CHAPTER STATE-MANAGED MARKETIZATION APPROACH – A THEORETICAL FRAMEWORK Ⅰ. Introduction How has China’s approach to oil and gas security been shaped? This is the central question that this study aims to examine. With the economic boom and concurrently surging oil and gas demand, China has become increasingly dependent on foreign imports. Such a growing reliance has aroused the government’s deep concern about oil security, and a series of measures have thus been taken to tackle it. Due to the profound impact of China’s dependence on the global market, along with the far-reaching influence of a rising China on the world, its approach to oil security has attracted wide attention: What view does China take on energy security? How has China coped with it? What are the implications of China’s approach? The question becomes trickier when it comes to the Janus-face character of China. On the one hand, further push for the establishment of market economy and WTO obligation fulfillment call for more market openness in its oil sector. On the other hand, despite great leaps in economic transformation, the regime remains an authoritarian party state which tries to rule out any change that may jeopardize regime survival. Hence, maintaining socioeconomic security and stability has been Hereafter, oil security refers to oil and gas security. The concept of oil security and more broadly energy security will be discussed in the next chapter. Hereafter ‘oil security’ includes gas. As the world second largest oil consumer next to the U.S., it is said that “Chinese oil demand is a key factor in world oil market” (EIA, “China Country Analysis Brief,” U.S. Department of Energy, August 2005, available at: http://www.eia.doe.gov/emeu/cabs/china.htmlhttp://www.eia.doe.gov/emeu/cabs/china.html. a priority for the Chinese Communist Party (CCP) government. Also, the prospect that conflict in the Taiwan Strait cannot be ruled out. Moreover, given that domestic oil companies can hardly compete with the multinational oil companies (MOCs), any further opening of the oil sector might be a time bomb for China's oil security. When combining the two sides, we can find that the government seems to be walking a tightrope: it has to balance further openness and energy security. This raises a question: to what extent is the Chinese government willing to open its oil market? What are the deciding factors? And what constraint is it confronting? According to international political economy, there are two basic modes (market and/or state) running the economy and allocating resources for each nation state. Accordingly, the ways countries adopt to deal with energy security can be classified as market-dominated approach (MDA) and state-controlled approach (SCA). MDA is defined as “one which relies to a significant degree on the use of flexible economic, fiscal and regulatory instruments which seeks to achieve stated policy objectives through market signals rather than on the use of the rigid regulations or ‘command-and-control’ type measures which mandate market outcomes.” SCA denotes greater government involvement in the energy sector characterized by a panoply of measures such as “setting detailed, quantitative In this thesis, China, CCP government, Beijing, the Chinese leadership, and the state all refer to the Chinese government in view that the CCP system has controlled the whole China. The MOCs are both profit maximizers and risk evaders. They shoulder no responsibility for China's energy security. In time of crisis, they may even take advantage of emergencies or just withdraw their investment. Relations between state and market are the central theme of political economy. Gilpin has defined political economy as “the field of study that analyzes the problems and questions arising from the parallel existence and dynamic interaction of ‘state’ and ‘market’ in the modern world.” See Robert Gilpin, The political economy of international relations, Princeton, N.J.: Princeton University Press, 1987, p. 8. International Energy Agency (IEA), The Role of IEA Governments in Energy: 1996 Update ， Paris: IEA, Organization for Economic Co-operation and Development, 1996, p.21. targets for the energy sector, subsidies and other financial incentives including support for mega projects, price controls, government deals for the purchase of oil and other barriers to free trade.” Distinctions between MDA and SCA are reflected in the following aspects: • Price determination within a country. SCA posits it is up to the state to decide or adjust oil prices, whereas MDA holds that the market plays a dominant role to dictate prices though sometimes the state may intervene in the market. But when intervening, the state mainly relies on the economic means, such as controlling aggregate supply, or adjusting tax rates. • Instruments with which the government regulates oil and gas trade. The SCA manipulates oil and gas trade through administrative instruments, including license, quota, import ban, high tariff, setting detailed, quantitative target for the energy sector, subsidy, support for mega project, government deal and other barriers to free trade, and so forth. The MDA posits that state intervention for purpose of enhancing energy security is quite expensive. If the state is involved in the energy market, it should aim to promote market efficiency and free trade by reference to economic instruments like tax rate, tariff, interest rate, exchange rate, and budget. • Oil and gas industry ownership predominance. The SCA deems the predominance of state ownership as a necessity to safeguard energy security while the MDA tends to encourage multiple market actors and competition. • Degree of openness to foreign investment in the oil and gas sector. Under the MDA, foreign investors enjoy equal rights with domestic actors to access the market, and ideally, it is up to the market to decide who wins, who loses, and thus who will enter or exit. By contrast, SCA sets an array IEA, 1996, ibid., p. 14. of conditions and only those that can meet these conditions and acquire the grants from the government can embark on business in that market. After entry, they may still confront various hurdles to run their business. • Whether energy is source of cooperation or conflict? The MDA regards energy trade as a source of cooperation while the SCA views it as a source of conflict and a zero-sum game. The MDA thinks energy trade can contribute to mutual communication and trust, thus fostering cooperation among nations. Also, the MDA deems it necessary to establish regional cooperation as it can promote market efficiency and save costs by way of avoiding repeated projects. However, the SCA regards energy trade as a source of conflict. First, because energy is a rare commodity and may run out soon, what one nation obtains is the other’s loss, that is, a zero-sum game. Second, for oil-rich countries, to safeguard the safety of their resources, and for oil importing countries, to ensure the continuous supply of oil, it is necessary to augment their military power. This competition becomes more intense between those neighboring countries with territorial or religious disputes. • Concerns about the gains from inter-state energy cooperation. When each can benefit from mutual cooperation, the MDA shows indifference to the gains the other side would obtain since it recognizes that inter-state cooperation is a positive-sum game and it is unlikely that both states can gain equally. However, the SCA’s concern is not “Will both of us gain?” but “Who will gain more?” If an expected gain is smaller than that the other state can obtain, it would not embark on such cooperation in that “one state may use its disproportionate gain to implement a policy intended to damage or destroy the other.” It seems hardly to verify or falsify whether a state concerns about relative gain more or absolute gain more, but Powell may be right. According to him, “concerns about relative gains Kenneth N. Watz, Theory of International Politics. Reading, Mass.: Addison –Wesley, 1979, p. 105. will inhibit cooperation when the utility of military force is high but not when the utility of force is low. And • Primary principle of deciding inter-state energy project cooperation. Both approaches would consider all-round benefits and risks, and would engage in those projects with high political and economic benefits but few political risks. Nonetheless, when facing a project which is economically infeasible but may engender high political benefits, MDA would withdraw in deference to the principle of profit maximizing. SCA would proceed due to the alluring political benefits. Table 1-1 shows the distinctions between MDA and SCA. 10 In spite of the fact that all nations pursue both strategies to some extent, 11 each state is located differently on the spectrum. Table 1-1: Distinctions between MDA and SCA State-Controlled Approach Market-Dominated Approach government dictates, or price controls market decides public ownership predominance private ownership predominance degree of openness to foreign investment foreign investors are under strict control foreign investors enjoy equal rights with natives instruments regulating trade of oil & gas import license, quota, import ban, high tariff, setting detailed, quantitative target for the energy sector, subsidy, support for mega project, government oil deal and other barriers to free trade use of economic and fiscal instruments like tax rate, tariffs, interest rate, exchange rate, budget etc. whether energy a source of cooperation or conflict source of cooperation among nations source of conflict zero-sum game concerns about gains from cooperation absolute gain relative gain principle to decide to cooperate between states strategic benefits prioritize commercial viability whether it is commercially viable price determining in one country’s domestic market oil & gas industry ownership predominance and David A. Baldwin, Neorealism and Neoliberalism: The Contemporary Debate, New York: Columbia University Press, 1993, p. 6. 10 In Speed’s (2004, p. 155) vein, liberalization is composed of four main reforms in its fullest sense, that is, changes of structure of the energy industry, ownership of the energy companies, the structure and function of government, and the development of energy market. 11 IEA, 1996, ibid., p. 11. What are the Chinese characteristics concerning the approach to energy security? Some contend that China takes a strategic approach (or SCA), 12 whereas their opponents claim that China follows MDA. 13 It is hard to conclude which view is correct, as both can find evidence to support their arguments. Yet just like a group of blind men touching an elephant, their accounts are partial. It is true that the Chinese oil sector has long been under state control, but simultaneously deregulation has been under way. 14 Thus far, more and more market ingredients have been ushered in, particularly into the refinery and distribution chains. In light of the above criteria, the Chinese government turns to both MDA and SCA instruments in most energy policies. 15 Tracing Chinese oil policy reform, it is easy to find that the reform presents the attribute of “one step forward, two steps back”. 16 As Downs argues, the strife between MDA and SCA features Chinese energy security rhetoric and practice. 17 Both the state and the market are brought into play, and a mix of both state regulation and market operations coexists in the Chinese oil sector. This thesis argues that China’s way of dealing with oil security is “state-managed marketization approach,” (SMMA) defined as a process wherein 12 See Philip Andrews-Speed, Xuanli Liao and Roland Dannreuther, The Strategic Implications of China's Energy Needs, London: International Institute for Strategic Studies, 2002. 13 See Robert A Manning, The Asian Energy Factor: Myths and Dilemma of Energy Security, and the Pacific Future. New York: Palgrave, 2000. 14 Deregulation is the process in which a government removes business barriers for purpose of enhancing market efficiency. Its rationale is that “fewer regulations will lead to a raised level of competitiveness, therefore higher productivity, more efficiency and lower prices overall.” Wikipedia, http://en.wikipedia.org/wiki/Deregulation. 15 For instance, crude oil price has been integrated with global market, but refined oil price is under government control; NOCs can be allowed to float in foreign exchange markets; Despite some policy constraints, foreign investors have been better treated than Chinese private firms; Both economic and administrative instruments including trade bans have been employed to regulate oil and gas trade; and the Chinese government has engaged in both energy cooperative projects and competitions for oil and gas acquisitions. 16 Robert A Manning, 2000, ibid., p. 84. 17 Erica S. Downs, China’s Energy Security, PhD dissertation, Princeton University, Publication Number: AAT 3110228, 2004, p. 4. the state has to recourse to a set of mixed means to divert the oil sector from state control to market operation, but in this process it is up to the state to adjust the extent and scope of market activities. China’s approach is typical of transitional economies embracing gradualism in the sense that market mechanisms are allowed into the oil sector not in an abruptly big-bang way but in a step-by-step manner. In general, the Chinese state intervenes in a select few ‘strategic industries’ with crucial fiscal or developmental contributions; more specifically, state intervention focuses more on certain ‘core’ segments with overall controlling or influential capacities within those selected industries, 18 while other ‘periphery’ zones have gradually been left to the market. Apparently the transformation process is not without turns and twists, implying that some ex ante marketized zones might be called off and returned to state control. This is mainly because in its effort to drive the oil sector towards the end of marketization, China also bears socioeconomic security in mind. To a great measure, marketization in this regard is just a means to attain the goal of a higher degree of oil security. As such, the quality of state “management” is ostensibly associated with state capacity. However, a strong state 19 is not a sufficient condition for good performance in “managing marketization” in that the latter correlates with other factors such as the uncontrollable nature of the market, bounded rationality, 20 18 In terms of the oil industry, state ownership dominance, the upstream business, pricing power, management personnel, taxing power etc. are such ‘core’ zones. 19 According to Weiss, a strong state possesses three core capacities: “the ability to formulate policy goals and evolve strategies for implementing them independent of societal pressures; the ability to alter the behavior of important domestic groups in order to further its policies; and the ability to restructure the domestic environment (e.g. property rights and industrial structure) in pursuit of its goals.” Linda Weiss, The Myth of the Powerless State, Ithaca, New York: Cornell University Press, 1998, p. 26. 20 Simon proposed the notion in 1957 in countering against the rational analysis made by Anderson. “Bounded and power abuse. Moreover, it is true that the government endeavors to reduce oil dependency, but it remains a question mark whether China is a strong state in every respect regarding oil security. On and off the government encounters considerable resistance in pushing its policies downwards as will be discussed below. China’s SMMA can be regarded as a portfolio, comprising the SCA, mixed approach, and MDA, which are the three values of the dependent variable. The mixed approach denotes that state and market compete with each other to govern the oil and gas sector. Differing from the mixed approach, the SMMA is a collection of state-market interactive dynamisms, whereas the mixed approach is in a competing situation or a kind of equilibrium wherein state control exists within some areas of the oil sector while market forces work in the other. Also, the SMMA differs both from the SCA, where every business is under stringent state control, and from the MDA, where the market plays a deciding role in running the oil sector. With the SMMA, the state intervenes in the oil market for purpose of social stability, economic security and state asset increment, rather than merely for market efficiency. Theoretically, we may indicate their differences as shown in Chart 1-1. Chart 1-1: Approaches to Energy Security SCA mixed approach MDA State-managed marketization approach rationality” means that an agent’s behavior is “intendedly rational, but only limitedly so.” Rationality basically means to purse an optimal goal with the resources available. See J. Anderson, “Cognitive Architectures in a rational analysis,” in K. VanLehn (ed.), Architectures for Intelligence, N.J.: Hillsdale, Lawrence Erlbaum Associates, 1991, pp. 1-24; H.A. Simon, Administrative Behavior: a study of decision-making process in administrative organization, New York , Macmillan, 2nd ed., 1957, p. xxiv. China’s approach reflects gradualism, the overall guiding principle of Chinese reform epitomized by “groping for stones to cross a river” (mozhe shitou guohe). It is true that reform and opening-up in the Chinese oil industry complies with this principle, but should we go no further, we might lose sight of the strategic thinking of the Chinese government, the opportunities and constraints it has confronted and the ongoing competitions in the Chinese oil market. Neither can we understand why deregulations or re-regulations came about at certain junctures, nor can we tell the future direction of China’s approach. This dissertation intends to study how and why China employs state-managed marketization approach to cope with oil security, and what its implications are. I argue that China’s approach to oil security has largely been decided by the interplay between the government and the national oil corporations (NOCs), the pivotal policy maker and the overriding policy enforcer respectively. Specifically, a MDA or a SCA will be employed respectively when one side’s role can be expected and accepted by the other; but if they have different role expectations, a state-market mixed approach will be the policy option. The SMMA that China has taken provides readers a new perspective to understand the state-market relationship in the globalizational world. While Lu suggests that state engagement to promote marketization is a must in China, Lin verifies that state capacity building goes hand in hand with marketization. 21 I 21 Feng Lu, State, Market, and Enterprises: The Transformation of Chinese State Industry, Doctoral dissertation, Columbia University, 1999, UMI No.: 9916899; Kun-Chin Lin, Corporatizing China: Reinventing State Control for the Market, PhD dissertation, University of California, Berkeley, Fall 2003. suggest that market deregulation and state regulation coexist and mutually shift within the two opposite transitional phases (decentralization before 1998 and recentralization since 1998) in the Chinese oil industry identified by Lin. State capacity is important for initiating reform, but with marketization going on, it is not necessarily compatible with marketization. Thus far state capacity has been undermined not only by local governments, but also by the NOCs as well. Second, I explain China’s energy security issue from a new perspective of the government-NOC interplay. Though the Chinese NOCs are nominally subordinate and separate from the government, they “have considerable power and influence based on their importance to the national economy, their near-monopoly status despite the 1998 reform, and their previous status as government departments or ministries.” 22 Philip Andrews-Speed simply portrays the role of NOCs in China without probing into their interaction with other players. 23 Based on the 1998 overhaul, Lin finds that the core subsidies stood together with the state whereas the noncore parts reacted against the state's further reform due to the state’s distinct policies towards them. 24 Based on his findings, I further argue that the NOCs have both pro- and anti-liberalization propensities, and even the core subsidies not merely take orders from the state, while the state is not so strong as to escape bargaining from the NOCs. Moreover, besides the coercion underpinning Lin's “strong state” logic and bargaining relationship that previous studies have identified 22 Philip Andrews-Speed, et al., “The ongoing reforms to China's government and state sector: the case of the energy sector,” Journal of Contemporary China, Vol. 23, No. 9, 2000. 23 Philip Andrews-Speed, Xuanli Liao and Roland Dannreuther, 2002, ibid. 24 Kun-Chin Lin, 2003, ibid. 10 The first type is pluralism, which holds that various types of social groups including SOEs and bureaucracies stand in a relatively equal line to influence state policy. Pluralism rightly perceives the rise of some interest groups like the NOCs, but apparently different social groups are unequal and state policy process is far from open in China. Second is societal corporatism, in which SOEs exert their influence on the government through their representative associations. Despite a growing impact in China identified by Scott Kennedy, even he himself admitted business associations’ role should not be overstated. 553 The third paradigm is state corporatism, which is of the view that the state generates great pressure on the SOEs to conform to state policies while the latter have to subject to state mandates. Walder’s version of ‘local state corporatism’ articulates that local government can replace entrepreneurs to drive local firms’ growth in China. 554 Similar to this paradigm which stresses that the power lies in the state, the patron-client model, the fourth type, is used to describe state-SOEs relationship as mutual obligations, each expecting to gain what the other can supply. 555 This model has properly depicted state-SOE reciprocal relations, but state coercion, state rent-seeking and SOE defection behaviors may exist as well. Rent seeking theory, the fifth paradigm, includes two aspects. One is disclosed by the public choice theory, portraying that the self-interested state bureaucrats and 553 Scott Kennedy, The Business of Lobbying in China, Cambridge, MA: Harvard University Press, 2005. 554 Andrew Walder, “Local governments as industrial firms: an organizational analysis of China’s transitional Economy,” American Journal of Sociology, Vol. 101, No. 2, 1995, pp. 263–301. 555 In his study on China’s internet services, Zhang conceptualizes the state-enterprise relations with unequal power position. See Jun Zhang, “Market Transition, State Connections and Internet Geography in China,” The China Review, Vol. 6, No. 1, Spring 2006. 262 politicians are not neutral arbitrator; rather, they may take advantage of their power to line their own pocket, maximize their own budget or try to increase their chances for staying in power. Likewise, SOEs managers may conduct rent-seeking as what the principal-agent theory discloses. 556 As this study has shown, the NOCs enjoy a rising power and influence in China’s energy industry; the government keeps patronizing the NOCs, and both have their interest stakes on the other; corruption resulting from rent seeking are prevalent. Hence, the above models have grasped some aspects of state-SOE relationship in China. Nonetheless, neither of them can fully cover this pair of complex, dynamic and evolving relations. Similarly, there are many debates concerning state-market relations and their different roles in promoting economic development. According to the remedy prescribed by “neoliberalism” or “Washington consensus” to post-communist countries including China, economic transition is simply a linear movement, namely, from state control to free market economy. Over the past quarter century, “neoliberalism”, marked by privatization and free competition, has become the “global policy paradigm”, and non-neoliberal policies and institutions have been deemed as “deviant”. 557 “Public discourse shows an overwhelming tendency toward simplistic trust in ‘the market’ and skeptical rejection of the state’s role in the 556 Ding has explored the major strategies widely employed by state-firm managers and officials to illicitly strip state assets. See X. L. Ding, “The Illicit Asset Stripping of Chinese State Firms,” The China Journal, No. 43, Jan., 2000, pp. 1-28. 557 Neoliberalism’s prevalence is largely due to the historically prolonged economic growth resulted from large-scale privatization programs by Thatcher and Reagan respectively in the 1980s. Robert Hunter Wader, “Beyond Asian Horizon: Neoliberalism and the Emergence of a Hereditary World Oligarchy,” Workshop in the First Congress of Asian Political & International Studies Association – Asia in the New Millennium, Singapore, 27-30 November 2005. 263 economy.” 558 According to its logic, there was a universally a priori fixed benchmark, by which latecomers could be measured, and a set of standard rules and goals, to which they were going to, or at least should integrate with. 559 Therefore, China’s breathtaking transformation was just a process of integrating with the presumed globalization practices. In particular, it is claimed that market had “a natural affinity” with private ownership, and thus “rapid privatization would generate the necessary conditions for an efficiently functioning market economy”. 560 By contrast, the developmental state model has highlighted a constructive role that the state has played in nurturing certain industries and fostering human capitals. 561 As such, it is believed that the state is a rational and unitary entity which not only has a good will to serve the public but also enjoys great autonomy and capacity to fulfill that aim. However, this model has aroused many criticisms. Neostatist scholars like Peter Evans, Linda Weiss and John Hobson argue against its assumption that market agents are passive policy recipients, neither is the state rational and unitary, possessing considerable autonomy and technical capacity, and staying immune to rent seeking. Instead, they maintain that government-business close ties are crucial to effective market governance and successful economic 558 Louis Putterman & Dietrich Rueschemeyer, “State and Msrket in Development: An introduction,” in State and Market in Development: Synergy or Rivalry? Edited by Louis Putterman and Dietrich Rueschemeyer, 1992, p. 1, ibid. 559 “Preface” by Peter Nolan, for Zhang, Jin, Catch-up and Competitiveness in China: The Case of Large Firms in the Oil Industry, London and New York, NY: RoutledgeCurzon, 2004. 560 J. Sachs, Poland's Jump to the Market Economy, Cambridge, MA: Harvard University Press, 1993; J. Konai, “The Affinity between Ownership Forms and Coordination Mechanisms,” Journal of Economic Perspectives, Vol.4, No. 3, 1990, pp.131-47. Cited from Ayse Bugra and Behlul Usdiken, 1997, ibid., p. 2. 561 Among the many studies along the developmental state line of reasoning, those frequently cited include Alice Amsden, Asia’s Next Giant, Oxford University Press, 1989; Stephan Haggard, Pathways from the Periphery, Cornell University Press, 1990; Chalmers Johnson, MITI and the Japanese Miracle, Stanford University Press, 1982; and Robert Wade, Governing the Market, Princeton University Press, 1990. 264 restructuring. 562 Likewise, the social-institutionalists and neopluralists underscore cooperative ties between government and the private sector. They not deny the importance of a strong state for economic development, but they stress the importance of private-sector preferences over state interests and institutions, which is opposite to the development state model which reifies the state. 563 The above models, though having different emphases, are common in presuming a state-versus-market dichotomy, which Underhill believes is problematic. According to him, both the developmental state model and its revisionists still stay in the state-market dichotomy paradigm, which conceals the fact that states are one of market agents and market actors also engage in the process of governance. He thus puts forward a state-market condominium model, regarding state and market agents as “part of the same integrated ensemble.” 564 This model has rightly perceived state-market reciprocal relations, and the dynamics between changing forms of governance and changing market structures. However, that model is preconditioned with democratic systems where various business groups can access to state governance. In the Chinese case, state-market condominium is at most a worthwhile pursuit. However, within that “ensemble”, state-market relations are equivocal. These important questions are unclear from this model: who is the director? Do they 562 See Peter Evans, Embedded Autonomy, Princeton University Press, 1995; and Linda Weiss, The Myth of the Powerless State, Polity, 1998; Linda Weiss & John Hobson, States and Economic Development, Polity, 1995; and Linda Weiss (ed.), States in the Global Economy, Cambridge University Press, 2003. 563 R. Doner, ‘Limits of State Strength’, World Politics, Vol. 44, No. , 1992, pp. 398–431; E. Y. Kim, ‘The Developmental State and the Politics of Business Interest Associations’, Pacific Focus, Vol. 8, No. 2, 1993, pp. 31–60; and D. Okimoto, Between MITI and the Market, Stanford University Press, 1989. 564 Geoffrey R.D. Underhill, “State, market, and global political economy,” International Affairs, vol. 76, no. 4, Oct. 2000, pp. 805-824; Geoffrey R.D. Underhill & Xiaoke Zhang, “The changing state-market condominium in East Asia: Rethinking the political underpinnings of development,” New Political Economy, vol. 10, no. 1, Mar. 2005, p. 1-24; and Geoffrey R.D. Underhill, “Markets, institutions, and transaction costs: the endogeneity of governance,” Working paper in the World Economy & Finance Research Programme, WEF0025, June 2007. 265 compete for that role? How does one’s change affect the other? Therefore, SMMA would be more appropriate to portray state-market relations in China’s oil sector. As abovementioned, institutionalists underscore the “synergy” between the state and the market, which is the basis for the catch-up of late-development countries. Particularly, institutionalists shifted their attention to the organizational differences among the capitalist economies and their subsequent economic performance. According to Onis, the East Asian model of developmental state is “the product of unique historical circumstances” with three key elements that make it extremely difficult to emulate, that is, “the single minded adherence to growth and competitiveness at the expense of other objectives, the unusual degree of bureaucratic autonomy and capacity, and the equally unique and unusual degree of public-private cooperation.” 565 It is true that “state leadership and policy are relevant to East Asia's developmental history,” but “the nature of society, culture, market, and evolving international economy is also important.” 566 Although new institutionalism has rightly pointed it out that both the liberalist and developmental state models took no account of the institutional context and incorporated institutional factors into analyses, it renders support to the argument that economic efficiency “appears almost as a moral imperative that justifies the disregard for conflicts of interest and inequalities of power as well as for the societally specific ways of dealing with them”. 567 565 Ziya Onis, 1991, ibid. Steve Chan, Cal Clark, and Danny Lam (eds.), Beyond the Developmental State:East Asia's Political Economies Reconsidered, New York: St. Martin's, 1998, p. 8. 567 Ayse Bugra and Behlul Usdiken (Ed.), State, Market, and Organizational Form, Berlin: Walter de Gruyter & Co., 1997, p. 5. 566 266 This project has verified state-market interdependent and intertwining relationship. The state engages in market activities via its SOEs, while the NOCs, the major market actors in the Chinese oil market, also directly involve in the process of governance. Meanwhile, as will be analyzed below, state and market compete with each other. This project has partly corroborated the above view regarding most states’ embrace of economic efficiency led by market, which may be called as the convergent effect brought about by economic globalization, but simultaneously globalization has created some divergent effects on China’s energy practices. B. State Managing the Market The Chinese government tries to “manage” the market in the process of handling its energy security problems. Other than laying out market codes and regulations, Beijing also resorts to the means such as shaping market actors, differentiating the market for the major NOCs, setting rules for their cooperation and competition, imposing limits on market entry, partially controlling prices, setting energy import/export quotas, and so forth. As a result, the scope and substance of market activities are modified by the government. Market competition has been arbitrarily formatted. The SMMA has exhibited that the Chinese government has fallen into a paradox with regards to the market. On the one hand, the government has to infuse market mechanisms into the economy and expose the SOEs to market competition to some extent, because it has to rest on promoting economic development to solicit 267 people’s compliance, on the other hand, the state expects that market competition could be under its control and would not generate domestic chaos. Likewise, the state is keen on the growth of the SOEs out of the concerns of national industry and international competitiveness. For that purpose, the state has privatized most SOEs while keeping those with strategic and fiscal potentials in hand. For the selected SOEs, the state granted them with considerable autonomy and directed them into engaging in market competition. In order to push forward its tough reform agenda, the state even recurs to what Solinger calls “virtual globalization” by threatening the direct injection of global forces into China, 568 as described by Lin in his studies of wage regime in China’s SOEs. 569 Nevertheless, the state dare not and is reluctant to release the SOEs entirely thanks to its sociopolitical concerns. Apparently China’s approach to oil security is not wholly following the internationally conventional way; rather, it is also transforming the international practice, adding new ingredients to countries’ used ways of dealing with energy security. In particular, China’s practices in the following are pronounced. First, Beijing aspires to reshape the NOCs into the flagship of Chinese corporation team so that they can lay a solid economic base for China’s rise. As the “world-system” proponents have argued, a state’s position in production for global 568 Dorothy J. Solinger, “Globalization and Human Rights for Workers in China: Convergence or Collision?” in Mahmood Monshipouri, Neil Englehart, Andrew J. Nathan and Kavita Philip (eds.), Constructing Human Rights in the Age of Globalization, New York: M.E. Sharpe, 2003. 569 Kun-Chin Lin, “Explaining Evolving Wage Structure in State-Owned Enterprises in China: Evidence from the Oil Industry,” Paper presented at the Workshop, “Globalization and the Workplace,” ST. Anthony’s College, Oxford University, 27-8 October 2006. 268 markets embodies profound implications for its politics and welfare of its citizens.570 And the optimal shortcut is to provide state support. On the one hand, the state is directly involved in reshaping Chinese oil producers; on the other hand, it also endows them with the autonomy to operate on their own rather than intervening in their routine business through administrative mandates. Second, the government seemed to treat the global integrated market as divided, and tap domestic market to powerhouse the Chinese oil giants so that they could be better footed in global competition. While carrying out thorough restructuring over Chinese oil market with the aim to reduce competition for the newly-born oil mammoths, the state does not reject market competition and exchange activities between and within the Chinese firms themselves. Thus, domestic market has become a powerhouse for the Chinese oil giants. In addition, the state also vigorously bolstered the SOEs to adopt the “go-out” strategy through both political and financial means, in the hope that they could gain more experience in engaging in global contests and contribute to China’s energy security through securing more foreign oil and gas assets. Therefore, China’s approach implies that it is hard for it to accept neoliberalists’ recipe of full privatization. The state has its own calculation regarding market competition and NOCs’ growth, but as will be discussed below, the market has its own logic and the NOCs have their own concerns which may not necessarily overlap with the state’s. 570 Christopher Chase-Dunn, Global Formation: Structures of the World Economy, Cambridge, Mass: Basil Blackwell, 1989. 269 C. NOCs’ Reactions on State Management and Market Power How the NOCs respond to the state’s SMMA? The NOCs get along well with their oligarchic status quo. While enjoying considerable autonomy in business operation, the NOCs have acquired great state support. In the policy sense they are holding a monopoly status in the Chinese energy market, and the government even renders diplomatic and financial backup in their efforts to expand business abroad. Nonetheless, the NOCs are caught in a dilemma. While striving for state support, sometimes they feel state intervention is nothing but a hindrance against their business expansion, as evidenced by CNOOC President Fu’s call for reduction of state-owned shares after the failed acquisition over Unocal. With the pressing competition from the MOCs, the NOCs attempt to press for more market autonomy, extricating themselves away from the sociopolitical obligations posed by the government. The NOCs have to confront the effected market forces ushered in the energy industry as well as the whole economy. Sometimes the NOCs even brace for market openness in order to capitalize on the pricing system or their collaboration with the MOCs, as verified by their claim for integrating domestic oil prices with global ones and the case of the CNOOC acquisition. However, most of the time they are eager to protect their prerogatives, turning against market openness to their competitors. “SOEs as an institution mediate market forces, sometimes as a force of inertia and conservative statist interests as described by March’s metaphor of the firm as an 270 adaptive political coalition.” 571 Therefore, the protected NOCs are ambivalent about market competition. This study finds that the Chinese authoritarian state is not so unitary and so powerful that it can push its will downwards with ease, and bar any pressure group outside its door. The state has been fragmented not only by its own bureaucratic structures (identified by Kenneth Lieberthal), and local governments (identified by Dali L. Yang, Yongnian Zheng, etc.), but also by the NOCs, an ascending vested interest group mainly transformed from the monopolizing power. As Lin argues, the state’s preformatted competition in setting domestic prices for goods and services can be undermined by the NOCs. 572 In the previous state-market relationship accounts, firms including the SOEs were presumed to be identical and their impact on both the state and the market had not been taken into consideration. As a result, firms are passive. Liberals and neoliberals basically treat firms as market, operating only in light of the rules of profit maximization and cost minimization with no other behavior goals. 573 Under the developmental state model, the firm is more a tool and a passive recipient of state policy, and at most, it follows the logic of neoclassic economics. According to North, as long as property rights are in place, firms would automatically act according to the maximizing behavior rules. 574 Therefore, his view of the business organizations 571 Kun-Chin Lin, “Explaining Evolving Wage Structure,” 27-8 October 2006, ibid., p. 31. Kun-Chin Lin, “The State as Market Surrogate: Pricing Goods and Services for Oil and Petrochemical Industries in China,” Paper delivered at the Annual Meeting of the Association for Asian Studies, New York, 28 March 2003, p. 39. 573 Ayse Bugra and Behlul Usdiken, 1997, ibid., p. 2. 574 Douglass C. North, Institutions, Institutional Change and Economic Performance, Cambridge: Cambridge University Press, 1990, pp. 78-84. 572 271 differs little from the neoclassical formula of the firm. 575 As this study has demonstrated, in spite that the NOCs are marching toward the goal of market actors, they behave with miscellaneous considerations, rather than merely economic one. For purpose of turning the SOEs into market actors, Lu suggested that the SOEs undergo organizational change from within, whose goal was to seek managerial control, meaning that managers take the responsibility for the performance of the enterprise. 576 From the perspective of role compatibility, I argue that the key lies in the transformation of roles. Ideally the state would be transformed just to act as a regulator, while the SOEs merely behave as market actors; but in the transitional period, it is apparent that this is not an one-step achievable goal for China. Therefore, in the transitional period, it is of importance to institutionalize the rules and norms of bilateral intercourse and dispute settlement so that both can form reasonable expectations, thus reducing the possibility of conflicts. D. Convergence and Divergence: Ungovernable Market Forces on the State and SOEs How does the market respond to the Chinese state’s SMMA? The Chinese government attempts to control the market, whereas the market has its own logic that does not succumb to the state’s will. Once released, the market would become an independent force expanding its space out of boundaries, pressing the actors within it to follow its logic, and even causing the state to surrender itself. “Once a crack is opened in the monolith that is the centrally planned economy, cumulative forces take 575 576 Feng Lu, 1999, ibid., p. 14. Feng Lu, 1999, ibid. 272 over and prise the crack open even more widely. The crack, in the case of China, was the elimination of the state monopoly over industry, which began a process of change that became irreversible.” 577 The intrinsic expanding impulse largely stems from the profit-seeking nature of the capital across the globe, from the nascent social forces pressing for leveling the playing field with the NOCs, and even from the pro-market tendency of the NOCs with a deeper pocket. Therefore, the Chinese domestic market, serving as the powerhouse for the NOCs, is bound to be subjected to the pressures of the international market. In particular, economic globalization has exerted great influence upon both the state and the NOCs. Most remarkable is the convergent effects on their behaviors. Convergence is in the sense of the change of their mindset and practices. The former refers to their new focus on consumption-side implication of energy security, as well as their embrace of market mechanisms to deal with China’s energy security problems, which largely results from their relinquishment of the previous ideology that centered on class struggle. Ensuing that, the state has embarked upon transforming its role and the governance over the SOEs. In practice, the convergent effects brought about by globalization encompass two aspects: gradual state withdrawal from specific energy firms’ operation and energy policy convergence. State withdrawal has been represented by a series of measures like the injection of more market competition, state ownership reduction, tax cut, less trade barriers, market openness, and price integration. As Chapter has 577 John McMillan and Barry Naughton, “How to Reform a Planned Economy: Lessons from China,” in Ross Garnaut and Yiping Huang (eds), Growth Without Miracles: Readings on the Chinese Economy in the Era of Reform, New York: Oxford University Press, 2001, p. 460. 273 illustrated, the roles that private investors (domestic firms and foreign MOCs) will play in Chinese energy market are set to loom larger. Moreover, China’s growing reliance on foreign energy resources has also compelled it to gradually integrate domestic oil and gas prices with international ones. Although refined oil prices are still decided by the state, as Friedan and Rogowski argue, global price signals work as shadow prices which instruct the trend of China’s oil and gas prices. 578 Sooner or later, the state has to leave oil and gas pricing rights to the market. The other aspect is the energy policy convergence. As a result of the change of its mindset, the current Chinese state has started its emphasis on both supply-side and consumption-led measures to resolve China’s energy security problems. Moreover, international common practices have been adopted by the Chinese government as well, such as diversification of oil import sources, construction of SPR, and formulation of stricter environmental protection and energy efficiency regulations. The convergent effects exerted by globalization upon the NOCs particularly consist in that they turn to be more profit-centered and market responsive. On the institutional level, the NOCs have been restructured largely in light of the western practice of corporate governance. In the routine business operation, they have learned to pool foreign capitals to boost their growth through listing the core assets abroad. They are also more sensitive to price signals in the global energy market, as evidenced by their manipulating the price gap between domestic and foreign oil 578 Jeffrey Friedan and Ronald Rogowski, “The Impact of the International Economy on National Policies: An Analytical Overview,” in Robert Keohane and Helen Milner, (eds.), Internationalization and Domestic Politics, New York: Cambridge University Press, 1996. 274 prices, by lobbying the government for more subsidies, or by creating tight oil supply market so as to push the government to raise oil prices. More striking is the measure to boldly whittle down vast number of workers in order to curtail costs. Globalization has also made it possible for the NOCs to ambitiously venture abroad. Nonetheless, globalization has also generated some divergent effects on the state and the NOCs. Apparently the Chinese approach to energy security is far from a MDA. Globalization has convinced the Chinese government that energy competition is world-wide. By no means is energy security in the eyes of it merely an economic issue. Its sociopolitical and security concerns over this problem have complicated its ways to handle it. As a result, the state still leaves a strong hand in managing energy businesses. Oil and gas prices have still been in the hands of the NDRC notwithstanding partially pricing deregulation. Visible and invisible barriers against private investors’ energy market entry and energy trade are still prevalent. Particularly, the state spares no effort to shore up the NOCs’ oil quest abroad. Regarding the divergent effects on the NOCs, the fierce market competition, coupled with their ambitions, has spurred them to resort to every resource available to cautiously guard against their prerogative. Taking advantage of global competition and the government’s energy security concern, the NOCs not only triumphantly prevented the state’s attempt to split them, but also successfully prevented it to fully expose them to hard budget constraints. Profit-seeking considerations and accountability to shareholders have also prompted the core parts 275 to push cost reduction and staff discharge obligation to the non-core parts. 579 Ⅳ. Controversies and Further Research This research tries to create a model to comprehend and decipher China's approach to oil security. The effort to use a simple model to explain a complicated social project, however, is set to generate this or that kind of shortcoming, controversy, and maybe problem, which in turn, leave much room for further research. One of such drawbacks is that, as government and firm's preferences are dynamic and interactive, it is difficult to predict the extent of conflict of interests on any particular issue using only the broad framework of role compatibility. Also, this model assumes that an underlying consistency in role preferences and expectations, which then translate into particular compromise solutions for each issue area. This assumption could be challenged as well. Second, SMMA seems lack of specificity for defining the dependent variable of changes in China's approach to oil security. It reveals little information about the cost and benefit to producers and consumers of any particular kind of "mix" of interventionism and market operations, the domestic-international linkage, or the enduring political implications for government-business relations. Also, it underestimates the importance of politics and institutional designs for different varieties of capitalism. 579 Kun-Chin Lin, “Explaining evolving wage structures,” 2006, ibid. 276 A third drawback come to mind lies in the fact that despite the increased influence of SOCs, it is difficult, if not possible to accurately measure it, since distinguishing it from government support would be an almost impossible mission, as long as the Chinese policy-making system remains a black box. 277 [...]... interpret how and why China’s conceptions on oil security have arisen, and why China took a state- managed marketization approach Also, the system-centered approach tends to neglect domestic variables Therefore, it needs to combine with other approaches to analyze China's energy policy making D Historical Institutionalism The state- , firm-, and system-level analyses tend to treat the individual and/or organizational... Democracy and Bureaucracy in a Leninist State, ” The Journal of Asian Studies, 1998 34 14 reference to the statist approach, the important role that the Chinese state has played in trying to ensure oil security can be highlighted However, there are some problems with statism to account for China’s approach to oil security First of all, statism assumes that the state leadership and bureaucracies are a... inclined to regard economic reform as a role transformation process In order to improve China’s energy security, I stress the importance of role compatibility and of transparent role expectancy for each other Ⅱ China’s Approach to Oil Security – Literature Review Other than institutionalism, studies on China's approach to energy security have three levels: state- , firm-, and system-level analyses A State- Level... Resources, claimed that oil self-sufficiency would be the optimal state for the sake of security; from an economic angle, due to the higher costs of domestic oil exploration, it would be a sub-optimal choice to import certain amount of oil However, in order to enhance China’s oil security, Tian recommended increasing domestic oil E&P as the 68 “Vice-Premier Wu Bangguo inspects Daqing oil field and Daqing... domestic political economy to spell out a country's policy outcome 47 Scholars making system-level analyses usually stand from the outsider’s stance to look at China’s approach to oil security, specifically to see the impact of China’s pursuit for oil security on the world, with the U.S in particular Dannreuther argues against the claim that China’s painstaking efforts for oil and gas would exacerbate... to China as it conforms to the authoritarian nature of its political system The influence of the one-party state indeed can be said to have deeply penetrated into the society As Lee argues, “Through its control over the economy, political propaganda and personnel management of cadres, the Leninist state has been able to deny much autonomy for civil society while maintaining its ability to respond to. .. feels at a loss to construe the 1998 oil industrial restructuring in China All in all, from the perspective of analysis unit, most previous studies on China’s approach to energy security focus either on the Chinese state, adopting the statist approach and presupposing the state organs as a unitary entity, or on the major market actors in the energy industry – the NOCs and MOCs Except historical institutionalists,... enjoying the public goods of sea lane security provided by the U.S 28 By contrast, Speed et al argue that China adopted a more “strategic” approach to energy security in that Beijing seemed to have paid more attention to the political gains from certain projects regardless of 25 According to Krasner, this approach is based on the assumption that “it is useful to conceive of a state as a set of roles and institutions... role.” 88 However, the NOCs have their calculations In October 2002 when other oil importing country raised their SPRs due to the intensified situation in the Middle East, one NOC acted against the current Not having obeyed the government’s mandate to increase oil stocks, it stopped oil stockpiling and involved in arbitrages by taking advantage of oil price surges It was estimated that, through this arbitrage,... the state has to turn to state- market condominium (see Table 1-2) Table 1-2 “Role Compatibility” Model Central Government Economic efficiency promoter (EEP) NOC Market actor State policy & social obligation undertaker (SPSOU) Internal stabilizer Ⅰ MDA Ⅱ state- market condominium Ⅲ state- market condominium Ⅳ SCA Having realized the importance of forging firms’ ability to compete in the market, the state . dissertation intends to study how and why China employs state- managed marketization approach to cope with oil security, and what its implications are. I argue that China’s approach to oil security has. 2004, p. 4. 6 the state has to recourse to a set of mixed means to divert the oil sector from state control to market operation, but in this process it is up to the state to adjust the extent. conceptions on oil security have arisen, and why China took a state- managed marketization approach. Also, the system-centered approach tends to neglect domestic variables. Therefore, it needs to combine