U.S.-China Commission Hearing: 

China¡¯s Capital Requirements and U.S. Capital Markets

 Thursday, December 6, 2001 

Panel II ¨C U.S. Capital Markets/China¡¯s Capital Requirements 

Testimony by 

Stephen M. Harner


S.M. Harner and Company


It is a great honor and privilege for me to be able to testify before the U.S.-China Commission.  During a 25 year career in finance, consulting, and government service in Greater China and Japan, I have observed first-hand how often perceptions and preconceptions about financial and business relations between the United States and these countries have departed from reality, and how usually U.S. interests¡ªboth commercial and national¡ªwould have been better served through careful analysis.

I hope that my testimony today will serve to clarify the reality as well as the implications of the relationship between China and Chinese entities and international financial markets.  To the extent possible, my testimony will offer quantitative support for my conclusions, as we are, after all, discussing money.  I feel strongly that speaking in quantitative terms¡ªputting a price on the matter, as it were¡ªis an important, perhaps the most important, step in reaching justifiable conclusions, at least concerning the question we are discussing. 

What are China¡¯s Current and Projected Capital Needs? 

I.                     China¡¯s Development Capital Needs ¨C How Much from International Markets? 

A.     Investment and Fund-Raising During the Ninth Five Year Plan Period 

For most of the past two decades, and particularly since 1992, China¡¯s economy has been in transition from the centrally-planned, wholly state-owned system to a ¡°mixed¡± system with a drastically reduced state-owned sector.   This transformation is nowhere complete and, indeed, is certain to last at least another decade.  During this period, the hand of government has been and will remain strong, and ¡°five year plans¡± remain highly relevant as indicators of where government will directly or indirectly (through its control of the financial system and major institutions) direct investment.  

In the following discussion, when I refer to ¡°China¡± I will be referring to the central and local organs of the Chinese state, state-owned corporations, and all other corporate entities and individuals undertaking investment activities in the economy. 

The question before us is:  What will be the capital needs of China in the coming decade and, particularly, during the next five years or so?  And to what extent will foreign capital be accessed or required?  To answer this question, let us first observe the record of the five years 1996-2000, the period of China¡¯s Ninth Five Year Plan (FYP).


Source:  People¡¯s Bank of China Quarterly Statistical Bulletin, No. 3, 2001



Figure 1 provides data from the period 1996-2000 showing the robust investment performance of the Chinese economy.  In each of these years, investment in fixed assets¡ªincluding capital construction, technological upgrading and transformation, and real estate¡ªexceeded 30 percent of GDP.  During the last three years the number was between 36 and 37 percent.  In absolute figures, this amounted to cumulative investment of over USD 1.7 trillion.   (Note:  until 1999 these data are greatly under stated, since non-state-owned units were not included.  From 1999 the figures are for ¡°the whole society¡±¡ªincluding all state-owned and non state-owned corporation entities (i.e., including also foreign invested companies)¡ªbut excluding collective units and individuals).  

Anyone who knows China knows that a significant part of the funds invested will generate little or no returns, or were simply wasted.   The period 1996-2000 was a period of virtually unrestrained commitment of funds¡ªinevitably sourced from banks--to investment projects by local government agencies and locally state-owned




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