer of Medicine: After the Division of Medical Treatment and Manufacturing of Medicines

  1. Manufacturer of Medicines and Medical Equipment
  2. Doctors after the Division of Medical Treatment and Manufacturing of Medicines
  3. Patients after the Division of Medical Treatment and Manufacturing of Medicines
  4. Market after the Division of Medical Treatment and Manufacturing of Medicines
    Appendix I: A Two-Phase Model of Doctor’s Reputation
    Appendix II: A Separating Equilibrium Model of Doctor Sending Signals
    Chapter II Insurance and Its Problems
    I. Purpose of Insurance: Eradicating Uncertainty, and Increase Utility
  5. Theoretical Foundation
  6. A Direct Estimation of the Advantages of Insurance
  7. An Indirect Estimation of the Advantages of Insurance

Ⅱ.Previous Study and Criticism of Insurance

  1. Moral Hazard
  2. Reverse Choice
  3. Structural Cost
  4. Monopsony
  5. Driving up Prices III. Proposal of a Deeper Problem: How Healthcare Insurance Hinders Market Mechanism
    1.Issue with the Payment Mechanism of Insurance: Loss of Budget Constraint, and Insensibility of Price
    2.Increase of Cost without the Budget Constraint
  6. The Distribution Inefficiency of Medical Services and Pharmaceutics between Consumer
  7. The Influence of Distortion in the Demand Structure on the Price System, and the Efficiency

Ⅳ.Insurance Paradox: Insurances Do not Reduce but Increase Healthcare Cost

  1. Insurances Change Demand Function: Tilted Demand Curve
  2. Two Parts of the Utility of Insurance
  3. A Hypothesis of Insurances Driving up Prices
  4. A Quantitative Analysis of Insurances Inflicting Healthcare Overuse
  5. Insurances as an Intrinsically Non-equilibrium Institution that Expands to Maintain Dynamic Balance

Ⅴ. Other Issues with Insurances

  1. Analysis of Insurances Regarding Threshold for Payment, Self-pay Ratio, and Payment Ceiling
  2. Insurance Hardly Subsidize the Unhealthy
  3. Managerial Costs of Insurance Agencies Drive up Financial Risks
  4. How the Current Insurance System Works

Ⅵ Economic Subject and the Market in the Current Insurance Institution

  1. Patients of the Insurance Institution
  2. Doctors of the Insurance Institution
  3. Pharmaceutics Manufacturers of the Insurance Institution
  4. Insurance Companies of the Insurance Institution
  5. Managerial Healthcare
  6. Healthcare Market of the Insurance Institution

Chapter III Government Intervention in Healthcare
I. Conventional Government Intervention in Healthcar

II. Intervention in Market Failures

  1. Prevention and Treatment of Contagious Diseases
  2. Public Health
  3. Intervention in Geographic Monopoly and Emergences: Price Control for ER etc.
    4.Intervention in Information Asymmetry and Clientism: Investigation of Doctors’ Qualifications, and the Quality of Medicines

Ⅲ.Intervention in Uncertainty: Government-Set Insurance Institution

Ⅳ.Government Intervention of the Insurance Institution

  1. Government Regulation of the Income of Doctors
  2. Government Regulation on Medicines Subsidizing Medical Services
  3. Government Regulation on Prices of Medicines
  4. The Extreme Form of Government Intervention— Universal Healthcare Insurance

Ⅴ.Macroeconomic Impacts Caused by the Insurance Institution with Government Intervention

  1. Decrease of Overall Efficiency of the Society
  2. Rapid Increase of Prices for Medical Services and Medicines
  3. Ratio of Healthcare Expenditure to GDP Increases
  4. The Unsustainability of Social(Healthcare) Insurance Institution

Ⅵ.Summary of the Theoretical Analysis
Chapter IV The Formation, Status and Issues of China’s Basic Healthcare System
I. China’s Healthcare Institution and Reforms

  1. Healthcare System During the Planned Economy(1949-1980)
  2. Market Reform and Loosening of Regulations for Healthcare During the Economic Transformation(1980~1997)
  3. All Round Healthcare Reform Era(1998~)

Ⅱ.The Institution and Policy Framework since the 2009 “New Healthcare Reform”

  1. Guiding Thoughts of the “New Healthcare Reform”: Market or Government
  2. Government-Led Healthcare Insurance Institution and Policy
  3. Constitution and Reform of Healthcare Insurance Resources
  4. Market for Medical Services: Institution, Policy and Industrial Organizations
  5. Market for Medicines: Institution, Policy and Industrial Organizations
  6. Comment on the New Healthcare Reform

Ⅲ. Basic Framework and Features of the Current System

  1. An Incomplete and Interfered Market
  2. A Healthcare System with Public Hospitals as the Main Entity
  3. Regulation on Setting Up a Hospital
  4. Qualification Validation and Entry Regulation for Doctors
  5. Tendencious Distribution of Financial Resources among Hospitals
  6. Price Regulations on Medical Services of Public Hospitals
  7. Price Regulations
  8. Regulation of Circulation of Hospital Medicines
  9. Duel Track System of the Medicines Retailing Market

Ⅳ. Healthcare Insurance in China

  1. Social Healthcare System: Compulsory Insurance
  2. Graded Insurance System of the social Healthcare System
  3. Basic Healthcare Insurance for Urban Workers
  4. Healthcare Insurance for Urban Residents
  5. The New Cooperative Rural Healthcare Insurance
  6. Differences in Healthcare Insurance for Out-Patient and In-Patient Services for Different Groups
  7. Actual Payment Ratio for Healthcare Fund
  8. Institutions of Healthcare Insurance
  9. Operations and Procedures of Healthcare Insurances

Chapter V. Efficiency and Fairness Evaluation of the Resource Allocation in Healthcare Industry
I. Standard for the Efficiency and Fairness of the Institution

  1. Market as the Fundamental Institution for Private Goods
  2. Inefficiency and Unfairness to Undertake Regulations for Private Goods
  3. Perfect Monopoly and Strong Oligopoly Should Be Regulated Following Certain Principles
  4. The Allocation of Financial Resources Should Follow Rawl’s Second Rule of Justice
  5. The Government Could Regulate when There’s Externalities
  6. Other Measures Should Be Taken to Deal with Market Failure Before Government Regulations

Ⅱ.Symptoms of Healthcare System Issues

  1. Aggregate Supply Grows Too Slow
  2. Huge Difference Between Hospitals of Different Grades
  3. Price of Medicines Pushed Up by Circulation and Pricing Mechanism
  4. Long Waiting Time and High Expenditure
  5. The Behavior of Doctors/ Hospitals Under Insurance Institution
  6. The Behavior of Consumers Under Insurance Institution: Excessive Demand
  7. Manufacture and Sales of Medicines Under Insurance Institution
  8. Doctors’ Income Are Generally Too Low
  9. Medical Treatments Subsidised by Selling Medicines and Abusing Equipment
  10. Concentrating of Patients in Big Hospitals
  11. Insurance Coverage Differs Largely among Different Groups
  12. Doctors’ Constrained by Regulation of the Locales of Practices
  13. Rent-Seeking Caused by Government Power to Allocate Healthcare Resources
  14. Tension Between Doctors and Patients
  15. Social Healthcare Insurances Fail to Meet Its Goal: to Cover Severe Diseases
  16. Increase of Healthcare Expenditures in the Current Healthcare System

Ⅲ.Institutional Analysis and Comment of the Current Healthcare System

  1. Compulsory Monopoly of Social Healthcare Insurance Institutions
  2. Low Efficiency of Public Hospitals Providing Private Goods
  3. Entry Regulation Hinders Competition
  4. Manufacture and Sale of Medicines: Concentrated Bidding Brings About Monopoly
  5. Healthcare Insurances and Public Financed Healthcare Weaken Market Mechanism
  6. Rent Dissipation by Regulations and Rent Conservation
  7. Inefficiency and Unfairness of Power-Led Healthcare Resource Allocation
  8. Unfairness Brought by Price Regulations
  9. Non-Equilibrium and High Transaction Cost Caused by Regulation

IV. Efficiency of Resource Allocation in Healthcare

  1. Aggregate Allocation Efficiency
  2. Insurances Drive Up Prices
  3. Loss Caused by Excessive Use of Healthcare Resources with Healthcare Insurance Institution
  4. Static Efficiency Loss with Healthcare Insurance Institution
  5. Loss Caused by Price Distortion with Healthcare Insurance Institution
  6. Efficiency Loss with Public Healthcare Institution
  7. Efficiency of Spatial Allocation of Healthcare Resources
  8. Cost and Disadvantages of Social Healthcare Insurance Agencies
  9. Summary

V. Fairness of Healthcare Resource Allocation

  1. Fairness of Spatial Allocation of Resources
  2. Fairness of Financial Resources Allocation
  3. Fairness of Healthcare Allocation Among Different Groups
  4. Fairness of Financial Resource Allocation
  5. Fairness of Competition between Private and Public Hospitals
  6. Summary
    Chapter VI. Reform Proposal Based on Market Institution
    I. Direction and Principle of Healthcare Reforms: Market as Foundation, Government Regulation as Supplement
    1.Two Key Points: Self-Pay Ratio and Monopoly
    2.Increasing Self-Pay Scope and Ratio, Better Utilize Market Institution
    3.Promoting Healthcare Market Competition
    4.Let Market Determine the Prices for Medical Services Under the Market Institution
    5.Open Prices for Medicines as the Market Determines the Prices of Medical Service
    6.Promoting the Division of Medicine and Medical Treatment, Medicine Prices Formed in Medicine Retailing Busines
    7.Cancelling Compulsory Social Insurance and Rely on Commercial Insurances
  7. Free Choice of Healthcare Insurance Forms by Individuals and Organisations
  8. Government Finance Should Subsidize the Poorest Group for Medical Services and Medicine
  9. Government Should Regulate the R&D and Sale of Western Medicines
  10. Government Should Maintain Market Order for TCM

Ⅱ.Comparative Study of the Main Healthcare Systems in the World and Lessons to be Learned

  1. The US Model
  2. The UK Model
    3 .The German Model
    4.The Singapore Model
  3. Quantitative Analysis Regarding Cost and Benefit
  4. Basic Comments and Lessons

Ⅲ.Institutional Reform of Healthcare Insurances
1.Institutional Reform of Insurance: Cancelling Compulsive Insurance and Establishing an Insurance Institution Where Market Comes First

  1. Reducing Social Healthcare Insurance Payment, Implementing Self-Pay for Small Illness(Out-Patient Treatment), Partial Self-Pay for Severe Disease(In-Patient Treatment), and Partial Insurance
  2. Cancelling Public Finance Healthcare, and Establishing a Fair Healthcare Insurance Institution
  3. Establishing National Medical Assistance Funds for Severe Diseases
  4. Developing Commercial Healthcare Insurance and Forming a Competitive Healthcare Insurance Market
  5. Encouraging Charity in Healthcare
  6. Allowing Differentiated Price Policy for TCM
  7. Allowing Consumers to Choose Healthcare Insurance Forms
  8. Establishing Compulsory Healthcare Family Savings Accounts

IV. Reform of the Healthcare Service Institution
1.Canceling the Government Entry Regulation for Medical Professionals,and Substituting with Competitive Association Certifications
2.Cancelling Entry Regulation for Hospitals, and Substituting with Constraints by Association and Competition

  1. Cancelling Price Regulation for Healthcare Services
    4.Cancelling Regulation on Fixed Locale Practices for Doctors, and Substituting with Contract Between Doctors and Hospitals
  2. Promoting and Encouraging the Establishment and Development of Professional Associations
  3. Encouraging the Transformation of Public Hospitals into Private Hospitals
  4. Encouraging the Development of Private Hospitals
    8.Encouraging Cooperation in Diagnosis Across Hospitals and Regions via the Internet 203

V. Institutional Reform of the Manufacturing and Circulation of Medicines
1.Approval Mechanism for New Medicines Should Be Established on the Basis of Cooperation Between the Government and Technical Associations

  1. Cancelling the Concentrated Bidding, and Allowing Enterprises to Compete in the Market
  2. Cancelling the Price Control of Medicines
  3. Cancelling the Entry Barrier for Medicine Circulating Enterprises, and Substituting with Constraints by Association and Competition
  4. Encouraging the Establishment of Associations in the Manufacturing and Circulation of Medicines
  5. Improving the Market Rules for TCM to Guarantee Quality

VI. Supplementary Regulation in the Healthcare

  1. Special Regulations: Contagious Diseases, ER, Medicine Quality
  2. Regulatory Monopoly and Collusion
  3. Property Rights Protection; Fulfillment of Contracts; Fair Competition
  4. Encouraging the Establishment of Consumer Association in Healthcare
  5. Encouraging the Development of Intermediary Services in Healthcare
  6. Promoting the Public-Private Partnership in Public Healthcare

VII. Estimation of Healthcare Reforms

  1. Basic Numerical Mode
  2. Constraint of Increase of the Healthcare Prices by Raising the Self-Pay Ratio
  3. Healthcare Resources Saved from Reducing Overuse
  4. Market Mechanism Strengthened by Enlarging the Scope of Self-Pay, Social Welfare Increased by Improving the Allocation of Healthcare Services and Medicines
  5. Better Co-Sharing of the Risks of Severe Diseases
  6. Breaking and Cancelling of Monopolies, Encouraging Competition
    7.Opening the Establishment of Hospitals, Encouraging Doctors to Move, and Improving the Spatial Allocation of Healthcare Resources by Utilizing the Mobile Internet to Shorten Waiting Time
  7. Reducing the Managerial Cost of Social Healthcare Insurance Agencies and Insurance Companies
  8. Better Healthcare at a Lower Cost for the Whole Society
  9. Summary
    Chapter VII Strategy and Procedures for Healthcare System Reform
    Ⅰ.Transition Economics:Pursuing reform cost minimization

Ⅱ.Experience of China’s Reforms

  1. External Reform
  2. Incremental Reform
  3. License Reform and Promoting
  4. Subsidy Reform
  5. Incremental Reform

Ⅲ.Possible Issues and Solutions in the Healthcare System Reform

  1. Public Misunderstanding of this Reform Proposal: A Political Economic Analysis
  2. Objection from the Previous Government Regulatory Agencies
  3. Objection from the Previous Social Healthcare Insurance Agencies
  4. Objection from the Interest Groups
  5. Temporary Turbulence before the New Equilibrium
  6. Short-term Increase of Healthcare Expenses

Ⅳ. Breakthrough of the reform
1.Cancelling of the Compulsiveness of the Social Healthcare Insurances, Promoting the Development of Commercial Insurances, and Free Choice of Insurances Forms by Individuals and Enterprises
2.Promoting the Development of Internet-Based Healthcare

  1. Opening of the Healthcare Service Price

Ⅴ. Reform Procedures

  1. Healthcare Insurance Reform
  2. Reform of the Medical Professionals Validation and License
  3. Opening of the Medical Services Prices
  4. Encouraging Public Hospitals to Transform into Private Hospitals
  5. Canceling of the Regulation in Medicine Circulations

Ⅵ. Sequence of Reform
Subreport 1 International Comparative Study of Healthcare Systems
I. Brief Introduction of Main Forms of Healthcare System(Four Healthcare Insurance Systems)

  1. Medical Services
  2. Medicine Manufacturing
  3. Healthcare Insurances


  1. Historical Development
  2. National Health System(NHS)
  3. British NHS Trust
  4. Private Healthcare Institutions
  5. Medicine Circulation in the UK
  6. UK’s Pharmaceutical Price Regulation Scheme (PPRS)
  7. The 2012 Cameron Healthcare Reform


  1. Healthcare System
  2. Medicine Manufacturing and Approval Institution
  3. Healthcare Insurance System
  4. Conclusion and Comments

Ⅴ.Brief Introduction of Germany’s Healthcare Insurance System

  1. Historical Development
  2. Status Quo
  3. Reforms
  4. The Role of Government

Ⅵ. Chinese Taiwan
1.Administrative Structure of Taiwan’s Healthcare

  1. Healthcare Service System
  2. Pricing and Management of Medicines
  3. Control Measures to Handle Medicine Prices Increase
  4. National Healthcare Insurance of Chinese Taiwan
    Subreport II Domestic Practices in Healthcare System Reforms
    I. Shenmu(神木) Model
  5. Background
  6. “Free Healthcare” in Shenmu
  7. Supplementary Reforms
  8. Influence
  9. Issues

II .Wuhu(芜湖) Model

  1. Content of the Reforms
  2. Achievements
  3. Issues

III. Suqian(宿迁) Model
1.Content of the Reforms

  1. Achievements
  2. Issues

IV. Summary and Lessons from Domestic Healthcare Reforms

  1. Positioning of the Healthcare Market: Government-Led or Market-Led
  2. Insurance Payment Reforms: From Item Payment to Multiple Payment
  3. Capacity-Building for Local Level Healthcare Institutions, Establishing Multi-Level Healthcare System
  4. Establishing Multi-Faceted Healthcare Insurance System
    Subreport III Comparative Study of the Economic Features of Western and Traditional Chinese Medicine
    Ⅰ.Basic Differences

Ⅱ.An Economic Comparison
Subreport IV Status Quo and Development of Internet-Based Healthcare 305
Ⅰ. Status Quo and Issues with China’s Mobile Online Healthcare

  1. Content and Development Background of China’s Mobile Online Healthcare
  2. Case Study of China’s Mobile Online Healthcare
  3. Profit-Making Pattern
  4. Issues and Challenges

Ⅱ.Status Quo and Development of Mobile Healthcare Applications in the US

  1. Sharing Economy: A New Definition of Internet-Based Economy
  2. China’s Mobile Internet Development
  3. Healthcare-Related O2O and Platforms
    Subreport V Survey
    I. Background and Methodology
  4. Background
  5. Methodology and Flaws

Ⅱ.Basic Situation

  1. Basic Information of the Surveyed
  2. The Healthcare Condition of the Surveyed
  3. Pharmacy and Out-Patients
  4. Comments on Payment Threshold, Prices of Medical Services and Medicines
  5. Cross-Region Healthcare
  6. Choices of Healthcare
  7. Survey of Accessibility

III. Main Issues and Conclusion

  1. Waiting Time and High Healthcare Expenditure
  2. Consumers and Doctors’ Certain Strategic Choice with the Current Healthcare System
  3. “Internet+” and New Opportunities of Mobile Internet
    4 The Withering Traditional Chinese Medicines
    Subreport VI Negative Influence of Healthcare Technology
    Appendix I: Pricing of Life and Health
    Appendix II: Survey
    Appendix III: Crowd-Funding as a Remedy for Insurance

List of Figures
Figure1.1 Estimation of Some Price Elasticity

Figure 2.1 Summary of the Influence of Co-Payment Insurance on Annual Average Healthcare Consumption according to Rand
Figure 2.2 Prices Comparison with and without Insurnaces
Figure 2.3 Numerical Ratio Matric(Rq)
Figure 2.4 Healthcare Expenditure Numerical Ratio Matric(Rq)

Future 3.1 Problems, Solution and Effects in the Healthcare Market

Figure 4.1. Price Changes for Medical Services 1956~1980
Figure 4.2 Difference Ratio in the Medicine Circulation (Real Term Price)
Figure 4.3 Categorized Income of China’s Insurance Industry
Figure 4.4 Combination of the two Social Insurances and Commercial Insurances, “Zhanjiang(湛江) Model” and “Taicang (太仓)Model”
Figure 4.5 Concentration of Anti-Cancer Medicines and Antibacterials for Systemic Use
Figure 4.6 Financial Subsidies and Education and Technology Funding for Hospitals of Different Grades(2015)
Figure 4.7 Reimbursement Policy for Urban Residents and Workers in Beijing
Figure 4.8 Beijing New Rural Cooperation Policy(Miyun District)
Figure 4.9 Reimbursement Ratio for In-Patient Treatment for Some Urban Workers
Figure 4.10 Reimbursement Ratio for In-Patient Treatment for Some Urban Residents
Future 4.11 Reimbursement Ration for Out-Patient Treatment for Different Groups in Beijing
Figure 4.12 Reimbursement Ratio for In-Patient Treatment for Different Groups in Beijing
Figure 4.13 Payment Ratio for Urban Workers by Social Healthcare Fund
Figure 4.14 Payment Ratio for Urban Residents by Social Healthcare Fund
Figure 4.15 Payment Ratio for New Rural Cooperation Healthcare Fund

Figure 5.1 Comparison of Bidding Price and Market Price for Some Medicine in Shanghai
Figure 5.2 Bidding Fee Standard for Medicine
Figure 5.3 Medicine Circulation Value Chain
Figure 5.4 Yearly Healthcare Expenditure per Person(2005~2014))
Figure 5.5 Ratio of Surveyed Residents Taking Medical Treatment in Two Weeks in 2008(0/00)
Figure 5.6 Supplementary Medicines Type and Quantity for Some Provinces
Figure 5.7 Doctors’ Annual Income, GDP Per Capita, and Ratio in Europe and US
Figure 5.8 Coverage of Different Healthcare Insurances(2014)
Figure 5.9 Main Cooperative Insurance Platforms in China
Figure 5.10 Actual Self-Payment Ratio Among Different Groups(2013)
Figure 5.11 Healthcare Insurance for Civil Servants(2007~2014)
Figure 5.12 Administrative Cost for Commercial Insurance Agencies Managing New Rural Healthcare Insurances(2010)
Figure 5.13 Healthcare Resources in Difference Cities and Provinces(2014)
Figure 5.14 Gini Coefficient for Healthcare Resources Allocation Across Provinces
Figure 5.15 Relative Strength Index of Financial Subsidies Per Person in Healthcare Across Provinces
Figure 5.16 Comparison of Healthcare Expenditure Among Different Groups
Figure 5.17 Financial Healthcare Insurance Fund Per Person for Different Healthcare Insurance Forms(2014)

Figure 6.1 Healthcare Expenditure and Percentage of GDP before and after the Reform(%)

List of Tables
Table 1.1 Standard Market with Demand That Lacks Elasticity
Table 1.2 Location Competition between Healthcare Providers
Table 1.3 Doctors Sending Signals and the Separating Equilibrium of the Market

Table 2.1 Mean Value and Standard Deviation Indifference curve
Table 2.2 The Random Number of Logarithmic Normal Distribution of Healthcare Expenditure and the Utility Indifference Curve
Table 2.3 Difference in Consumption Due to Fixed Cost and Variable Cost
Table 2.4 Inefficiency of Resource Allocation on the Supply Side Brought by Insurances
Table 2.5 Inefficiency of Resource Allocation on the Consumption Side Brought by Insurances
Table 2.6 Efficiency Loss Due to Price Distortion
Table 2.7 Tilted Demand Curve
Table 2.8 Influence of Change of Self-Pay Ratio on the Utility Curve(I)
Table 2.9 Influence of Change of Self-Pay Ratio on the Utility Curve(II)
Table 2.10 Utility of Insurance and Its Illustration
Table 2.11 Influence of Self-Pay Ratio(%) on Prices and Its Derivative
Table 2.12 Influence of Self-Pay Ratio and the Price (e=0.5)
Table 2.13 Influence of Self-Pay Ratio and the Price (e=2)
Table 2.14 The Relation between Self-Pay Ratio and Prices with Different Degree of Monopoly(e)
Table 2.15 The Influence of Self-Pay Ration on Quantity and the Quantity
Table 2.16 The Influence of Self-Pay Ration on Healthcare Expenditure and the Expenditure
Table 2.17 The Quantity of Demand(α=0.5) with Different Degree of Monopoly(e)
Table 2.18 Influence of the Degree of Monopoly on Healthcare Expenditure and the Expenditure
Table 2.19 Healthcare Demand Curve with and without Insurances
Table 2.20 Canceling the Threshold for Reimbursement and High Self-Pay for Insurance
Table 2.21 Consumers Tend to “Buy More” and “Buy More Expensive”
Table 2.22 Insurance Companies Constrain “Buy More” and “Buy More Expensive”
Table 2.23 Aggregate Pre-Pay Institution
Table 2.24 Insurance Companies Constrain “Buy More” and “Buy More Expensive”
Table 2.25 Comparison of Price Ratio Matrix Spatial View with and without Insurances
Table 2.26 Price and Quantity Change due to the Change of Self-Pay Ratio with a Certain Supply Function
Table 2.27 Quantity Ratio Matrix Spatial View

Table 3.1 Government Constrains the Price and Quantity of Medicine
Table 3.2 Doctors’ Income Constrained by Regulators and the Public
Table 3.3 A Market without Insurances and Free Choice of Insurance
Table 3.4 World Healthcare Expenditure and Its Percentage of the GDP

Table 4.1 Pricing of China’s Medicines
Table 4.2 National General Public Budget Expenditure on Urban Residents and New Rural Cooperation Healthcare Funding(2010~2015)
Table 4.3 Healthcare Insurance Market Structure According to the Premium(2014)
Table 4.4 Amount of Patients in the Three Grades of Hospitals(2005~2015)
Table 4.5 End Medicine Market Structure(2015)
Table 4.6 Government Healthcare Expenditure(1999~2015)
Table 4.7 Amount of Patients in Public Hospitals and its Percentage to the Total Out-Patients (2005~2015)
Table 4.8 Development of Medicine Price Regulation
Table 4.9 Personal Obligations Standard for New Rural Healthcare Insurance and the Standard for Financial Subsidies
Table 4.10 Amount of Medical Assistance Funds by Ministry of Civil Affairs
Table 4.11 Healthcare Insurance Payment Procedures and Functions of Different Departments
Table 4.12 Healthcare Insurance Payment Process

Table 5.1 Change of Aggregate Supply and Demand in the Healthcare Market (1980~2014)
Table 5.2 Comparison between China and Other Countries In Terms of Healthcare Resources Owned by Every 10,000 People(2013)
Table 5.3 Ratio of Patients in Different Grades of Hospitals(2005~2015)
Table 5.4 Medicine Bidding Mechanism
Table 5.5 Utilisation Rate of Beds in Different Grades of Hospitals (2005~2015)
Table 5.6 Ratio between Healthcare Cost Per Person and GDP Per Capita
Table 5.7 The Constitution of the Income of Public Hospitals(2015)
Table 5.8 Changes in the Structure of Healthcare Expenditure Per Person in Comprehensive Hospitals of Different Grades
Table 5.9 Ratio between Labour Cost and GDP Per Capita and Its Changes
Table 5.10 Ratio between Out-Patients Cost and In-Patients Cost in Public Hospitals(2015)
Table 5.12 Amount of Doctor-Patient Conflicts
Table 5.13 Increase of Out-Patients Cost(2000~2015)
Table 5.14 Increase of In-Patients Cost(2000~2015)
Table 5.15 Welfare Loss Caused by Regulations
Table 5.16 Change of the Aggregate Supply and Demand in the healthcare Market(1980~2014)
Table 5.17 Structure of Financial Subsidies
Table 5.18 Density of Medics Per Million People Across Provinces
Table 5.19 Administrative Expenditures in Healthcare Institutions
Table 5.20 Advantages and Disadvantages of Insurance
Table 5.21 Number of Medics Per Million People Across Provinces(2014)
Table 5.22 Number of Grade Three Hospitals Per Million People Across Provinces
Table 5.23 Financial Subsidies Per Person Across Provinces Modified by GDP Per Capita (2014)
Table 5.24 Relative Strength Index of Financial Subsidies Per Person in Healthcare Across Provinces
Table 5.25 Comparison of Healthcare Expenditure Among Different Groups in 2013
Table 5.26 Relative Strength Index of Financial Subsidies Per Person in Healthcare in Different Groups

Table 6.1 Relation between Healthcare Expenditure Ratio and Healthcare Profit
Table 6.2 Ranking of Some Countries’ Healthcare Efficiency
Table 6.3 Relation between the Payment Ratio of Cash for Healthcare and Efficiency
Table 6.4 Logarithmic Normal Distribution Based on the Data of CHARLS
Table 6.5 Random Number Distribution of In-Patient Cost Generated by the Logarithmic Mean Square Error Based on the Data of CHARLS
Table 6.6 Income Standard and Healthcare Cost Random Number
Table 6.7 Distribution of Out-Patient Healthcare Expenditure and In-Patient Healthcare Expenditure
Table 6.8 Canceling Out-Patient Insurance
Table 6.9 In-Patient Healthcare Insurance Cancelling Payment Threshold and Raise Self-Pay Ratio
Table 6.10 Percentage of Healthcare Expenditure before against after Reforms

Table 7.1 Illustration of Healthcare Reform Process

On Brush Holder Hill / Sheng Hong

As a Hill the brush holder is high,
As a sea the paper is wide;
There is no one word on the sea,
Nothing spoken by the God.

Note: English is not my mother language. As a practice, this poem is translated from my poem in Chinese: 题笔架山。 I hope the experts who master both English and Chinese to offer me some suggestions.

August 25, 2020

The Level of Decoupling between China and the United States and Corresponding Influences / TEMVON

Simple estimation on decoupling (simulated based on SIEM)

(1) Static loss caused by chip decoupling

(2) China’s electromechanical products suffering from static loss in the world market caused by chip decoupling

(3) The influences of US’s increasing tariff on Chinese products


For the United States, to maintain its good relationship with China is to strike a balance between national security and economic development.

The United States assumes that China is a potential enemy for the United States, so it will restrict the allocation of strategic resources to the Mainland China as it does to the enemy countries.

One of important military technologies is to ensure the accuracy of weapons. It is computer technology and information technology that determine the accuracy of missiles or UAVs, including obtaining information, information network, information processing, and taking actions according to information orders. Therefore, computer technology and information technology should be regarded as strategic ones.

The United States maintains a certain amount of large trade deficit, so that it can export dollars, obtain seigniorage, and make up for defense spending. If the deficit is greatly reduced, the seigniorage revenue will be only reduced, not to mention the benefit of the United States. However, Trump administration attempts to correct what they think is unfair by raising tariffs on Chinese products, which is aimless.

In general, raising tariffs on Chinese products does not punish those enterprises or enterprise groups that engage in unfair trade. 93% of China’s exports to the United States are provided by private enterprises and foreign-funded enterprises, but the means of unfair competition are mainly adopted by state-owned enterprises (SOEs).

Figure 1 share of China’s SOEs and non SOEs’ exports to the United States (as of October 2020)

In terms of intellectual property rights, monopoly market is not open and government subsidies and Internet have not provided access to the public, so enterprises can be dealt with as a unit. This is because those who violate the rules of fair competition in the market do not take the state as a unit, or the industry as a unit, but at most take the enterprise group as the unit.

With the modern computer technology and information technology, it is relatively affordable and easy to collect and process the information of specific enterprises and impose legal sanctions on illegal enterprises.

The reciprocity is the structural treatment of individual cases. The principle of reciprocity is to treat the other party in the same way as the other party treats itself, that is, “don’t do to others what you don’t want to do to yourself”, and it is also “if the other party is not treated equally, make it equivalent.”

For China, the best choice is to keep all the economic relations with the United States, including the purchase of high-tech products and technologies, the open access to financial markets, trade relations, and cooperation in education and scientific research.

If China and the United States are decoupled from each other, such as trade decoupling, the Mainland China will lose the US market and the huge international market of its allies immediately. Financial decoupling will cause great losses of resources and reduce the real valuation of the enterprises. If decoupling of high-tech products will cause many enterprises in Mainland China to stop production immediately, the decoupling of high technology education or technology cooperation will also cause the Mainland China high-tech enterprises to lose American resources.

The only thing that needs to be improved in the past trade relations between China and the United States is to adjust the asymmetric tariff to the symmetric tariff, that is, to reduce China’s tariff level on US imports (weighted average 6.3%) to the US tariff level on China (2.9%).

Figure 2 Weighted average tariff rates of China to the US and the US to China

The most important way for Mainland China to achieve the goal of anti-decoupling is to resume the path of marketization and rule of law, and follow the market rules, rule of law, and freedom of expression..

If it follows the market rule, rule of law and freedom of expression, Mainland China is sending the strongest “non hostile” signal to the world. Because these rules and principles are made for the fair settlement of disputes in peaceful means, they are non-violent and pose no threat to other countries. These signals will also affect US’s judgement on Mainland China and makes US view China as a rival rather than an enemy.

The development of strategic high technology depends on a set of institutional environments, namely, market system, rule of law and freedom of speech. One of the most important links is the mechanism for continuously generating innovative ideas, and the environment for innovative technology elites and entrepreneurs to stand out.

Take the US chip decoupling as an example. China will not be able to make up for this shortcoming at least in the medium term, that is, 5 to 10 years, or even in the long term, 20 to 30 years. This is because the production of chips requires an all-round institutional environment. First of all, it needs world-class universities and research institutions. The first principle is free expression, which takes a long time.

Chinese universities and scientific research institutions still pay attention to administrative departments. They have only carried out a certain amount of academic research, and the research topics are only limited. Due to the strict examination and approval system of private foundations, 90% of government research funds are used for applied research, and the application evaluation mechanism is unfair and opaque, so there is little innovation in the basic theory.

Threatened by the US restrictions on chip supply, the Chinese government issued a military order against the Chinese Academy of Sciences under the “national system” to overcome problems such as chip lithography. However, this government-led research and development method itself has many drawbacks. In the case of political ambiguity, the government’s allocation of scientific research funds depends more on power and relationship. Government funds will not be effectively allocated to people with the ability to innovate.

If China wants to establish a complete chip industry system, it is impossible to rely solely on huge investment in the medium term.

Like the United States, the principle of reciprocity is also the best principle for China to follow. It should be emphasized that the Chinese government should attach importance to the positive principle of reciprocity. The positive principle of reciprocity not only refers to the equal punishment of the other party’s unfair behavior, and its purpose is to force the other party to return to the rules of fairness; but also refers to the fact that one party should reflect on whether the other party’s action is reasonable and whether it conforms to the constitution. If so, it should not take revenge, but should adjust its own behavior.

The constitutional system of the United States not only stipulates the constitutional rights of citizens in the constitution, but also effectively protects the constitutional rights of citizens through the judicial system.

This means that if foreign governments or enterprises violate the constitutional rights of American citizens in the United States, they will be stopped and punished; if the United States government wants to punish foreign governments or enterprises that infringe on the constitutional rights of American citizens, they will also be stopped or suspended.The Americans, including the American media in the United States, will denounce things that Americans think violate the values of the constitution of the United States. This kind of condemnation will affect public opinion and the legislature of the United States. For example, the bills passed by Congress to punish those who violate human rights and the rule of law are not bills directly related to American citizens or the country. It was almost unanimously approved, which shows that the two parties in the United States are more consistent at this time, and there are fewer interest groups hindering them.

If the decoupling actions taken by the US government violates the constitutional rights of US citizens, citizens will also go to court.

There is a tradition of lobbying in the United States. If the US government’s Sino-US economic policies harm the interests of interest groups, the interest groups can prevent or restrict these policies through lobbying.

If the US government takes a large-scale decoupling action, it will have a more significant impact, and the damaged interest groups will also respond more fiercely. The lobbying activities of industrial interest groups are key to limiting the decoupling of the executive order of the US President.

As long as there is suspicion of violating US laws, US companies will not hesitate to take legal measures against competitors, especially those from overseas. Of course, their lawsuits may not be tenable, but this may be a means of competition. Especially in the United States, local American companies have a “geographic advantage”.

When foreign companies generally violate U.S. laws and regulations, the US Congress will also strictly require or impose sanctions on foreign companies.

The provisions of the Chinese Constitution on civil rights are similar to those of the US Constitution. However, the difference from the United States is that China’s Constitution cannot be directly cited in court trials, that is, constitutional rights cannot be effectively implemented.

However, a series of administrative laws in China, such as “Administrative Punishment Law”, “Administrative Reconsideration Law”, “Administrative Procedure Law”, and “Administrative Enforcement Law”, restrict the power of the administrative department and can be used in judicial process. The process may play a role in defending the Constitution and effectively restricting the executive organs.

China’s courts cannot be “free from administrative interference” as stipulated in the Constitution. One of the most serious forms of interference is to force the court to “not accept” administrative litigation filed by citizens. Therefore, the various “Administrative Laws” cannot actually be used in the judicial process. The rights of citizens stipulated in the Chinese Constitution are often not effectively protected.

The reform and opening up started in 1978 After more than 40 years of development, the Communist Party of Chinese (CPC) has formed a tradition different from that of Mao era. This can be called the “Deng Tradition”, that is, the reform and opening up. This tradition advocates marketization and rule of law, tends to the principle of freedom of speech, and hopes to gradually reform the political system.

This tradition has dominated China’s system reforms and policy formulations during the 30-odd years of reform and opening up, lifted restrictions on people’s economic freedom, motivated entrepreneurship and market vitality, and brought China’s miracle. The foundation of Deng’s tradition in the CPC has been deepened.

Reform and opening up is not only a concept, but also an expedient measure to improve the situation of the CPC. The impetus released from the transition from planned economy to the market economy and the improved resource allocation will continuously generate the wealth, which will also bring benefits to CPC officials. On the other hand, although they know the importance of the market, they tend to gain a larger share of the market, and thus have an anti-market tendency.

When it comes to the relationship with the United States, Deng Tradition is more inclined to understand the reasonable requirements of the United States, and changes the pressure from the United States into a driving force for domestic reforms.

However, SOEs are a very powerful interest group. They instinctively oppose the abolition of the privileges and monopolies of themselves. Because they and administrative officials belong to the same interest group that can exchange identities, they have very powerful political resources that will affect government policies and even international relations.

The Deng’s tradition and the power of special interest groups are integrated. On the one hand, Deng’s tradition and the discourse of reform and opening up still have a certain or even dominant position in the CPC, because this may be used to maintain the CPC’s image of continuing reform and opening up, and help ease the ideological tension with the United States and the Western world; on the other hand, monopoly group of SOEs and administrative abusive groups hold actual political power and conduct counter-reform and opening operations under the rhetoric of reform and opening up.

After the reform and opening up, private enterprises have made considerable progress. According to the National Bureau of Statistics, by 2019, non-state-owned enterprises accounted for about 73% of the industrial added value; non-state-owned enterprises accounted for 87% of urban employment, and provided more than 100% of new job opportunities. If we simply associate the proportion of employment with the proportion of GDP, knowing that the proportion of employment in the state-owned sector in rural areas will be lower, we can infer that the proportion of GDP created by the non-state sector is more than 87%.

Figure 3 proportion of SOEs and non SOEs in industrial added value

Figure 4 employment increment of SOEs and non SOEs in each year

The rapid development of non-state-owned enterprises since the reform and opening up is propelled by the market rules and the rule of law, as well as the property rights system. However, they often suffer from the exploitation of state-owned enterprise monopoly, the increase of tax rate, and the threat to their security and property rights by the administrative department and its officials. Therefore, they have the orientation to support marketization and rule of law, and oppose administrative abuse and state-owned enterprise monopoly.

Non-state-owned enterprises have always been relying on their own innovation and efforts to gain access to the US market. As mentioned previously, non-state-owned enterprises in Mainland China account for 92% of exports to the US; they also attach great importance to the patent system so as to develop their own technology and products. In 2016, the effective patents obtained by non-state-owned enterprises accounted for 97% of all patents.

SOEs have unfairly obtained various preferential treatments, subsidies and monopolies. They are unfair competitors in the Mainland China’s market, and of course they are also unfair competitors in the international market.

SOEs lack a mechanism to encourage innovation. They rely more on their monopoly on the domestic market and manage to grab the intellectual property rights of enterprises in other countries. Such monopolies do not want to see the IP system be further strengthened.

The so-called “administrative abuse group” refers to administrative departments that do not abide by the constitution and laws. They often violate the rights of citizens and enterprises under the banner of the government, manipulate the judicial department, and deprive citizens and enterprises of the right to justice. The abuse of police force suppresses the complaints of citizens or enterprises, and further violates the rights of citizens and enterprises, and seeks their own interests.

This administrative abusive group even created its own standards that are different from the Constitution and the law. For instance, they illegally determine a large number of residential houses that have been inhabited for 10-20 years as “illegal buildings” and proceeding in a brutal demolitions.

Since this interest group often violates the Constitution and laws, it does not want their unconstitutional and illegal activities to be exposed by the media and condemned by the public. Therefore, they support the suppression and monitoring of Internet public opinion, and oppose the freedom of speech.

Corporate executives, white-collar workers, small and medium-sized enterprises’(SME) owners, professionals and freelancers are the strong players in market competition. They benefit more from the market system, gaining higher income and accumulating a certain amount of wealth. They adapt to market rules and hope that property rights will be protected, so they tend to restrict the administration by the rule of law, and rely more on freedom of speech.

The Chinese government opposes decoupling measures, especially, to giving the access to foreign companies and individuals with more Chinese market demand. This includes lowering tariff rates, lowering restrictions on foreign investment, and opening up more Chinese domestic markets. Its purpose is to provide benefits to countries other than the United States in order to contain the United States.

An important achievement is that China signed the Regional Comprehensive Economic Partnership Agreement on November 15, 2020. Another important achievement is the Sino-EU Investment Agreement signed with the European Union on December 30, 2020. The agreement includes the protection of investment, respect for intellectual property rights, transparency of subsidies and improved market access conditions.

The US’s requirement to enter the Chinese monopoly market, cancel government subsidies and protect intellectual property rights will be opposed by state-owned enterprise monopoly groups and administrative abusive groups. However, as the Chinese Communist Party’s senior officials have declared that they will carry out these reforms, they may become one of the driving forces for reform in this field in China.

On the one hand, the CPC’s senior leaders not only sincerely follow Deng’s traditional ideology and use reform and opening up discourse, but also realize that marketization and rule of law can bring them benefits as a whole; on the other hand, they want to gain a larger share of incoming wealth.

The best choices that meet the interest of both China and the United States are shown as follows:
(1) The United States: Restrict strategic high-tech, and let others go; however, individual or structural sanctions should be imposed on companies that violate fair trade rules;
(2) China: Maintain all the original economic relations with the United States; the condition is to improve the intellectual property system, break monopolies, remove government subsidies from SOEs, and provide open access to (at least part of) the Internet. Furthermore, it is necessary to reduce the level of tariffs on American products based on that of the United States on Chinese products.
(3) Common points: Except for strategic high-tech, the rest should not be decoupled; Sino-US tariffs should be equal.

The global loss due to the decoupling of US-China chips ranges from US$393billion to US$1179 billion. Assuming an even distribution of production and consumption, calculated at 18% of the world’s GDP, the EU’s revenue will decrease by US$70.8 billion to US$212.3 billion, 18% of world’s GDP.

Figure 5 Trade of high tech products between the US ,China and the EU in 2018
unit: million US dollars

China is the EU’s third largest importer and the largest exporter. It is the second largest trading partner in general, and it has approached the scale of trade between Europe and the United States.

The EU and China have similar trade structures. As a unified trade and tariff unit, the EU is China’s largest overseas market for intermediate products, accounting for 16.48%; its intermediate products are also China’s largest overseas supplier, occupying 12.43%; significantly higher than the 7.38% and 11.7% of the United States. Therefore, seen from the data reflected in trade, China and the EU have a deeper international division of labor.

Figure 6 Distribution of China’s intermediate products market and supply place in 2017 Unit:%

Since the European Union does not have the same large-scale leading chip manufacturer as the United States or East Asia, the largest chip manufacturer in Europe, STMicroelectronics’ sales in 2019 is only about 9 billion US dollars. Regardless of the quality and quantity of chips, it cannot replace the United States or East Asia. Generally speaking, there are very few EU countries that can replace the United States in chip supply. Therefore, the decoupling of strategic high-tech between China and the United States will not directly bring much market to EU companies.

The average price of EU products is also 13.5% higher than that of China, and there is competition from East Asia, the United States, ASEAN, and emerging economies. The EU will not substitute much for the production of electromechanical products.

Since the EU is still a consortium of sovereign states, its legislation and decision-making procedures are complicated, and the unanimous consent rules or double-specific majority rules require high cost and time-consuming legislation and policy formulation. However, once a law or policy is formulated, it will be more effective and authoritative, and will have more bargaining power in negotiations with other countries.

The cultural traditions and institutional structures of EU countries are closer to the United States between China and the United States. Its values are in favor of market rules, the rule of law and the freedom of speech. As the Chinese government has done something that violates market rules, the rule of law, and the principles of freedom of expression, the EU’s overall judgment on China has changed, and it has gradually regarded China as hostile.

When the EU once again regards China as a potential hostile country, it will move closer to the United States in terms of strategic high-tech products, and will not export high-tech products that the United States prohibits from selling to China.

In order to achieve effective decoupling of China’s strategic high-tech technology, the United States will inevitably put pressure on the European Union. It will not allow EU countries to steal the market left by the US’s decoupling or allow China’s 5G equipment to enter the EU market. If the United States wants to have an effect on the strategic high-tech decoupling, it cannot allow EU countries to give access to China in the high-tech field. This includes not only high-tech products such as chips, lithography machines, AI, robots and precision machinery, but also it requires the EU to decouple from China in the fields of high-tech scientific research and education.

The decoupling of the United States from China should be limited to the decoupling of strategic high-tech fields. When the United States goes further, it will be concerned about the substitution of the European Union, thus restricting the decoupling to strategic high-tech areas that must be decoupled.

General conclusions about the degree of decoupling
(1) The common best choice of China and the United States: decoupling in strategic high-tech fields;
(2) Consider the status quo of the US system structure: the trade war may be suspended, sanctions on Chinese state-owned monopolies and sanctions on Chinese Internet companies that affect American public opinion, and sanctions on Chinese companies with intellectual property rights violations may be increased;
(3) Consider the status quo of China’s institutional structure: the market is less likely to recover, the rule of law and the freedom of speech in the short term, and the decoupling of strategic high-tech fields is inevitable;
(4) The United States adopts structural or case-by-case handling of China’s problems in market entry, intellectual property rights, Internet access, and government subsidies.
(5) The two sides can reach an agreement on tariff equality, that is, China will reduce the tariff on the United States based on the tariffs imposed by United States, and the two sides can further reduce the tariff to zero.

Full text in Chinese : http://sheng54.net/2021/02/26/%e4%b8%ad%e7%be%8e%e8%84%b1%e9%92%a9%e7%a8%8b%e5%ba%a6%e5%8f%8a%e5%85%b6%e5%bd%b1%e5%93%8d%ef%bd%9c%e5%8d%81%e7%bb%b4%e8%bf%9c%e6%99%af%e5%85%ac%e5%8f%b8%ef%bc%88temvon%ef%bc%89/