The development of the Chinese economy and China’s role in the

global economy

Communist China under Mao

• In 1949 the Chinese Communist Party led by Mao-Zedong captured power. It inherited a country ravaged by a long civil war.

• Part of the population belonging to the southern regions had fled overseas, and had established a rival government in Taiwan as well as feeding the widespread Chinese diaspora across Southern Asia.

Communist China under Mao

• The economic model followed by the Chinese Communists mirrored the Soviet Stalinist one, by giving priority to the development of heavy industry.

• There was also a radical agrarian reform, based on large scale redistribution of land to the peasants.

• The USSR supplied both technicians and investment capital for the all the major industrial projects.

Early economic achievements under communism.

• In 1960, once the first five year plan had been completed, China broke off relations with the USSR for ideological reasons and national and military rivalry .

• In China economic policy became more radical with the Great Leap Forward of 1958, which consisted of forced collectivization of the countryside with the formation of large communes.

• The results were less production, more inefficiency, famines, the collapse of industrial production.

Chiese economic development under Mao

• the key struggle was between political cadres and technicians or experts.

• The cultural revolution launched by Mao against what he saw as the moderate, bureaucratic leadership brought about havoc and destruction.

Chiese economic development under Mao

• The Chinese model was different from the Soviet one.

• Heavy industry in China was less important than in the USSR and there was less centralization of power.

• On the whole however, the system was based, as in the USSR, on the transfer of resources from agriculture to industry.

Chinese economic development under Mao

• Regions and local bureaucrats and party chiefs enjoyed a certain amount of freedom.

• While there were a number of big State owned companies in heavy industry and in the industrial-military complex, there were also many regional conglomerates, which were called collective companies, with close ties to their respective regional communities.

Chinese economic development under Mao

– China achieved a certain degree of economic development between 1953 and 1978.

– Starting in 1978, after the disappearance of Mao, a new era began, under the leadership of Deng Xiaoping, who carried China gradually towards a market economy.

The Chinese take-off: moving towards a market economy

• Starting very gradually in 1978, and much faster since 1991, China has moved towards becoming a market economy.

• Initially progress was limited and halting. There was talk of a mixed system, of a dual economy, part of which remained under State ownership and State planning, while the rest was liberalized.

• This mixed system, with its dual nature, encouraged a great deal of corruption.

China towards the market

• In 1979 4 Special Economic Zones were set up in the coastal provinces with the aim of attracting FDI.

• The special economic zones were in areas not far from both Hong-Kong and Taiwan.

• In the course of the 1980s more coastal areas were granted the same privileges previously granted to the 4 Special Economic Zones.

Structure of the Chinese economy, by employment andby GDP.

The Tiananmen square repressionThe Tiananmen square repression

• In 1988-9, measures were taken to clamp down on inflation, and these measures sparked off a revolt, which threatened to become a political anti-socialist and pro-west revolution.

• Starting from the blood clampdown on the protesters in Tiananmen Square, the revolt was crushed by the more conservative wing of the Communist leadership.

• For a moment it seemed as China might be heading backwards.

China toward a market economy

• The conservative coup of 1989-90 did not succeed in reversing the new course that China had undertaken from 1978. The collapse of the USSR was an important factor in this. The push towards liberalization and capitalism came especially from the coastal areas, the economic importance of which had grown enormously.

China toward a market economyChina toward a market economy

• It was Deng Xiaoping who gave a new push to China’s transition to the market when he made a well publicized trip to Southern China. In 1993-1994 a new wave of reforms was unleashed on the part of the Communist Party itself. This seemed to be a open endorsement of a transition to a capitalist system.

• Among the reforms: a drive towards efficiency on the part of State-owned companies, a banking reform, which left banks in the hands of the State, but compelled them to follow commercial banking guidelines, the privatization of a number of economic sectors, the encouragement towards the creation of a efficient stock market, membership of the WTO in 2001.

Chinese economic modernizationChinese economic modernization

• In 1983 the banking system was reformed. • While previously there was a State bank monopoly, a

range of new banks was created, including an agricultural bank, an industrial bank and many other specialized banks. All were state-owned.

• Very high investment rates increase the amount of fixed capital per head and drive up the levels of productivity.

• Regional imbalances become very serious. The development of new booming manufacturing centres on the coast undermine the older industries in the interior. Large parts of Chine remain rural and serve simply as a reservoir of cheap labour for the new industrial coastal zones.

Foreign owned companies have acquired an ever growing importance in the Chinese economy. The Chinese huge internal market with its fast growing incomes, its cheap available work force has attracted huge flows of FDI.

Domestic Chinese private firms have struggled, because of uncertain laws on private ownership and because of scarce capital. They have preferred to let foreign firms come in, take them over, and do the job.

FDI in ChinaFDI in China

Strengths and weaknesses of Chinese industryStrengths and weaknesses of Chinese industry

Two are the key advantages of Chinese industry: the availability in the country of raw materials and the huge pool of cheap labour.

Among the raw materials possessed by China, there is coal (12% of world output), and to some extent oil and gas (fractions of world output)

China is the second world producer and consumer of coal. There is also a large capacity of hydroelectric energy.

The number of workers in manufacturing and construction was, in 2001, 160 million. f which 90 were based in the countryside and 70 in towns. Since then numbers have grown. There is a huge reserve of labour in the rural provinces eager to take up jobs in industry and in the service sector.

Company structureCompany structure

In 2001 there were 8.600 large companies. They included:

1. STATE OWNED COMPANIES – In 2001 they accounted for about 40% of industrial production. They are still prevalent in heavy industry, energy, chemicals and petrochemicals, and they are in charge of state monopolies such as tobacco.

2. Private companies: they accounted for about 30% of industrial output. There were important in traditional manufacturing sectors such as textiles, furniture, and also in electrical appliances.

3. Foreign companies: their importance is growing all the time. In 2001 they accounted for about 30% of output. A significant share of FDI comes from Hong Kong and Taiwan, but there a large number of US and European companies as well. They have a leading position in the more advanced sectors of the economy, for example electronics, automobile

Chinese commercial policyChinese commercial policy

• Protection of the domestic market. Up to the mid 1990s,the Chinese market was heavily protected by tariffs. After that there was a gradual liberalisation, in view of Chinese membership of WTO in 2001.

• Export promotion: starting in the mid 1980s Chinese authorities granted both exporters as well as incoming corporations a preferential regime, with tariff exemptions. All machinery and semi-finished products imported into China to be used for exports were allowed in tariff-free.

China and the Asian economyChina and the Asian economy

• China has enormously increased its economic clout in the last twenty years. After the demise of the Soviet Union, China is aspiring to the role of a military superpower and directly challenging Japanese supremacy in Asia.

• China is in transition towards capitalism. It is still however in a anomalous position, not entirely capitalist and no longer socialist

• China is a great exporter and it is also a great attraction for FDI. However Chinese corporations do not have the same strengths and organizational qualities as Japanese ones.

• China acts as a great assemblage economy, for the MNCs of the whole world and particularly for Asian MNCs. China is the country were goods get assembled to be finished off elsewhere.

Ratio of Chinese GDP accounted for by foreign trade (in percentage term)

Projected GDP per head at PPP (purchasing power parity exchange).

China and the rest of AsiaChina and the rest of Asia• Neighboring countries have benefited from the rise of the

Chinese economy, in particular, from the growth of Chinese exports ( at an average rate of 17% between 1980-2006 ) and from the growth of FDI flows into China. Countries belonging to ASEAN have thus see a sharp rise of their share of incoming FDI. An integrated Asian economy is gradually taking shape.

• A) MNCs investing in China, often invest in neighboring countries as well, as a form of insurance in case political turbulence were to hit China.

• B) Manufacturing in China generates a number of cross-country exchanges within the area, involving both inputs, components, semi-finished goods. Thailand, Singapore, Malaysia, Indonesia, Taiwan e South Korea are all affected.

China and the rest of AsiaChina and the rest of Asia

• C) Intra-area trade has grown much faster that trade between the area and the rest of the world.

• D) Japan has intensified its trade with the rest of Asia (a process which started in 1985). Often Japanese companies are the initiators and leaders of vast, complex production networks.

• E) MNCs account for a large share of total Chinese exports. Some of these MNCs have their headquarters in other Asian countries. MNCs are particularly dominant in high-tech exports from China and these cover nearly 50% of total Chinese exports.

China and the rest of AsiaChina and the rest of Asia

• F) There are first signs that a number of Chinese companies are becoming world competitors.

• H) The most important Chinese asset remains the size of its rapidly growing domestic market.

• China’s domestic market acts, and will act even more in the future, as the driving engine of the whole Asian economy, sucking in a huge amount of imports. In 2007 Chinese imports have grown more than US imports (although in aggregate they are still much smaller)

Questions about ChinaQuestions about China

• a) Property rights and the rule of law are only partially enforced.

• b) Regional differences and social inequalities breed social protests.

• c) China’s banking system is rigid and highly bureaucratic (most of it is State controlled). National accounting is opaque

• d) there is a basic contradiction betweena one party system and a market economy.

Questions about ChinaQuestions about China

• New figures from the World Bank (2007) have estimated Chinese GDP at some 40% lower than previous estimates. China is still the second economy in size but in per capita terms its GDP is less than 10% of US per capita GDP. This new estimate, measured at PPP, (purchasing power parity) is based on a much wider selection of goods and services than the previous one.

• India’s GDP has also been downsized by about 40%.

APEC. (Asian Pacific Economic Cooperation)APEC. (Asian Pacific Economic Cooperation)

• A grouping of countries created in 1989 in Camberra. It was the result of an Australian initiative, meant to encourage a strong unitary action of the countries of the East Pacific in the context of the Uruguay Round talks.

• Japan supported l’APEC for the same reason. • Within APEC the USA, backed by Australia,

Canada e Singapore pushes for the liberalization of trade and FDI.

• China and Malaysia take a more cautious approach and reject full-scale liberalisation.

APEC. (Asian Pacific Economic Cooperation)APEC. (Asian Pacific Economic Cooperation)

• In 1994 an agreement was reached to liberalize trade and investment with 2010 for all the industrialized countries of the region, while less industrialised countries would have another 10 years, until 2020.

• In 1997, during the financial crisis, Japan proposed to institute an Asian Monetary Fund, under its leadership, to assist ailing Asian economies and to intervene to alleviate the effects of the financial crisis, thus replacing the IMF. The US vetoed this suggestion, although later a more limited Japanese financial rescue package was allowed.

The AFTA The AFTA (Asean Free Trade Area) Asean Free Trade Area)

• It does not include Japan, South Korea and Taiwan. Its aim is a free trade area, AFTA, to be achieved in next few years. A number of practical tariff reductions and other commercial measures have already been taken. In 2002 China signed an agreement with AFTA to eliminate reciprocal barriers within 10 years. Eventually an area of over 2 billion people will be created. Japan is bound to join eventually. The Japanese have insisted that the US be included in a preferential arrangement which it might join.

• A new grouping is emerging in Southern Asia, with India, an economy which has recently been experiencing fast rates of growth in the lead. The countries interested will be Pakistan, Bangladesh, Sri Lanka, Nepal, the Maldives, Buthan.

Questions on China.

• Discuss the Chinese economy. • 1) How fast is the Chinese economy growing and

how fast will it grow in the future?• 2) Is China a land of consumerism?• 3) Is China a technological power?• 4) How is China contributing to globalization

(migration, foreign trade and foreign investment)

• Present your conclusions on the impact of China on the Global economy taking account of the different topics outlined above.

• What will be China’s role in the global economy by 2020?