Diminished State Capacity

1. China’s central government has very few officials
2. Uses a lot of meetings to communicate information from top to bottom.

China is generally more more understaffed because lack of people.

Information Control in China

Information control is required to ensure cohesion in a super decentralized environment; and thus messages deemed divisive or destabilizing are restricted.

China’s restrictions are highly unusual since US trade partner + China + Russia didn’t do this.

China’s State Economic Role

two key properties

1. high proprtion of assets owned / controlled by state entities
2. unusually high barrier for seeking alternatives outside of China

achieving this…

1. high levels of state ownership and control
2. barriers that block alternatives from outside

state ownership

1. 39% of industrial assets
2. 90+% banking
3. all telecom and transport
4. education, scientific, and technological services, media

Extraordinary high in the state woning enterprises, land, and public institutions. State liberalized until around 2008, and then tightened again. Country owns almost 90% of Banking assets.

Why?: if you control the banks, you can control who to lend to.

illegal ownership

• Chinese government prohibits foreign ownership
• this includes media, communication

How to get around this? Variable Interest Entities

• Variable Interest Entities

  1. make a Variable Interest Entities in the Cayman Island
  2. share profits

walled-off

1. strict capital controls
2. exchange rate managed, pegged
3. no foreign otwnership of banks, stocks, bonds
4. no foreign participation in the banking system

Largest on-shore bond market.

RMB

• RMB is not freely convertible
• strict controls on purchasing and selling RMB