2012 Conference

China and Inner Asia Session 271

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The Politics of Regulation in China’s Strategic Industries

Organizer and Chair: Yukyung Yeo, Kyung Hee University, South Korea

Discussants: Loren Brandt, University of Toronto, Canada; Margaret M. Pearson, University of Maryland, USA

During the 1980s and '90s, the question in China was one of transforming socialist institutions into market institutions. Today, though, with the socialist system basically dismantled and a market put in its place, the issue has become one of understanding how the Chinese party-state governs this market, and what kinds of regulatory policies and tools are employed. While China is purposively attempting to build up a modern market system and benchmark regulatory institutions from advanced industrial economies, economic institutions and their actual practices are often highly context-specific. Therefore, it makes a lot sense to explore what form China’s new regulatory state will take in governing its strategic industries. This panel is designed to investigate the political economy of China’s economic regulation. The focus of the panel is placed on the questions of how the Chinese party-state exercises its regulatory means and control, and what forms of regulatory authority is rising. To this ends, this panel of scholars investigates/compares a range of strategically significant infrastructure (oil, power, telecommunications, and aviation) and manufacturing industries (automobile and electronics). The papers here study how bureaucratic politics, central-local dynamics, the role of foreign capital, and sectoral characteristics interact and shape China’s regulatory regimes in industrial economies. And how do the contours of Chinese regulatory state vary across sectors? What are the underlying political and economic logics? In so doing, the panel hopes to reflect upon the major features of China’s system of economic governance, normatively and institutionally.

The Politics of Regional Monopolies in China: Oil and Power Companies
Kun-Chin Lin, University of Cambridge, United Kingdom

Over the past decade, a hallmark approach in China’s industrial policy has been state sponsorship of domestic oligopolies along regional lines. The statist logic is compelling – industrial collusion offer fiscal and market stability, and captive markets ensure profitability and organizational advantage for the new federally-controlled companies to combat local government protectionism and market fragmentation. Through the case studies of the Chinese national oil corporations (NOCs) and independent power providers (IPPs), I demonstrate that regional oligopolies have experienced different outcomes in their ability to gain control over markets under their nominal jurisdictions. While NOCs have largely consolidated their control by displacing local state and private players, IPPs have had to constantly negotiate with coal producers and provincial electricity grid owners. In both industries, oligopolistic competition has not followed market signals but centered on Beijing’s role in cross-sectoral redistributive policies including price-setting. I argue that the contentious sectoral politics stem from the institutional legacy of the creation of these state-controlled oil and power corporations, examining the variables of asset profiles, pricing mechanism, and degree of corporate centralization. I conclude that the contribution of the regulatory state is not so much in the creation of national level supervisory institutions or even pro-competitive rules, but in bringing to an end the political economy of “particularistic contracting” between the state and state-owned corporations.

The Political Economy of Chinese Competitive Industries
Yukyung Yeo, Kyung Hee University, South Korea

One of the most important aspects of China’s move to a market-based economy has been the effort of the government to replace its former structure of direct government control with regulatory mechanisms deemed appropriate to an advanced industrial economy. Yet existing studies on the subject of regulatory state in both Chinese and comparative political economy have remained limited by mainly focusing on formal state institutions and infrastructure industries. Using case studies of telecommunications and automobile, this paper has two-fold arguments. Empirically, despite the differences in the industries (such as sectoral characteristics, central-local power relations, and role of foreign capitals), the central state oversight sets in when the sector is strategically significant. However, the forms of regulatory authority vary across sectors. While formal state institutions account for the politics of regulation over telecoms business, the case of automobile manufacturing shows how the Chinese central leadership actually exercises its regulatory authority for strategic but highly decentralized sector thorough “informal” systems of control. Hence, moving beyond the conventional approach that highlights formal institutions in infrastructure industries, this study calls for the need to take into account both formal and informal state institutions to better understand China’s regulatory governance in competitive sectors.

Regulatory Construction of a Lifeline Industry: The Turbulent Path of Airlines Reform
Sarah B. Eaton, University of Gottingen, Canada

The post-1978 course of Chinese airline development is marked by a puzzling pattern of reform and retrenchment. In the early reform period, policymakers adopted a comparatively radical reform pathway premised on government-enterprise separation, localization, dropping barriers to entry for start-up airlines and price deregulation. In the late nineties, this process of reform ground to an abrupt halt as the General Civil Aviation Administration of China (CAAC) tried to re-regulate prices and cut back capacity in the industry and, most decisively, when it engineered a major restructuring of the industry around the Big Three state-owned airline groups in 2002. And while the industry has been open to private sector participation since 2005, the market access of private airlines is limited by informal and formal barriers to entry. What accounts for this reverse course? The evidence suggests that complementary economic and political logics have shaped this policy shift. When measures promoting competition cut into the commanding presence of the largest state-owned players, the CAAC which retained close ties to the largest airlines intervened to manage the market in accordance with the SOEs’ particularist interest in maximizing revenue. In addition, the development of an SOE-directed industrial policy regime over the 1990s emphasizing the development of large, globally-competitive and profitable SOEs has also left an imprint on airlines regulation by solidifying the norm of ‘managed competition.’

National Policy Paradigms and Local Government Initiatives: The Campaign of Industrial Upgrading in China’s Electronics Industry
Ling Chen, Johns Hopkins University, USA

The electronics industry has been the largest high-tech industry that China seeks to promote in its campaign of industrial upgrading. Governing the electronics industry, however, has become an increasingly challenging task. In contrast to the state-monopolized infrastructure sectors that are largely managed from above, the diversity of the electronics industry allows it to be managed both from above and from below. The electronics industry is also different from the automobile industry, where the role of foreign investors is restricted to a few joint ventures. Governing the electronics industry involves regulating a large number of domestic and foreign enterprises at the same time. As such, the industry becomes a typical example where upgrading initiatives since the 1980s have been caught between competing policy paradigms supported by two camps of central government agencies. On the one hand is the logic of expanding the industry by attracting large volume of foreign direct investment. On the other hand is the logic of nurturing indigenous innovation capacity. The co-existence of the two logics provided space for local governments and electronics business (both domestic and foreign) to selectively maneuver and adapt the policies to local contexts. These adaptations affected the competitiveness of local electronic firms and their position on the global value chains, which generated further feedback for revisions of paradigms at the central level. Thus, examining the policy loops running through the central and local level is crucial for understanding the dynamics of regulating high-tech industries in China.