FACTORS
EXPLAINING THE RAPID ECONOMIC GROWTH OF CHINA IN RECENT DECADES
China’s rapid path to economic development is well documented
and even though growth rates appear to be slowing, there is no doubt as to the
pivotal role China’s economy is playing in the global economy.
China initially
pursued an export-oriented path to industrialization
– similar to the Asian Tigers
before them – but has begun to diversify into
other sectors of the economy in the last ten years. It has done this with an
unwavering determination to accelerate growth rates and expand its economic
reach. As geographers, we need to understand the factors responsible for
China’s economic success.
Labour supply
There is a
plentiful supply of workers in China with a steady stream of rural-urban
migrants in search of work. This is due to the mechanization of
agriculture leading to unemployment and under-employment in rural
areas and concurrent growth in industrial work in urban areas. It is
estimated that 500,000 million people will leave the Chinese countryside in
search of work over the next two decades. Voluntary migration of the rural
population has been accompanied by aggressive re-planning schemes in which rural
villages are demolished and new manufacturing settlements built at rapid pace
for former agricultural families to move in to.
Wages and
unemployment
The unemployment
rate has fallen in recent years to just over 4%, but high rates in the past
drove down wages. If workers demand higher wages, there are many more who will
take the jobs available. Wages in other East Asian countries earn up to 10
times more than Chinese workers. This has increased profit margins and
attracted inward FDI (Foreign Direct Investment) as American, European and
Japanese companies open factories under licence in China.
Female
participation in the workforce
China’s workforce
is characterized by a higher than average female participation in manufacturing
industry. Western cultural analyses of gender divisions in the workforce have
little relevance in Chinese economic growth. This, along with the
One-Child Policy which has meant women were involved in child-raising for
a much shorter period than in many other countries, has made a much larger
workforce available.
Political
system
The non-democratic
and authoritarian political regime in China has meant that it has been possible
to embrace western-style free market economics while maintaining control over
the political system. In many ways, the planned economy of China (where the
state controls economic activity rather than private business) has accelerated
economic growth because the government has controlled all
decision-making. Since Mao in 1953, the government has followed a series
of Five Year Plans (or Guidelines, as they are now called, to reflect China’s
transition towards a ‘socialist market economy’) which have enabled the
government to enact any reforms it feels is necessary. The country is now in
its 12th Five Year Plan (2011-2016) and policies include spending 2.2% of
GDP on R&D (Research and Development) and moving coastal
regions from being ‘the world’s factory’ to being hubs of R&D, top-end
specialist manufacturing and services.
Strong
leadership
Chinese politicians
are said to feel a greater responsibility to the nation than to themselves.
Strong leadership from the head of state has been a major factor contributing
to economic success.
Free market
economics
China first began
moving away from a centrally planned economy towards a market-oriented system
in 1978. Deng Xiaoping was Mao’s successor and he sought to bring an end to
China’s relative economic isolation.
Export-led
growth
This is the
strategy which China initially pursued. The strategy is beginning to become
phased out in favour of Import Substitution Industrialization by
which consumer products imported for China’s growing middle-class are
increasingly being made in China, such as cars, domestic white goods and house-
and office-furniture.
Special Economic
Zones and FDI
Foreign investment
was encouraged in the initial phase of economic growth. They tended to locate
in one of 6 SEZs (Special Economic Zones) or 14 Open Cities in
which a relaxation of regulation and government control created a more attractive
business environment. These are designated zones where TNCs (Trans
National Corporations) are offered incentives such as reduced tax rates to
set up manufacturing operations. An example is a Taiwanese TNC, EUPA, which
manufactures coffee machines in Xiamen (an Open City) and employs 25,000
workers.
Private
enterprise
For many years all
manufacturing in China was state owned and operated. This has gradually been
relaxed as the economy has been restructured and now up to 50% of businesses
are privately owned.
Energy supply
Since the 1990s
China has been developing its energy base, with new hydroelectric and nuclear
power plants. China is also embarking upon a massive coal-fired
power-station opening programme based on its own substantial coal reserves plus
imports from Australia and Indonesia. However, serious urban air pollution
together with a commitment to limiting carbon emissions after 2030 is leading
to a less rigorous expansion of this electricity source.
Investment in
infrastructure
The government has
built many new roads, improved the rail system and made China’s major rivers
navigable all year round. China has five of the ten largest container
ports in the world (including Shanghai and Shenzhen). Urbanisation
has also been encouraged. with a robust urban-construction
programme.
Economic
diversification
China has recently
started to diversify into Research and Development, specialist manufacturing
and hi-tech industry. It is investing labour and capital in innovation
so that it can sustain its economic growth and reduce the risk involved in
having a narrow economic base.
Education
Literacy levels of
China have risen dramatically over the past 20 years and now stand at 95%. This
has underpinned the economic development of the country. As a result, China has
both large numbers of unskilled workers and a growing number of highly skilled
workers. For instance, China trains 600,000 new engineers every year.
‘Going
global’
China has started
to globalise economically by buying up foreign companies in North America
and Europe particularly. In fact, in 2010 China invested $56bn
in in outward Foreign Direct Investment. With inward FDI
averaging some $60bn per year, China had, by 2015, converted from a
net recipient to a net investor in FDI, a marker of its economic maturity in
many respects.
Location
China’s geographical
location has geopolitical significance because of its proximity to consumer
markets and trading partners. South Korea, Taiwan, Japan and Hong Kong are on
major trade routes. It is no coincidence that the first SEZs were concentrated
on the east coast facing Taiwan and the Pacific, particularly around Hong
Kong.
Raw materials
China has a great
wealth of natural resources, having vast reserves of coal, oil and natural gas.
These are being used to fuel the industrial development of the
country. However, so large is the country’s requirement for raw
materials to feed its manufacturing industries, that it is a major
importer of oil, gas, coal, iron-ore, copper and other key commodities in
world trade.
Confucian
values
State and
society are emphasized above the individual. There is a long
history of submitting personal ambition to that of the community and state
through Confucianism. The degree of control and authoritarian structures are
more accepted in China than in most western cultures with their emphasis on
individualism.
Population
growth
Rapid population
growth in China, despite the One Child Policy, has resulted in very large
numbers in the economically active population, leading to
rapid urbanisation.
This has fuelled further industrialisation, allowing for
further population growth.
As geographers, we
should categorise these factors (Social, Economic, Environmental,
Political), rank them, draw links between them and consider the players and
stakeholders involved. We will then have a detailed understanding of the
factors which have enabled China to pursue an accelerated
path to economic development.
__________________________________________________________
How did China Become the World’s Second Economic Power?
China
has become the world’s second economic power in four decades, to the
astonishment of many observers and thanks mainly to four factors. The first is
Deng Xiaoping’s opening-up-to-the-world policies and the 1979 Equity Joint
Venture Law. Together they have allowed (among other things) foreign capital
and Western companies to enter China, transforming the domestic economic
landscape entirely from one that is traditional and obsolete to one that is
dynamic and modern. The second factor is the State Strategy outlined in the
various Five-Year Plans (FYP). This strategy has led to the gradual flourishing
of the Chinese economy and that of some industries targeted by the State in the
FYP. The third factor is China’s most precious treasure, namely its labor
force, whether the cheapest or the most educated. Estimated at over 786 million in 2017,
this labor force has allowed China to become the world’s factory in only three
decades. And finally, the fourth factor is China’s diaspora or overseas Chinese
(Huáqiáo who are Chinese citizens residing abroad and Huáyì who are of Chinese
descent living abroad, regardless of their citizenship). On the one hand, the
Chinese diaspora has sent remittances estimated at $64 billion in 2017, as
reported by the World Bank’s Migration and
Development Brief. On the other hand, some of these overseas Chinese
came back home to benefit from China’s booming economy and offer their
expertise gained abroad, mostly in Western countries such as the U.S.
That
said and in addition to these factors considered as catalysts to China’s
booming economy, China used several internationalization strategies to shake
its economy from the impoverished state left by Mao Zedong. What are these strategies? What is China’s and its
instruments’ (namely its companies’) modus operandi? How did China become the
second economic power in the world?
The answers to these questions can be summarized in several
factors. Let’s start with the first one.
Trade: The yin of China’s
internationalization strategies
The
most striking facet of China’s internationalization strategies is without doubt
trade. The number of China’s largest companies in the world has been growing steadily
since 2000, prompting Fortune 500 to
talk about the “Chinese Factor” in 2006 (China was then the only country that
was able to bring in four new companies into the ranking that year). The number
of dragons continues to grow. From 2000 to 2018, their number has been
multiplied by ten (going from a mere 12 to 120). Meanwhile, the first of the
ranking, the U.S., continues to lose places by more than a third (going from
197 to 126 – – only six companies more than China, predicting that the
Middle Kingdom will dominate the ranking in 2019), while the second of the
ranking, Japan does the same by losing half of the places (going from 103 to
52).
China has also started in an insidious Sun-Tzu style to
conquer the world using its little dragons that have invaded mature markets,
beginning with thousands of small Chinese businesses in Africa and South
America that pave the way to the biggest ones, encouraged by the Go Out Policy
launched in 1999.
But
first, the West entered China’s market. Indeed, Western companies (regardless
of their size) transferred their production in China to enjoy economies of
scale and to secure shares of the vast domestic market as well as to export
their products to the rest of the world. Chinese companies’ sensu lato then took control of the much more
lucrative local market and have started invading the global market. Undeniably,
Chinese companies invade their domestic market from the outset with economies
of scale, since the Chinese market itself is gigantic, something that a Western
company cannot afford to do at home from the beginning. A Chinese company that
is emerging nationally is already a strong company having won a victory over
its competitors. It has a strong basis from the start in a highly fragmented
transitional market with provincial protectionism that makes competition
between Chinese companies harder and which pushes them to maintain and
cultivate privileged relations with the authorities (Guanxi’s importance
here is vital).
A Chinese company’s presence in the local market
disturbs international competition and attracts Western companies that propose
commercial agreements. Given the massive size of the untapped Chinese market,
these companies compete easily (to a certain extent) in the global market and
disrupt the established order, as is the case with Haier and Huawei that
started sweeping Africa, Asia and that has penetrated Eastern Europe. To do so,
they have the help of state logistics, financial aid and tax exemptions, an
assistance that is decried as unfair by Western countries and that must be
stopped, as stated by the U.S.
That
said, the Achilles’ heel of Chinese companies’ candidates to
internationalization is and remains branding, something that is still not yet
massively developed because of China’s goods reputation of bad/low quality. At
the same time, despite the current trade war, China is robust enough to tackle
what the U.S. is trying to do with its tariffs since it has developed its New
Silk Road (the Belt and Road Initiative) weaving its web by land and sea on
three continents, but what helped China’s
trade reach these heights?
Joint-Ventures: The growth engine
of the Chinese economy locally and abroad
The growth engine of the Chinese economy (especially at the
domestic level) is undeniably joint-ventures (JVs). They are the best way for
foreign enterprises to do business guaranteed by the Chinese state. With nearly
20,000 foreign companies settling in China yearly since 1978, the total
investment volume is now over 100 billion, making China the world’s factory,
producing in large quantities at low cost to the point of becoming the center
of the planet’s endemic growth.
To maintain their position in the Chinese domestic market
or to expand it, JVs are forced to re-invest. The bigger the investments and
the foreign company, the more important the Chinese counterpart should be.
Nevertheless, larger Chinese companies may, in their thirst to attract foreign
capital, accommodate smaller foreign firms as well and this is where lishu
becomes a key factor.
Lishu
represents the links between state hierarchy and enterprises controlled by
central government, provinces, cities and prefectures, rural and urban
communities. JVs develop relationship networks to minimize their costs and
maximize profits by seeking strategic alliances. What muddies the waters is the
rampant corruption that plagues all levels of Chinese society, including the
highest. Indeed, the perception index of corruption in China has worsened;
China’s rank went from 40 in 1990 to 79 in 2016 according to Transparency International, despite Xi Jinping
efforts to eradicate it. It is a plague that will not disappear anytime soon,
one that puts sand in JVs’ gears on top of the fact that JVs are becoming
more and more criticized by foreign companies since the famous cases of Danone Wahaha and Heartland Spindle that
turned sour to the advantage of their Chinese counterparts who enjoy the
support of the whole state apparatus.
Actually,
Chinese companies continuously evaluate the costs and benefits of their
relationship with foreigners. As soon as they find a better partner, they
get rid of the current one and go for the new one. Fortunately, China allowed
other forms to bud under its ‘paternalist’ control, such as the share-risk
partnership and even the private sector at the domestic level, while it allowed
new ways to do business at the international level. What are they?
Mergers and Acquisitions: The
gate to the global market
The purchase of foreign companies around the world has
accelerated in recent years (e.g., China Mobile’s acquisition of Paktel in the
telecom sector or Sinopec buying shares in Repsol Brasil for $7.1billion). The
most striking examples are the purchase of badly bankrupt or failing businesses
in the U.S., such as what happened in the Rust Belt where Chinese interests
bought many about-to-close companies, and all machinery and documentation were
sent to China.
A new trend that has been observed for some time in
commodities is that Chinese state-owned enterprises (SOEs) are acquiring large
companies operating in the mining and energy sectors. However, they are
encountering more and more resistance from Western states, as was/is the case
in Australia where several purchase attempts failed (e.g., UNOCAL stopped from
being purchased by CNOOC). Some countries realized too late what was happening
and are trying to react to stop China’s insidious invasion, especially now that
the race for commodities is starting to get tougher with India and Brazil’s
rise, who also want their share of the market to fuel their growth.
China
has also created stock exchanges in which both Chinese and foreign companies
are listed. Chinese companies operating on their stock market have access to
investments abroad as well as through mergers and acquisitions. And with China
being the world’s first forex reserve ($3.2 trillion in reserves held in Q1
2018 according to the IMF), China’s state has had a firm stronghold on capital
controls and on the oversight of overseas investments since late 2015. This
policy was initiated to maintain financial stability and to more efficiently
control the exchange rate after the 2015-2016 yuan devaluation, but what fuels China’s economy?
Local and Foreign Supply Chains
Logistics: The fuel of the Chinese economy
Despite China being officially the world’s first buyer of
raw material, Chinese state companies divert a large volume of raw materials
from official networks, mainly from Africa. Their modus operandi is well known.
They settle in developing countries by buying or renting land, extract what
they can or grow what they want and then send it directly to China without
using the official channels. No need for markets and no paying in foreign
currencies. In this, China still takes advantage of its title of leader of the
Third World inherited from Mao’s era when barter between countries was
encouraged.
The modus operandi of Chinese enterprises in the official
channels varies. On the one hand, big Chinese companies settle in developing
countries, get contracts to build infrastructure and/or modernize them; moving
their whole of labor force from China. They barely interact with local people
(instead creating Chinese ghettos) and do not interfere in the political affairs
of the country in which they live, as is the case in Angola (e.g.). On the
other hand, Chinese small businesses observe the local market, import goods
almost identical to those that sell well on the spot and break prices, leaving
the local industry to struggle for its survival. This is how the chicken
industry in Zambia and the bikini industry in Brazil were severely hit.
In
general, China imports wood from Brazil; agricultural products from Argentina,
East Asia, and South Asia; Venezuela’s minerals and hydrocarbons; and
hydrocarbons and raw materials from Central Asia and Africa. It exports
agricultural products to Africa and Asia. Recently, China began building
assembly plants in Africa (Algeria and Senegal) and Asia. And with the
establishment of the Belt and Road Initiative, roads and maritime routes will
be dedicated to filling China’s needs regarding raw materials and energy, and
it will be a more direct way for China to export its goods. But then again and
despite all of this, how China’s economy
will maintain its growth and its leading position as the second world economic
power aspiring to dethrone the first one that is the U.S.?
Technology, R&D, and
Innovation: The keys to global domination
Chinese
companies’ innovation at home consists mainly of buying back companies or
creating JVs to take advantage of the ability to innovate from abroad. Foreign
firms invest in R&D in China because of the abundant, educated and
inexpensive workforce. A culture of innovation, R&D, and technology is increasingly
taking hold in China following government guidelines, as Wan Gang (Minister of
Science and Technology) told the media:
“China needs to enter the ranks of innovative countries and become a big
technological innovation power by 2050.”
The R&D expenditure of the 100 largest dragons was $
33.76 billion in 2008, spending more than twice as much (2.3 times) as South
Korea, while in 2017, it is estimated to have spent $279 billion in R&D
(more than 8 times in 8 years!). Leading other countries by its gross research
and development (R&D) expenditure worldwide in 2018 (in billion U.S.
dollars) shows that China is nearing the U.S. at a quicker pace.
There is still much to be done for China to overcome
the image of a hacker, imitator and thief of Western intellectual property
without worrying about patents and licenses to sell them in the Southeast Asian
and African markets. To work on this image change, more and more tripartite
alliances (government-university-industry) are being established to accelerate
the pace.
While
the opportunities and challenges that await the Chinese regarding the
internationalization of their R&D are still little known, there are
opportunities for the emergence of Chinese R&D through the return of
Chinese expatriates and of Chinese students sent around the world. Moreover,
China’s companies can call upon the 47 million Chinese people of the diaspora.
This unique situation has allowed China to be among the world’s top 20 most
innovative economies in 2018, while the U.S. has dropped out of the top 5 as
highlighted in the 2018 Global Innovation
Index report.
The new modern Chinese diaspora is considered to be wealthy
and highly educated, unlike the first poor one, the coolies who were cheap
labor for many host countries like the U.S. and Canada. The Chinese diaspora
continues to weave its web all over the world (thus serving the CCP’s political
interests), even in parts of the world that did not interest it in the past, as
is the case for Morocco today.
Delegations
explicitly sent to receive advanced academic training in technology and
international business administration are becoming the norm. In 2003, 20,000
highly skilled personnel trained in technology and business administration
returned to China to work. In 2017, Chinese students abroad totaled 608,400
according to the Ministry of Education of
the PRC. This figure indicates a multiplication of over 15.6 times
in eighteen years (38,989 students in 2000), while in 1978, there were only 860
Chinese students abroad!
These
students focus on the following areas: economics, finance, international trade,
business administration, telecommunications and high technology. The case of
Lattice Power, created in 2006, and crowned by MIT Technology Review in
2011 as one of the 50 most innovative companies, is convincing
with its workforce composed of graduates from around the world.
That
said, the Chinese went from the duplication phase (blind imitation) to the
creative duplication phase (copying with minor changes) by developing their
standards, thus preparing for the local innovation phase. These phases are
found in all sectors activity targeted by government guidelines. Furthermore,
in China’s twelfth FYP
(2011-2015), it is specified that China must develop the seven
emerging industries, namely biotechnology, new energies, the manufacture of
high-end equipment, energy savings and environmental protection, alternative
fuel cars, new materials and next-generation information technology. And
Chinese companies answered the CCP’s call massively.
Talking about innovation and R&D brings up the subject
of intellectual property rights. Historically, intellectual property rights
have never been codified. Confucianism and Neo-Confucianism do not recognize
the notion of copyright that the Confucian State must uphold. The same goes for
contracts between individuals or between companies. The state does not
intervene in case of conflict. The neo-Confucian milieu does not favor
denunciation within the company, considered to be treason, and so piracy
becomes a regular activity in a society where it has never been considered a
crime.
What is interesting is that Chinese brands have not yet
massively penetrated the Western market and have therefore not been confronted
with the practices of imitation and piracy. This subject is still little known
and less documented. However, many Chinese companies started filing patents in
China and internationally (e.g., Lattice Power has filed more than 150
patents). Even more telling, the Chinese government is ready to enact
legislation protecting intellectual property rights to encourage R&D in
China. China, cornered by innovation’s norms, has conceded to protect the
intellectual property right it has never recognized, but still, to date no
concrete action has really been taken by the government.
The Chinese state: The holder of
the keys to success
In conclusion, the spearhead of the Chinese economy lies,
in fact, in its companies (small and large) that are instruments of another
company, namely the Chinese state, as it is the state that holds the resources and
their allocation through its FYPs. It is the state that regulates the Justice
sector and interprets it for its companies. Judge and party, the PRC distorts
the economic game since his hand is visible both inside the country and abroad.
China’s instruments to ensure global domination are in two
categories. The first one is JVs that are formed on the same model and follow
the same internationalization strategy. When the strategic objectives differ
from those set by the PRC, the latter triggers a process of questioning. The
second one is SOEs whose strategy is set by the PRC. They do not care about
resources, expenses or profitability as they operate in a logic that is far
from capitalism.
These Chinese companies have become
insidious war organizations, just like the silent force of water undermining
the foundations of a structure. These organizations do not take prisoners, but
they create armies of unemployed people in the rest of the world, which leads
us to raise several questions: Is the rise of protectionism everywhere a
reaction to China’s rise or no? Is the current trade war carried out mainly by
the U.S. (beyond the way it is being done) have a reason to take place or no?
Will China overcome successfully all the hurdles on its path to global domination?
About the Author:
Fatima-Zohra Er-Rafia
Fatima-Zohra Er-Rafia is a lecturer at HEC Montréal
and Polytechnique Montréal, a consultant, and an independent researcher. She
holds a Ph.D. in Business Administration with a focus on China and Japan. Dr.
Er-Rafia specializes in cross-cultural management, international affairs,
strategy and organizational behavior. Her focus is on Weberian sociology,
politics, economics, and history, and she uses aspects of all these disciplines
to study Asia.
Dr. Er-Rafia previously served as a Corporate
Strategist at Desjardins Group and as a Management Consultant, Director of
Operations, and a Strategy and Business Development Consultant at Stratégies
Internationales. She provides training for Business Executives at the
international level and regularly gives presentations about Asia’s geopolitics,
and its business, management, and culture. She is the recipient of several
honors and awards and author of two book chapters on China and Japan, several
articles and over twenty business case studies.
Comments
Post a Comment