China’s Economic Development

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5. China’s (Economic) Rise

5.1 China’s Economic Development

The Chinese economy is the second largest economy worldwide. It recently surpassed Japan and Germany and has had the by far fastest growing economy for the past 30 years. Its growth rates average around ten per cent per annum- even projected into the future a steady growth of the same magnitude is foreseen, making it bound to become an economic superpower.⁴

The primary accumulation of the Chinese economy as we know it today has taken place between 1978 and 2008. This stage is characterized by the development of an export-oriented economy, as has been the case for many of the second-tier newly industrializing countries in Asia. The first region to be developed was the Pearl River Delta during the 1980s, followed by the Yangtze River Delta in the 1990s and the Bohai Bay area since 2000. Analyzed with consideration of Hu’s line⁵, dividing China between Heilongjiang and Guangxi, one can find that the impact of development in this stage has been greater on the eastern regions, which are home to the coastal development areas of Pearl River Delta, Yangtze River Delta and Bohai Bay area.

(Yang 1990, 231; Waters 1997, 76)

Before the 1970s however, the PRC underwent little successful economic

development. In its early years, the People’s Republic relied on an economic policy closely resembling that of the Soviet Union. It promoted heavy industries and collectivization against all odds, leading to unsatisfactory results- reaching a peak in the Great Leap Forward campaign. The Great Leap, aiming to use a process of rapid industrialization and collectivization to jumpstart China into a modern communist society, led to economic devastation and famine. The country, closed off to the world, started to adjust its economic policies only after Deng Xiaoping attained the position of paramount leader after 1978. He opened China to the world and is considered to be

4 Refer to: IMF (2011). World Economic Outlook Database, Report for Selected Countries and Subjects for further information.

5 黑河-腾冲线 （Hēihé-téngchōng xiàn)

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the architect of economic reforms labeled as the “Socialist Market Economy”. (Shirk 1993, 24)

After 1987, the Chinese government gradually allowed economic initiatives to emerge in Southern China. Within the coastal regions of the south, The People’s Republic established Special Economic Zones (SEZ). (Zeng 2010) In these zones, a liberal and market oriented economic setup was offered to investors. The primary aim of the SEZ was to attract foreign investments, or business activities by Chinese-foreign Joint- Ventures. The production of an SEZ is primarily meant for exports and thus adheres to market principles. In a sense, these zones were early gateways for foreign investors into China, offering tax incentives and access to cheap labor beyond the borders of the SEZ. This developmental model has led China to become the largest recipient of FDI among all developing countries:

“In recent years, FDI to China accounts for 1/4 to 1/3 of total FDI inflow to developing countries. Foreign investment has become an important source for China’s investment in fixed assets. Its share in total annual investment in fixed assets grew from 3.8% in 1981 to its peak level of 12%

in 1996.” (Fung/ Iizaka/ Tong 2002, 2)

Induced by the inflow of capital, economic momentum emerged, which helped China to position itself as the largest producer of consumer goods and simple industrial products. China's economic development is to this day based around this industry.

Exports and investment are crucial caterpillars for its growth – as has been the case in the last four decades. (DB Research 2011)

China has come a long way since the early reforms started in 1978, which were directed at the agricultural sector. Price reform and financial rewards were to induce increasing initiative in farmers and rural enterprises. In 1984 this idea was extended to also cover the industrial sector- allowing companies to use any surplus production for their respective benefit. This move set in motion the growth of a fairly liberal market of foodstuffs and consumer goods, while at the same time maintaining a dual track system with an additional state controlled market in place. (Brandt 2008, 10)

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At the XIV. Party Congress in the fall of 1992, the Socialist Market Economy was enshrined as the central economic policy objective. This affirmation towards continuous reform set in motion an unprecedented inflow of FDI from abroad. This went hand in hand with a gradual liberalization of China’s policies toward FDI.

Before the establishment of four SEZs in Shenzhen, Zhuhai, Shantou and Xiamen, the National People’s Congress had already granted legal status to foreign investments in 1979.⁶ In 1984 fourteen other coastal cities and Hainan Province were awarded SEZ status and finally in 1986 wholly foreign owned enterprises were permitted to operate in China. (Fischer 2006)

The adoption of the “Provisions of the State Council of the PRC for the

Encouragement of Foreign Investment”, entailing “(…) preferential tax treatment, the freedom to import inputs such as materials and equipment, the right to retain and swap foreign exchange with each other, and simpler licensing procedures (…)” (Fung et al 2002, 3), were the first crucial steps towards providing actual incentives to foreign investments rather than simply allowing them to operate. This in turn also served the interest of the Chinese government. Beyond aspects of job creation, China managed to link its FDI promotion activities to its domestic objectives. These

objectives include technology transfer and progress in areas with substantial weaknesses. Through a “Guiding Catalogue of Foreign Investment Projects”, investments were channeled into areas of national interest to help upgrade products, improve efficiency, save energy and control pollution. (Perkins Coie LLP 2012; Fung et al 2002, 4)

As can be seen from the discussion above, China has turned into the most important host to Foreign Direct Investments from Western Countries, as well as from

Taiwanese and overseas Chinese businesses. Its policies towards FDI have developed gradually and over time, from mere permission of FDI inflows to active promotion and subsequent selection:

„China’s policies toward FDI have experienced roughly three stages:

gradual and limited opening, active promoting through preferential

6 Law of the People’s Republic of China on Joint Ventures using Chinese and Foreign Investment (1979)

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treatment, and promoting FDI in accordance with domestic industrial objectives. These changes in policy priorities inevitably affected the pattern of FDI inflow in China.“ (Fung et al 2002, 5)

However, China has not remained a manufacturing giant for cheap consumer

products. As is already indicated above, China managed to upgrade its own industrial potential and extend its domestic capabilities, slowly moving up the value chain. Yet, as the traditional export markets for Chinese products undergo economic reshuffling and experienced continuous crisis since the year 2000, China was again forced to reconfigure its economic strategy.