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.


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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/

On GuangYue Building / Sheng Hong

The ancient town is circled by white water,
In the town there is a high building established;
For it is majestic the suburbs look lower,
We need not say sorrow when up the building stepped.


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

December 2, 2020

A Feeling of Visit to Ten Thousands Buddhas Tower in Mengcheng / Sheng Hong

Ten thousands buddhas resident in ancient tower,
 No better than live in my mind;
 The sixth ancestor saw no bodhi,
 Ordinary people worship golden sculpture.

Note: English is not my mother language. As a practice, this poem is translated from my poem in Chinese: 访蒙城万佛塔有感。 I hope the experts who master both English and Chinese to offer me some suggestions.

December 4, 2020

A Trip of Zhuangzi Temple / Sheng Hong

Zhou and butterfly share one mind,
Zhuang and fish feel pleasure with each other;
Nature and Human originally are one,
Life and death follow the God's order.

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

December 4, 2020