Maria Csanádi Institute of Economics HAS

1. Characteristics of resource allocation during crisis: the case of Zhengzhou’s manufacturing enterprises Maria Csanádi Institute of Economics HAS

2. Collaborating partners and funding • Institute of Economics HAS: Maria Csanádi • Beijing Normal University: Li Shi and 15 phd and master students interviewing and collecting news : Gao Xia, Feng Yi, Zhu Mengbing, Cui Yaqiong, Yuan Zeqing, Nie Zihan (+assistant), Zhang Jiliang, Li Chao, Bao Chuanjian, Dai Song, Zhao Guohua, Chen Jianwei, Xu Yantian, Wang Chuanchao, Sundan (assistant) • Institute of Economics CASS: Liu Xiaoxuan • Fudan University: Zhao Chen + Xu Wei Changzhou U. • Ferenc Gyuris Department of Economic Geography at ELTE University Hungary • Aniko Polenyik PhD student at Szeged University H. • Financed by: Hungarian National Research Fund

3. Approach News analysis1760 newscollectiononcrisis, enterprises, investment and migration Enterprise questionnaire: representative sample 445+119+300 Zh.m + Zh.c +Ch.m Changzhou Zhegzhou Manager interviews 45 Number of locations and number of interviews were determined by my guanxi and the collaborators’ physical capacity Presentation Migrantinterviews 200 M. Csanádi

4. Sampling • Manufacturing enterprises • 12 subsectors • Random sampling (10) • Size and ownership concerns: SOEs and large enterprises included owing to their low number • 14% SOE or state controlled enterprises

5. Size characteristics in the sample M. Csanádi

6. Motivation and working hypothesis • Motivation: How does a transforming economy like that of China adapt to global crisis? • Hypothesis: Shock induced by the crisis activates state interventions, interventions activate the decision-making network, the network in turn, activates the system characteristics of resource distribution • Characteristics: political rationality of selective allocation preferring large enterprises that are closely integrated into the decision-making process (IPS, Csanádi, 2006) • Consequences: General system-characterisitcs imply structural motivation of economic units for growth and thereby for repetitive investment overheating

7. Sensitivity to crisis in production between 2008-2010 • Though only 11% of the enterprises were directly exposed to global crisis through export, over 30% stressed to have been strongly hit by it. • Yet, among those strongly hit, only 10% suffered steady decline in output, while 45% demonstrated steady growth, and 34% recovered after the first year of stagnation or decline • Would this be true regarding other economic indicators?

8. Sensitivity to crisis through other indicators between 2008-2010 • The dynamics of other economic indicators: changes in profit, fixed assets, employment and migrant employment between 2008-2010: • Show somewhat higher sensitivity (lower growth) to crisis than that of the output • Still, steady growth and recuperation after stagnation or decline are the most frequent cases in all indicators

9. Puzzle: low sensitivity or flexible adaptation to market conditions? • Indicators suggest either low crisis sensitivity, despite 30% stressing to be hit strongly by it • Or low profit sensitivity: about 70 percent of the enterprises stressed that they would survive zero or negative profit– taking them as temporary. • Third option: flexible adaptation to market rather than low crisis- or profit sensitivity, since also profit showed high percentage of steady growth and recovery

10. Signes of adaptation to market in a transforming economy • Most frequent enterprise strategies in case of zero profit or loss: to remain on the market with production rationalization by decreasing costs (63.6%), by changing production structure (38.7%), by retraining staff (27.5%) or by increasing domestic sales (19.1%), • The less frequently would they choose: • Different ways of „physical” withdrawal from the market (in increasing order): to cut export (0.4%), to reduce the proportion of migrant workers (2.7%), to cut working time (7.0%), to implement paycut (7.4%), to lay off (10.0%). • Different ways of economically rational adaptation through development was not among the most frequently chosen solutions: invest in R and D (10.0%) and to raise funds (9.7%).

11. Investment sensitivity during crisis? • Are they avoiding investment during crisis? No • 55% percent of the enterprises had resources from banks, 29.4% received from commercial institutions, 29.4 % invested from own sources – apparently low investment sensitivity. • The share of the sources in investment: 47.5% own sources followed by bank loans 16.9%, and commercial credit 12.6 • Resources were overwhelmingly for short-term, • since only 13.5% of enterprises had long-term debts • 18% of the enterprises were involved in the stimulus package • Low percentage suggest strong selection in resource distribution for larger investments. Criteria?

12. Biased selection in allocation? • A bias towards larger enterprises (compared to the sample’s size- distribution), increasing with the years. • A bias towards size and level of integration: both large- and medium-sized enterprises are overrepresented in connections compared to the basic ratios of the sample • Bias towards those with network increasing with the years • Size and connection bias simultaneously reflects the non-market focus of adaptation of enterprises in their drive for resources

13. Allocation of resources and guanxi in a transforming economy • These drives motivated by biased selective allocation in the politically monopolized decision-making structure -- despite transforming economy -- implies strong connections with distributor organizations not only in case of SOEs but also in case of private enterprises • This is supported by the fact that while only 14% of the enterprises in the sample are state owned and state controlled, 40% have connections to the LDRC, 36% to Land Bureau, 30% to Housing Committee. Do connections matter?

14. Distribution and guanxi • Those with guanxi had more chance to participate in the stimulus plan. (This was the fact with 42% of those with connections to Cadre Administration, 33.6% of those who had connections with the LDRC, 30.0% of those with Housing Committe, 30.6 with connections to the Planning Bureau and 22.6% with the Land Bureau.) • Those 83 enterprises who got the stimulus support, had more frequently connections with distributor organizations than those in the sample (53% in LDRC compared to 28.0%), (36.1% with Land Bureau as opposed to 22.7% in the sample) • How general is this in the sample

15. Chances for being privileged • Seven direct or indirect sources: longterm debt, stimulus support, investments directly related to stimulus plan, urgent need for long-term financing, slight longterm financing gap to be financed, projects financed by provincial government, new project • Chances (Ch): the number of received privileges (Pr) times the number of enterprises in the given group (N), divided by all potentially receivable privileges (PPr) in the group times the number of enterprises in the group (N). (GrCh = PrxN/PPr.xN). • Average chance of all sample enterprises will be deducted from group chances GrCh-AvCh = (-) below or (+) above the average chances

16. Politically rational reactions to crisis in allocations – bail-out • Export sensitivity: Exporting enterprises, had substantially higher chances to get privileged (17.0%, 16.5%, 18.5% along the three years), compared to those who were not (-1.1%, -1.0%, -1.3% along the three years). • Crisis sensitivity: Enterprises had somewhat higher chances for resource allocation if they were strongly hit by the crisis (2.9%). Chances declined radically if they were hit mildly (-0.4%) or were not hit by the crisis (-4.4%).

17. Politically rational criteria of allocation-- size and type sensitivity • Size-type sensitivity rank: employment, fixed assets, sales in all years • Size sensitivity rank: large, medium, small in all years • Both reflect timeless political, rather than market sensitivity of allocation

18. Sensitivity of allocation to state ownership and central subordination Note: Numbers show the deviation from the average which is 11% Chances according to ownership forms Note: Numbers show the deviation from the average which is 11% Chances according to administrative subordination

19. Sensitivity of allocation -- the strength of guanxi Note: Numbers show the deviation from the average which is 11% Chances to get privileges and strength of connection with banks and government departments

20. Hierarchy of chances according to distributing goverment authorities .

21. Hierarchy of chances according to official visits

22. Chances in case of institutional backing – type of collaterals

23. Chances in case of positional backing –personal positions

24. Self-similarities of allocation in party-states

25. Conclusions • Owing to economic transformation a schysophrenic behavior of enterprises is experienced: economically rational adaptation to market on the short-term and politically rational adaptation to allocation preferences on the longer term, • Allocation of resources have a fixed path: Higher are the chances to be priviledged for large and state-owned or state controlled enterprises, deeply integrated into the decision-making network through guanxi

26. Conclusions (cont.) • Allocation preferences induce politically rational economic behavior of enterprises for growth and drives for deeper integration into the network • Politically rational allocation preferences and politically rational economic behavior lead to overheated investments rather then for economically rational adaptation to market • These characteristics probably become more salient in case of stronger state intervention to compensate the impacts of the crisis as it happened during crisis through the stimulus package and its multiplicative effect

27. Future research plans? • In order to find out if these local results are indeed the characteristics of politically monopolized resource allocation even in an economically transforming party-state independent of space and aggregation level further surveys should be done at prefecture and provincial levels, in spatially different locations. • In order to find out if these characteristics emerge only in case of stronger state intervention in transforming economies reacting to larger shocks, or are independent of time owing to general system characteristics of allocation such survey should be repeated also after the short-term impact of the stimulus package

28. :--( However, I have already exploited all possible guanxi of my friends Thank you for their help and for your listening