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7.1 Influence of the “US school” in PRC bureaucracy

Although domestically educated officials still dominate many political and high-ranking government positions in the PRC, since the 1990s many persons who studied economic theory, particularly in the United States, have started to assume important policymaking roles in government institutions such as the Peoples Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE). The US has become the most popular study-abroad destination for young students in the PRC, followed by Australia and European countries while Japan, formerly the most popular country for Chinese students studying abroad, now comes third or fourth. This change points to a decline of the “Japan school” in the PRC policy-making process.

What factors are driving this change? One factor is that a more open PRC economy and the increased trade and capital flow with other countries motivate more students to learn English as an international language. Immigration policies and the availability of scholarships may be another factor. However, economic policy changes within the PRC and economic trends outside the country in recent years also make the US attractive to Chinese students since the processes of converting the PRC economy to a more market-oriented economy requires knowledge on contemporary economic theory. Many view the US as the best place to study these economic theories. Economic trends outside the PRC further contribute since the US economy enjoyed a new stage of development in the 1990s while Japan underwent a long recession after the bubble economy collapsed in the late 1980s. For some in the PRC it seemed that the US might offer better economic lessons than its neighbor. And in a culture that places a premium on personal networks, many young students who aspire to succeed in the bureaucracy believe that studying in the US provides the advantage of acknowledgement as members of the same alumni group as the sons and daughters of such past PRC leaders as Deng Xiaoping and Jiang Zeming.

However, we neither recommend nor predict a dominant “US school” for policymaking in the PRC. Although nurturing policymakers who learn contemporary economic theory will promote the effort to work out market-oriented economic policies, the PRC should be careful not to rely only on neo-classical economic-based mathematical theory, but should try to learn from the wide range of experience of other Asian countries. Some foreign commercial bankers in the PRC have criticized PBOC Beijing policies as “pie in the sky” that may not reflect the reality of the local financial market. Moreover, the optimal allocation theory of contemporary mathematical economics cannot address the crucial problem of income distribution. The current Hu Jintao and Wen Jiabao administration has emphasized the importance of addressing income disparities, putting forward the idea of a harmonious society ( “hexie shehui”). Given speculation that the current administration has criticized and penalized some of those who pursued radical privatization in the previous administration, the influence of the “US school” in the PRC bureaucracy may now be on the decline. (31 May 2005)

7.2 Competing bureaucracies under a socialist market economy

Since the PRC’s entry into the WTO in 2001, authorities have been grappling with how to deal with the issue of preferential tax treatment for foreign-invested companies. Both foreign and Chinese companies have been paying close attention to this question, yet after more than three years of interest in the issue, no final decision has been taken.

At first glance there seem to be differing views that are complicating a rather simple situation. Heavyweight players in the PRC bureaucracy on this issue are the Ministry of Finance, State Tax Administration and Ministry of Commerce. Ministry of Finance and State Tax Administration are certainly in favor of terminating this treatment primarily from a revenue consideration, but also as a matter of applying fairness in the taxation principle. The Ministry of Commerce strongly opposes it, saying that this treatment is essential to encourage FDI, which has been the main engine for economic growth in the PRC.

The fundamental difference seems to be that while the Ministry of Commerce tries to use the tax regime as one important policy tool, one which may contribute to achieving a certain policy goal, the tax authorities want to approach any taxation regime purely from the standpoint of what makes tax logic. The PRC is not unique in this respect since the exact same situation exists in Japan.

In the past government ministries under the State Council mechanically carried out policies that were decided by the Communist Party without adding their own ministerial views and opinions on policy matters. Or rather, they did not explicitly express their views and tried to avoid giving an impression to the outside that conflicting views on a specific policy agenda were circulating among ministries and Party. However, although preferential tax treatment is just one of many policy issues facing the PRC now, it is interesting to observe that ministries now quite openly express their own views. How should we interpret such a change in the context of the PRC?

First, it is apparent that the tight Communist party control over mass media has been gradually loosened. Now the Party seems less concerned about giving an impression to the outside that there are conflicting views within the government. Second, in general the PRC bureaucratic structure has gradually changed to reflect the shift of economic structure from a centrally planned to a more market-oriented one. One milestone in this regard was the transformation of the former State Planning Commission to a State Development and Reform Commission in the late 1990s. This may indicate that each ministry has become a more autonomous entity with power to pursue its own policy. Third, there is a close relationship between the Ministry of Commerce and the foreign-invested companies that appears to be supported by the strong, influential power of foreign-invested companies. This means that a more open economy invites pressure from outside which inevitably affects policy decision-making within the PRC. Another example of this is the recent foreign pressure to revaluate the renminbi.

Lastly, as the bureaucracy becomes more flexible proper policy coordination is essential. In this regard the role of the Party, and maybe other administrative bodies like the State Development and Reform Commission, becomes more important. This requires PRC authorities to have even clearer ideas and policies than ever when deciding which economic policies to pursue in the future. (20 January 2006)

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