Competition Policy, Corporate Saving and China’s Current Account

Rod TyersCollege of Business and Economics

Australian National University

Funding: ARC Discovery Grant No. DP0557885Institutions: CBE, CCER at Peking University, Hong Kong IMRComments and discussions: Feng LU, Justin Yifu LIN, Ling HUANG, Miaojie YU and Yongxiang BUResearch assistance: Pingkun HSU at the ANU and Liu LIU at the CCER

Plan• Oligopoly rents, saving and rapid growth

• Corporate, national saving and the current account

• Excess saving and China’s “growing pains”

• Modeling competition policy, saving and the current account

• Policies to moderate the gross saving rate

– Public SOE dividends– Fiscal expansion– Privatisation

• Policies to reduce oligopoly rents

– Price regulation– Anti-trust policies

Oligopoly rents and rapid growth

• Fernald and Neiman (2006): oligopoly rents helped concentrate income, raise saving and accelerate growth in Hong Kong, Korea, Singapore and Taiwan

• China’s growth has surged since its WTO accession in 2000 with average GDP growth rates similar to those of Korea at its peak

• Lu et al (2008): find substantial oligopoly rents in China’s petroleum, metals, transport and telecommunications, all of which are dominated by SOEs

• Kuijs (2006): coincidental rise in corporate (mainly SOE) saving to 20% of GDP in 2005

Real GDP growth rates, %/yr

-10

-5

0

5

10

15

20

1950 1960 1970 1980 1990 2000 2010

China

Korea

Taiwan

“Excess” savings?

• Gross saving > 50% GDP, higher than needed to finance investment, yielding CA surplus of up to 10% of GDP

• High household saving rates

– China’s household saving rates are high at 25-30%• Decline in SOE employment• Competing permanent income, life cycle hypotheses

– Modigliani and Cao (2004)• Permanent income story is strong

– Horioka and Wan (2007)• Support for both the permanent income and life cycle hypotheses• Persistence is strong

• At 20% of GDP, corporate saving is extraordinarily high

Saving and the current account

• Expenditure on GDP: Y = C + I + G + X - M

• GNP is Y + N, where N is net factor income from abroad

• Disposal of GNP is Y + N = C + T + S– where S = SH + SC is total private (household + corporate) saving

• From these it follows that

CA = X – M + N = SH + SC + (T - G) – I = SD - I

Gross domestic saving and investment%GDP

-10

0

10

20

30

40

50

60

1999 2000 2001 2002 2003 2004 2005 2006 2007

I / Y

S / Y

Sd / Y

(Sd-I)/Y

Household saving rates, survey data

0

5

10

15

20

25

30

1978 1982 1986 1990 1994 1998 2002 2006

Urban Saving Rate

Rural Saving Rate

Average

Savings components, flow of funds

0

5

10

15

20

25

30

35

40

45

50

1992 1994 1996 1998 2000 2002 2004 2006

Total

Corporate

Government

Household

Taiwanese saving

-5

0

5

10

15

20

25

30

35

1981 1984 1987 1990 1993 1996 1999 2002 2005

Total Savings / GDP

Corporate Savings / GDP

HH Savings / GDP

Govn't Savings / GDP

Growing pains and excess saving

• New income retained in the urban and corporate sectors

– Consumption share of GDP falling– Unequal distribution of the fruits of growth

• Rising saving–investment gap (CA surplus)

– Protectionist backlash in trading partners

• Capital controls require that CA surplus exits as reserves

– Sterilisation requirements now exceed PBC and commercial bank capacity

– This distorts the balance between nominal appreciation and inflation in favour of inflation

Declining consumption share

0

5

10

15

20

25

30

35

40

45

50

1999 2000 2001 2002 2003 2004 2005 2006 2007

C / GDP

G /GDP

I / GDP

X / GDP

M / GDP

Addressing excess saving

• Policies to reduce total saving

– State SOE dividends (increased corporate taxation)– Fiscal expansion (temporary reduction in government saving)– Privatisation (reduction in corporate saving rate)

• Policies to reduce oligopoly rents

– Price cap regulation– Anti-trust policies

• Analysis requires an economy-wide model with imperfect competition

Modelling• Comparative static general equilibrium model with

oligopoly

• Genesis: Harris (1984), Horridge (1987), Gunasekera & Tyers (1990), Golley (1993), Rees (2004), Tyers (2005)

• 18 sectors, 5 primary factors: capital, skilled labour, unskilled labour, land and other natural resources

• Firms in all sectors interact on prices with propensities to collude represented by conjectural variations parameters

• Home products in each sector are differentiated by variety

• Home products are imperfect substitutes for foreign products, which are assumed homogeneous

• The economy is “almost small” – fixed import prices but foreign substitution drives export demand

Pricing behaviour

– Each firm supplies a differentiated product, so prices to max profit:

– The trick is to know the elasticity of demand, which depends on elasticities of substitution, firm numbers and conjectural variations:

– Firms are identical in each sector and μ=0 indicates non-cooperative Nash, μ=1 indicates full cartelisation

– Elasticities differ according to the source of demand, so

11

1

ii

i

i

pm i

v

iji

ik

p

p

,F F I I X X G G

i i i i i i i is s s s i

Modelling – macro extensions

• There is a capital goods industry that services investment

• Open capital account

– Fixed household saving rate– Fixed sector-specific corporate saving rates– FDI inflow and ΔR outflow depend on home and foreign real rates of

return

• Investment driven by the Q-related ratio of the rate of capital return and the financing rate, r, which satisfies the above

ExpH C NFI S S T G S R

0

VcExp K rI P I

r

Y Kc i ii iK

P MPr

P

Model database

• National and government accounts, balance of payments and inter-industry flows: GTAP VI (2001)

• Flows and parameters capturing imperfect competition:– pure profits: China Statistical Yearbook data on profits and business taxes combined

with PBC data on financing rates facing each sector for 2005

– “effective” firm numbers, conjectural variations: judgements based also on China Statistical Yearbook firm numbers and industry concentration for 2005

– Initial varietal elasticities of substitution: literature and calibration

– fixed cost shares of revenue: literature and calibration

• Calibration steps:– initial elasticities + effective firm numbers + conjectural variations → mark-ups

– mark-up margin – pure profit → fixed cost

– check fixed cost shares against data and judgement

– revise elasticities as necessary

Pure profits by industryca 2005

Per cent of industry turnover Pure profit

Agriculture 0

Metals & minerals 16

Coal 6

Petroleum 35

Processed agriculture -3

Electronic equipment 9

Motor vehicles 4

Chemical products 5

Textiles 1

Other manufactures 10

Electricity -3

Water -17

Gas mfg & distribution -1

Telecommunications 51

Insurance and finance 40

Transport 40

Construction 15

Other Services 15

Policies to reduce saving*

• Public SOE dividends

• Corporate tax rates on accounting profits increased by• 10% (petrochemicals, coal, electricity and telecommunications) • 5% (steel, transport, electronics and retail trade)

• Fiscal balance maintained at constant G by reducing tax rate on production labour income

• Privatisation

• sc →0 in all industries

• All profits are returned to households as dividends

* See paper for fiscal expansion as a temporary measure

Short run effects of saving policy shocks% changes

-120

-100

-80

-60

-40

-20

0

20

40

Real G

NP

Real G

DP

Real exc

hang

e ra

te

Consumptio

n

Househo

ld sa

ving

Corpor

ate

savin

g

National

savin

g

Reserv

e ac

cumulat

ion

Value

of E

xpor

ts

Value

of Im

ports

Trade

surp

lus

Current

acco

unt s

urplus

Public SOE dividends

Privatisation

Policies to reduce oligopoly rents

• Price cap regulation– Medium run closure, shock: mark-up → P=AC in all sectors– Capital stock held constant

• Anti-trust policies (free entry)– Long run closure, shock: pure profits ↓ 30%*

in all sectors– Capital stock expands at constant external rate of return

*At 100% new entries would be extremely large in very profitable industries

Effects of competition policy shocks% changes

-40

-20

0

20

40

60

80

100

120

140

160

Real G

NP

Real G

DP

Real exc

hang

e ra

te

Real pro

ducti

on w

age

Real sk

illed w

age

Real la

nd re

nt

Real re

sour

ce re

nt

Total

num

ber o

f firm

s

National

capit

al sto

ck

Av gro

ss ra

te o

f ret

urn

Price caps

Entry

Effects of competition policy shocksChanges in % of initial GDP

-30

-20

-10

0

10

20

30

40

Consumptio

n

Househo

ld sa

ving

Corpor

ate

savin

g

National

savin

g

Inve

stmen

t

Foreig

n inv

estmen

t

Reserv

e ac

cumulat

ion

Value

of E

xpor

ts

Value

of Im

ports

Trade

surp

lus

Current

acco

unt s

urplus

Price caps

Entry

Conclusions – saving reduction

Public SOE dividends• raise consumption and reduce the imbalance only slightly• turn domestic demand inward, reducing elasticities and raising

oligopoly rents• do not foster further growth

Privatisation• substantially raises consumption and eliminates the imbalance• turns domestic demand inward, again reducing elasticities and

raising oligopoly rents• no GDP or employment gain, investment and growth reduced

Conclusions – competition policiesPrice cap regulation

• raises consumption and more than eliminates the imbalance• reduces costs throughout the economy, depreciating the real

exchange rate and boosting GDP and export growth• real wages rise substantially• sectoral redistribution favours less labour-intensive industries• services sectors are larger and more competitive

Freer entry• entry is substantial (25% more firms) raising fixed costs and reducing

production scale• national capital stock larger with more foreign ownership and

repatriated profits• modest rise in consumption and reduction in the imbalance• reduced investment due to lower real capital returns with larger K• large increases in real wages and rents• sectoral restructuring again reduces labour intensive activity• GDP and exports modestly higher but GNP smaller