Capital Requirements and U.S. Capital Markets
December 6, 2001
II ¨C U.S. Capital Markets/China¡¯s Capital Requirements
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?
China¡¯s Development Capital Needs ¨C How Much from
Investment and Fund-Raising During the Ninth Five Year Plan
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 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).
Bank of China Quarterly Statistical Bulletin, No. 3,
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
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