ASIAN AFFAIRS INTERVIEW WITH WANG HOUHONG

Vice-Governor of tHainan Province

A FRESH START FOR HAINAN ISLAND

Laurent Malvezin.- The Asian financial crisis has created in China some pressure both on its domestic market and its international trade. Hainan is a Special Economic Zone whose economy is very much sustained by tourism and exports. The SEZ has also the reputation to be the weakest of all the SEZ. How did the island fare during the crisis?

Wang Houhong.- As you mentioned, Hainan was already facing financial disturbances a couple of years before the Asian crisis unfolded. The reasons for the financial stress we had were inherent to Hainan. They could not be compared to those faced by other countries or economic areas, because the SEZ is very young: it is only for the past the past 12 year that Hainan is enjoying some socioeconomic since it only became a SEZ (1) in 1988. For years later, in 1992, the economic growth was 40,2%! But, needless to say that such a growth rate is never really and could not be sustained because its contents. At that time, in the earlier 1990, the main engine of growth was the boom in the property market which induced a tremendous expansion of the financial sectors. In other words, we had a bubble, invest and today we are still coping with its consequences and it remains a complex issue. The financial institutions gave loans without much thinking to the real-estate developers. With such a high growth, capital was raised easily. Then later on, problems appeared. The loans became bad, and it ended up with the bankruptcy of the Hainan Development Bank in 1998. That was the first Commercial Bank in China that was allowed to collapse (2).

L.M.- The collapse of the Hainan Development Bank was presented by the Central government as the proof of its willingness to clean up the Chinese banking system. Why was the Hainan Development Bank then singled out?

W.Hh.- Many reasons. One of them was that the bank was in fact a combination of five trust companies and 28 credit agencies that the government had merged into a single commercial bank. These companies and agencies, due to their excessive growth, had all been in trouble. For the enterprises and the population, the closure of a bank like the Hainan Development Bank provoked a number of serious problems. There are actually many others trust companies no different from the closed bank still in operation. We have to reform them, and that’s what we are doing now: so that in the foreseeable future Hainan will become a “financially safe zone”.

L.M.- What is the size of the private sector in the economy of Hainan?

W.Hh.- We do not consider that a comparison between the size of the public and the private sectors in the economy is the most relevant point. We rather look at the role they both play in the whole economy development of Hainan. Of course, the public sector in Hainan is prominent (2). Its role is important in the sense that it leads the economy, including the non-state sector. Nevertheless, we have 300 (private) companies or SME in Hainan in the field of innovation and technology and we assist and encourage them.

L.M.- In 1993, Hainan launched a slogan: “Before starting, let’s fix the rules” (3) for promoting the rule of law which is the corner stone of a market oriented economy. The main target was to convince the foreign investors that Hainan which had a bad reputation a wild place was no longer the Far-West. What was the result?

W.Hh.- Since the establishment of the SEZ of Hainan 12 years ago, more than 130 billion Yuan have been invested, while during the previous 35 years, between 1950 and 1985, it was only 10 billion ! You can see the difference. One third was Foreign direct investment (FDI).. So, looking back at the global trend since the open-up policy, we can say that it was positive. But it was not a continuous smooth curve. In fact, we had a lot of up and down. This is because the introduction of market rules was a progressive affair. It did not happen in one day and in all sectors at the same time but was spread overtime.

L.M.- Certainly, but for the past five years, it is more the trend is rather down as if the foreign investors were quite disenchanted by the economic environment of the Hainan, since other SEZ do not face the same slowdown.

W.Hh.- If you say that the investment environment is the main cause for the FDI drop these past five years, I would say that it is not the only reason. Remember when FDI reached its peak, some of those investments were not healthy ones. It was mainly restaurant, nightclub, hotels and real estate. That is why we should look at the quality of the investments, and by quality I mean productive investments and not hot money. In the context of the economic structural adjustment that we are launching, it is that kind of speculative investments that are going to be affected and it is a welcome fact that such investments are now slowing down!

L.M.- Another vivid slogan that created big waves was “small government, large community” (4). Did the government achieve such a goal ?

W.Hh.- Since 1988, Hainan has basically three priorities. First, to encourage the coexistence of simultaneous various economic development, to implement a socialist market economy, and its third goal you mentioned, to have a small government. As regards this goal, Hainan was before 1988 facing an unique situation. At the time, it did not a provincial functional administrative government, because it was simply not a province! When Hainan became a province in 1988, the whole administrative structure had to redesigned but it was like taking a white paper and starting from scratch.

So, in earlier 1988, the Hainan local government was divided into 26 different departments, following more the district scale organisation, I would say the old and irrational one, we had. The 1998s re-sizing and shrinking of the administrative bodies was a long way away. We had to fit with the State Council original functional organisation. The problem was that Hainan’s size didn’t allow us to fit closely with it, so we were forced to adjust again to make our organization acceptable for the supervisory organs of the State. It meant in some cases that all that was done was to put a signboard on a door with a yet to exist bureau, just to keep being in accordance with the norms!. We had to take into account the administrative mentality of the day. But in 1998, the State Council organs downsizing policies necessitated and implied changes in people’s mentality, and work style. Before that, in Hainan, indeed, there was a propensity for administrative inflation (5)!

In January 2000, we started downsizing according to the policies. We have shed 38 % of the administrative staff. The easiest part of the job is to reach the number but the most critical and thorny issue is to give those who step down a decent way out, and we are working on it.

L.M.- Are there Departments that do not fit with the new directives?

W.Hh.- In economic matters, no. We followed the MOFTEC structure. Domestic economy, trade and industry are now grouped under a same organ. But in cultural related sectors, we have a rather big difference. In Beijing, there are a Ministry of Culture, a National Press and Publishing General Department, a National Broadcast, fiL.M and Television Department, and a National Sports Department. In Hainan there all fit under one hat, the so-culled “Culture, Broadcasts, Television, Publishing, and Sports Department” ! Quite a bit long name, don’t you think ?

L.M .- Well, as long as it makes sense and is workable, why not?

W.Hh.- Indeed and, by the way, Beijing fully supports our view in that matter.

L.M.- So, how small is now the Hainan government?

W.Hh.- We are down to 22 provincial government level organs, plus 10 departments (ju) directly placed under the provincial government

L.M.- You have raised earlier the question of the administrative work style, more specifically the “administrative mentality of the day”. What exactly do you mean by that? Is it linked to political consciousness, or to integrity ?

W.Hh.- Fundamentally, the question of mentality of people in government offices is essentially whether they know where they are empowered to do something and where they are not. For example, for a given situation, if it is to the enterprise itself to solve a problem, why should an government official intervene? So, it is a problem of competence, of administrative boundaries of the power of the government. We are now asking each government organ to look carefully at the matter and take stock. Those who do not reappraise their role to our satisfaction will be simply retrenched. It is the only way to restore a high level of efficiency in the government actions. This reappraisal job is nearly completed and we are preparing now to release its results to the population to let them know what we have done.

L.M.- Obviously, the reorganisation of administrative organs and the reappraisal of its prerogative and duties is closely linked to the separation of power between the government and the public or private enterprises, not to mention the people.

W.Hh.- Yes, it is.

L.M. – Is the problem of the State-owned enterprises as complicated in Hainan as elsewhere? What is the state of their finances?

W.Hh.- Since last year, they are globally recovering from their chronic deficit. Most of them are now starting to be profitable.

L.M.- Talking about the reappraisal of the role of the administration raises the question of responsibility. What it means really is that the administration is going to do less. But in the past, the Chinese were told that the government will cater for everything. Is the population ready to take its responsibilities and let the government shed it?

W.Hh.- Let’s put things like that: sometimes jobless workers will do a seat-in at the main gate of some provincial government. They wait because they expect that the government will provide a new job because, in the mindset of those people, the government takes care of everybody at every time. This is a kind of mentality and behaviour that can be found mostly in the hinterland where consciousness of the role and place of the government is very deepen entrenched, and that results from the degree of implementation of economic reform. In Hainan, however you won’t find any more such people. At the gate you went through, there are few guards. If the population wanted to do a seat-in, they wouldn’t have any difficulties to do so. But they just don’t. Hainan got used, earlier than other major provinces to think differently, because of the structure of the economy which has been liberalized towards a market economy very early. I take another example : if you go down the street here and ask for one pound of vegetables, you don’t have to bargain for a while, the price is the price and that’s it. It is sometimes different in other places in China. Here this is clearly an illustration or a sign of the impact of the reform towards a market oriented economy on the population. The population knows the price to pay to go through it, and even for major restructuring measures like the social protection system or the retraining of the laid-off workers, it can bear it because they know what is the challenge, for everybody.

L.M.- The political reform issues in China seem to be set along three main goals all linked to one another. One is the shrinking of administrative bodies and personnel. You have described it. The second is the decentralization of power and finally the third one is the separation of the government from the CPC organs…

W.Hh.- What does “separation” mean? This expression is in fact not used any more. Actually, political power and government action are placed under the leadership of the CPC. In that configuration, what could “separation” mean? Nothing! To be more specific, if you ask who is going to handle of a given task? What are the responsibility and prerogatives of the government organs and those of the party? It is clear. So, no matter how you put it, it does not make sense to talk about “separation”. Even for the “decentralisation” of power from the centre you mentioned as a reformist issue. It is not as explicit as it sounds. Sometimes its meaning is a “transfer” of power, sometimes a “cancellation”. So at the provincial level, when we talk about “reforms”, what we mean is. To sum-up for us, there are four types of action when talking about a provincial level reorganisation, to retain such or such organ at the provincial level, to delegate such or such administrative power to the inferior level, for instance, to the municipalities and/or the districts, to merge a department with another, and then, maybe the most decisive decision, to eliminate as we did for 32 % of them.

L.M.- Mountains of books and articles have been written about Hainan, but most are negative. The common view is that Hainan, because of internal difficulties, has never been able to catch the train of the economic reforms the right way. One of the reasons that concur with what you aid is that the financial sector got it wrong in the first place and fuelled a speculative bubble that has yet to be digested. Among the SEZ of China, Hainan in spite of huge natural resources is the laggard. Why?

W.Hh.- Well, Shenzhen has Hong Kong, Zhuhai has Macao, Xiamen is full of investments from Taiwan, Shantou has the Chinese Diaspora support, and who is backing Hainan?

L.M : All of them, I assume.

W.Hh : Not exactly ! What Hainan did in terms of economic reform, is in fact quite unique when you take several factors into account that are easily overlooked by the critics. First, unique among the five SEZ of China, Hainan is a province of 34,000 km2, the others are only urban areas. It is quite different. To a point, Hainan is a microcosm of China, with developed coastal areas and a relatively poor hinterland (6).

L.M.- Then what are the priorities? It seems that they keep changing. Maybe that is where the problems lie, don't’ you think so?

W.Hh.- That question is, for Hainan, essential. And it’s true that when we were groping our way along during the first few years of the reforms, we had all the hot money going into property. We ended up with about 7,03 million square meter of private housing! You need them to digest them. All these investments are not due solely to Hainan banks. In fact, commercial banks in the hinterland of China, via some investors, played an important role as well. At the end of 1999, the debts in the sector, including interest was estimated to be 46 billion Yuan. The State Council is looking at the problem very seriously. On the other hand, to say that banks are not doing the right think today is only partially true. A bank is also a enterprise: it has to get back the money invested, before extending a second loan. But if the capital was not used in a proper way and is now sleeping there, how can banks deal with that? Fortunately, not all have been involved in the bubble, and we have today more and more national commercial banks extending loans to Hainan businesses, and we have to thank their head office for their collaboration with Hainan.

L.M : If we look at the economic data going back to 1990, after the peak of 1992, it is just a long slide without end. When do you expect the trend will reverse?

W.Hh.- If we look at the last 20 years, it has been a rough ride full of ups and downs. We said the peak was in 1992 with a 40,2% growth rate, then 20 % in 1993, 11% in 1994, 4,3% in 1995. That was the bottom of the cycle and in fact we started to grow year on year again in 1996, with a 4,8 % rate followed by 6,7 % in 1997, 8,3 % in 1998, 8,6 % in 1999. The growth in 2000 should be even higher (7). In fact, for the last two years, the rate of growth is actually higher than the national average growth. People should not expect to have 40 % growth again in Hainan. It is just not desirable because such a rate would only bring major problems afterwards. So I don’t think it is proper to say that it was all down hill since 1992. The economy of Hainan is growing year after year .

L.M : What is going to be done for the Yangpu Industrial Development area ? Is there a new plan (8)?

W.Hh: Why a new plan ? No, we have just to make the original one work. The history of Yangpu, with thirty km2 of wasted land, not far from Haikou (the capital of Hainan) was a complex one. I suggest that you read the Hainan daily today. There are some reports about 1,000 companies willing to invest in Yangpu. But at the beginning, there was no infrastructure at all and so a huge construction project was necessary. In 1991, Deng Xiaoping approved the way we were handling our economic reforms. However, it is then that we missed the best opportunity to develop Yangpu. The re-launch of the project is just a question of “when”. The willingness is still there. the team of cadres in charge of Yangpu has been changed. Now that the new highway has been completed, Yangpu is now at one hour and a half far from Haikou. They are confident and will boost its development

L.M.- Can Hong Kong be a model of development for Hainan which shares some of its natural advantages, such as the location and deep-water harbour capabilities ?

W.Hh.- Hong Kong, since its return to the Mainland, and actually since the open door policy of China, is closely linked to the Mainland. Because of the nature of its economy, it played an important role as a reference for the government of Hainan, handling economic transition toward a market oriented economy. Moreover, Hainan and Hong Kong have natural links. Do you know that in Hong Kong there is The Hainanese Compatriots Association as well as other commercial associations for Hainanese?

L.M.- But there, you are. You said Shenzhen had Hong Kong to justify its pace of developments. So Hainan too has Hong Kong with a strong Hainanese diaspora. Do they play an important role in the development of Hainan?

W.Hh : Definitely! Our diaspora with 3 million Hainanese abroad, is the third largest of China, just behind the Cantonese and Fuijanese ones. The proportion of Hainanese living abroad compared to the size of population is in fact higher than the Cantonese one. The city of Wenchang in Hainan has a local population of 500 000. About the same number of Wenchang natives live abroad! To become an overseas Chinese seem to have been the story of the Hainanese!

L.M.- Do you know the size of the investments made by the overseas Chinese in Hainan?

W.Hh.- It is impossible to work out such a figure because their investments are mixed-up with other foreign investments. In the Hainan government, we have only one bureau called “External affairs and Overseas Chinese affairs Department, so it is put together. In the central government, the Overseas Chinese Bureau is an governmental organ in itself.

L.M.- Do you offer preferential treatment for the so-called “returned Chinese” ?

W.Hh.- Yes, the Overseas Chinese policy is naturally encouraging not only Hainanese, but all the Chinese community living abroad to stay, pursue their studies, work and invest in Hainan. I just take one simple example. For the High school final term examinations which allow to go to university if successful, we add ten points for all the children of Overseas Chinese. So, if one student gets 60 out of 100, we add 10, so he actually have a 70/100 mark !

L.M.- Hainan is a strategic location in the South China Sea, quite close to Vietnam. Does Hainan play any special role in the Spratlys issue?

W.Hh : Hainan has juridictions over this area including Xisha, Zhongsha. To be brief, the “South China Sea” belongs to China, and Hainan has its administrative and juridic supervision prerogative because of its geographical situation. Hainan has a large ocean existence, and a small continental existence. Concerning the dissension itself, a province can hardly be involved in such a process, so all the political aspects are concentrated at the Central Government’s level (9). On the economic side, we are also attentive to the dialogue process. You know that China stands for a common exploitation of the Sea Resources. Some of them like fishery, aquaculture can be develop by Hainan, other like mineral products, natural gas at the national level.

L.M .- In the coming decade, what is the main objective for Hainan ?

W.Hh.- President Jiang Zemin has recently pointed out four fundamental directions: economic prosperity, people’s wealth, a civilized society and a sustainable environment.

Autumn 2000

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Notes -

(1) Hainan was established as a Special Economic Zone in April 1998, with Haikou as administrative centre.

SEZPopulation (million of Yuan)GDP billion of Yuan)GDP per headIncome (billion of Yuan)Total

Exports

(billion USD)Shenzhen416541 000130175Zhuhai1,55538 170304Shantou4,9367459374,6Xiamen1,3540300007514Hainan7,87 76,2*10000421,2* The five Special Economic Zones in China (Estimations for 2000)

* In 1998, the GDP reached 43,9 billion Yuan, and the total export 0,9 billion USD.

 

(2) Hainan ITIC

 

(2) Place of the State Economy in the Economy of some China Provinces:

 

ProvinceGuangdongFu JianHainanShanghaiTianjin% of State

Economy16,5617,0139,8938,3231,46

 

(3) From 1988 to 1993 an opposite expression circulated : "open first, and regulate later". In 1993, this slogan ("xian li guiju hou banshi") was launched by former Governor of Hainan Ruan Chongwu who wanted to reform people's mentality and misunderstanding of the economic reforms.

 

(4) "Small Government, large Community" ("xiao zhengfu, dashehui") was launched and officialised in 1987, eleven years before the 1998 central administrative organs resizing reforms which aimed at cut 50 % of the 8 millions administrative personnels in the whole country.

 

(5) The proportion of administrative personnels in the Provincial Government Offices in three different provinces (1997).

 

ProvincesSuperficy

Km2Population

MillionGDP

Billion YProvincial Gvt adm. personnelsHenan166 00091,73678079Fujian124 00032,62605650Hainan34 0007,138,95324

(6) Estimation 2000

 

Sectors

%

SEZAgriculture,

fishery

%Industry

%Services

%Shenzhen14455Zhuhai2.352.245.5Shantou24553Xiamen2.550.447.1Hainan273439

 

(7) All China and Hainan GDP growth comparison since 1992 in %

 

 

 

 

 

 

 

 

(8) Yangpu Industrial Development Zone was established in April 1989 in Hainan's county of Danzhou, 180 Km far from Haikou. Some cadres in the CPCPC, including one standing committee member, Zhang Wei, expressed vigorously their opposition to Yangpu that they considered as selling the Nation to foreigners ("maiguo"). Afterwards, Deng Xiaoping repeatedly gave its approval for the continuing of the project in Yangpu. Since 1992, Yangpu has accumulated more than 4,5 billion HK$ in construction and infrastructure.

 

 

 

GovernorsFirst SecretaryPresident of NPALiang Xiang

(1988.8 - 1989.9)

Xu Shijie

(1988.9 - 1990.6)Xu Shijie

(1988.8 - 1991.7)Liu Jianfeng

(1989.9 - 1993.2)Deng Hongxun

(1990.7 - 1993.1)Deng Hongxun

(1992.4 - 1993.1)Ruan Chongwu

(1993.2 - 1998.2)Ruan Chongwu

(1993.1 - 1998.2)Du Qinglin

(1993.2 - now)Wang Xiaofeng

(1998.2 - now)Du Qinglin

(1998.2 - now)1987- 1998 main Provincial Political Leaders