Key Sequence

Notation

New Concepts

• Lagrangian
• Lagrange Dual Problem
  • Strong and Weak Duality
  • constraint qualifications

Important Results / Claims

• Connection between duals and conjugates

Questions

Interesting Factoids

Revenue vs Market Cap

• large Chinese coporations are not listed on stocks or only a bit of their shares
• thus revenue / market cap is very different measures

Role of State-Owned Enterprises

1. almost 40 years after market reforms, China’s state-owned enterprises still have a large role
2. state owned enterprises are called on to support economic growth for China/deliver aid/satisfy industrial policies

Problems with SOEs

• lots of debt
• pushed down future productive growth and pushes up public debt
• current policies not tackling SOE performance

Private firms is contributing to about half of economic exports

China has two main forms of foreign involvement:

1. belt and road initiatives: construction projects in foreign countries
2. Investments in foreign countries (buying and building)

Expansions

Two key factors—

1. good forex reserves to finance this expansion
2. coordinated and financed by Chinese government with national priorities

Pros and Cons

Pros

• large foreign exchange ourselves

Cons

• largely based on debt financing internally since companies are not allowing to invest in foreign areas

Market Limitations

To invest overseas, a company needs permission from the government to move money out of the country: this means that China’s currency is non-convertible; thus it limits outwards expands, and domestic companies thus cannot move overseas.

China’s financial system is based on banks: 80% provided by banks or bank-like lenders; 20% from stocks and bonds. 90% of banks are owned or controlled by central or regional government.

Key: this system is build for stability / control.

1. unusually high bank dominance
2. AMC became permanent and control much of the economy
3. stock markets dominated by state entities, unusually limited foreign participation
4. IPO funding shared among different stock type
5. lockup of state shares which devalues companies

Definitions

Capital flows through stocks and bonds. Within China, although the government exert a certain degree of control; a bank based system gives banks a directive, they can control capital flow much easier.

What did we learn thus far?

1. unitary political system—extension of party organization into every part of government (agencies, banks, schools, etc.)
2. unusually large state ownership and assets; unusually high barriers
3. asset transfer to AMCs

taxation setup

• banks are an arm of the state
• China’s fiscal system based heavily on taxation of enterprises
  • VAT on manufacturing: 34%
  • corporate income tax: 17%
  • social security contributions: 18%

compare that to China

• corporate taxes: US: 4%; China: (^)
• payroll taxes: US: 16%; China 25%

fiscal system

• china: taxes on housholds are only 10-11 percent of revenue
• private wealth, capital gains are not taxed
• no inheritance tax
• 20% or so should pay some income tax, actual number is largely lower

distinct feature

1. strongly reliance on enterprises
2. heavily VAT-based
3. central and local government misalignment

History

Taxation 1.0

• tax farming
• each level given a quota of tax to become the higher levels
• central government thus had a smaller share—localities had too much power

Taxation 2.0

• 1994 tax reform
• no more tax farming
• central government got more revenue
• only Beijing tax: everyone else shared a bit of the revenue and can put into special banks

Adverse Incentives

• even if a company is loosing money, its still paying a lot in taxes which is good for government
• …companies are therefore being propped up just to keep them operational

New Fiscal Source for Localities

• Beijing asserted ownership on land
• use rights sold to developers
• ground rent charged for fees

Impact of 2008

• exports dropped 20%
• tried to turn to domestic sources of wealth; but consumers can’t spend enough
• China instead decided to go New Deal and just stimulate economy by building things

China’s Stimulus

• underfunded local mandates (i.e. “we’ll fund half, and you will match, grow your GDP by n%”)
• bank loans to governments (this is not possible in US because then US collapsed) to match the above

BUT: local governments can’t make new taxes and can’t make bonds; they can’t borrow from banks either; so they make a local state enterprise via a “local government financing vehicle.”