One has to be careful reading Chinese new spaperreports on economic policies these days.The articles arenot lying，but they tend to mislead because the writersgenerally do not understand the economic system.Sincexians are given substantial autonomousdecision-makingpowers on economic matters，sometimes what is announced by Beijing as an intendedpolicy is not fol-lowed.Minimumwages have been introduced at differ-ent dates and vary greatly among xians，and some xiansmerely announce that there is one but choose not toenforce it.When Beijing announced that 70% of apart-ments must be built to no more than 90 square meters,some localities announced one or two such projectswhen selling land，while others acted as if nothing has happened.Newspaper headlines say that one outsider cannot buy more than one living quarters: Shenzhen cur-rently enforces this policy，but Shanghai says they have not heard of it.40
This does not mean that Beijing is not in control.They are in control，but local officials know what type ofannouncement is for real and what type is meant to testthe waters.Local officials have their way of evaluatingthe seriousness of the documents handed down to them.Requests fromBeijing for local opinions regarding poli-cies are routine，and adopted policies may be quietlydropped without announcement.Some villages have democratic voting，some do not，and those who do intro-duced voting at greatly different times.
I surmise that this seemingly chaotic picture is not really chaos，but it is the result of a combination of theautonomous powers given to localities and varying deci-sions on the part of the localities to adopt policies.Inparticular，a decision to adopt policies for windowdress-ing is subject to considerations as to whether the xian
【40】By November 2007 this rule applied to Shanghai also，but different parts of that very large city have different ways to getaround it.The rule has therefore never been enforced inShanghai.In Shenzhen the rule was enforced for a while，thenan outsider who wanted additional living quarters could buy away for about US4,000，and then the property market fell andthe government looked sideways.
would gain in competition.A xian would have to attractmore investors to increase value-added tax——indeed tosurvive——and the officials know the adoption of badpolicies will drive themaway.If Beijing really meant toenforce a policy，the xians will accept，but if the policy iscontrary to locality interests，they will complain.Thecomplaints are often effective if the number is largeenough.
It is difficult to demolish the rights structure of thexian system，and this is a good reason to support theoptimistic viewthat the rapid growth can be sustainedfor many years to come.The problemlies in matters inwhich the localities have no say: The monetary system,exchange controls，foreign policy，freedomof speech andreligion，state-monitored education and healthcare，com-munications，and the activities of large state monopolies.
I am concerned that Beijing does not seem to have anadequate comprehension of the workings of the econom-ic system，for there are indications that they are trying totamper with it.41 My viewis that with some gentle finetuning，the systemwill be solid and firm.As I remarked.
【41】On 1 January 2007，Beijing imposed two items on thexians.First，compensations paid to peasants to obtain land weresubstantially increased.This is a judgment call.Second，allland sales for construction purposes must go through auction.Inprinciple this latter would run counter to the workings of thexian system，but there is a way out.A xian would make a landauction project specific，and with obscure advertising and shortlead time，a successfully negotiated investor is usually the auc-tion winner.
in my long article of February 2004，in idealized form the layer-by-layer chaining of responsibility contractswith sharing arrangements possesses the merit that，if thedelineated rights of one member in the chain are infringed upon，all members in that chain must in some degree share the cost of that infringement.
Because of locality or xian competition，joint-venturecontracts with foreigners were developed into a specialformof patent licensing，with royalty payments remit-table to foreign banks free of exchange controls.I have investigated patent licenses for some years and fullyunderstand the difficulty of their enforcement，but takingthe formof a joint-venture contract with a foreign direc-tor on site to monitor performance，enforcement costswould be sharply reduced.This is one reason why for-eign investors flock to China today.Zhou Yan miracu-lously got hold of a number of samples of these joint-venture contracts，and earned a doctorate in a good dis-sertation analyzing them.I have arranged to have herdeliver a precisin this conference，so I will say no more.
