In the past 40 years, China has achieved sustained high rates of economic growth after the implementation of the policy of reforms and opening up. This has generated worldwide attention for the “Chinese miracle.” In 1980, China’s exports amounted to only 5.9 per cent of GDP and its foreign investment abroad was only just over $1.6 billion; by 2013, the latter figure had increased to $290 billion.
China’s integration into the world economy essentially began in the 1990s. In 1992, Deng Xiaoping, the then national leader, during his visit to the southern part of the country, for the first time put forward the idea that China should open up. This pronouncement can be said to have laid the basic framework for the Chinese economy in the next 10 or 20 years. Since then, a large number of workers have migrated from the rural areas to the urban centres while a significant amount of foreign capital has been invested in the coastal areas of China. As a result of the combination of foreign capital and China’s cheap labour force, Chinese coastal areas became the centre of assembling processed products, which were then exported abroad. This is characteristically a very Chinese model of opening up to the outside world. In the course of this phenomenon, the assimilation of China into the world economy has increased substantially.
The international environment of that time was also very favourable to China. In the 1990s, with the end of the Cold War, world globalisation was at its peak. Western countries in general supported China’s opening up policy. At that time, the international situation was also relatively stable while the international economy was shifting from traditional inter-industry trade to intra-industry trade driven by emerging technologies such as the internet. This provided China with greater opportunities to enter the global production network. It was able to not only draw in more foreign capital but also benefitted from foreign investments in the technology sectors, leading to a spillover effect.
Chinese business enterprises have very strong learning abilities; hence the ability of the manufacturing industry to enhance labour productivity is very fast. This has been further strengthened and attained its peak since China joined the WTO in 2000. From 2005-2007, it was China’s exports and imports that drove its economic growth.
With the global financial crisis in 2008, China’s globalisation process entered a new stage. First, China’s trade surplus as a proportion of GDP decreased steadily. Second, China’s capacity to draw FDI also declined significantly. In 2014, Chinese FDI abroad surpassed FDI in China. Third, since 2014, China’s foreign exchange reserves of approximately $4 trillion began to decline. This has more or less stabilised around $3 trillion in recent times.
All these factors point toward the various internal and external changes within the Chinese economy. Externally, after the global financial crisis, globalisation has slowed, trade protectionism has intensified and China’s increased reliance on exports has further impeded the Chinese economy. Internally, China is conscious of the great imbalance that has plagued its development model in the past. Very high rates of savings and excessive dependence on investments have been the two main causes for China’s trade imbalance.
Farmers from the China’s countryside have spent their youth working and contributing to its export enterprises, and earning foreign exchange by exporting cheap products to markets abroad. While the income that they earned abroad is deposited in Chinese banks, creating huge forex reserves for the country, China invests most of these reserves in US treasury bonds at very low rates. One point of view therefore is that China has already fallen into the “dollar trap” because it is accompanied by lack of material benefits and loss of efficiency. Moreover, China has found it difficult to assume a positive and more responsive method to deal with this situation.
After the global financial crisis of 2008, China planned to give serious consideration to both the domestic and international markets and, in fact, gave more importance to the development of the domestic market. Until now there has been some success but there is scope for improvement.
On the one hand, due to the importance given to the development of the domestic market, China’s domestic rate of consumption has increased at a very high rate, thereby creating a new domestic consumer market. A significant number of Chinese companies are now more active in the domestic market, notable among them internet companies such as Alibaba, Tencent, and Baidu.
On the other hand, China has seen a decline in its ability to upgrade its manufacturing industries. Foreign enterprises are no longer favoured in China as they were in the past. Many, including even local Chinese companies, are now considering shifting production to emerging-market economies such as Indonesia and Vietnam to make use of the comparative advantage in labour costs.
It is against this backdrop, that Chinese leader Xi Jinping has put forward the “belt and road” initiative, which is, in fact, a Chinese version of globalisation.
Overall, China’s economy and globalisation have had a shared evolutionary relationship — China has been the biggest beneficiary of globalisation while it has, at the same time, attempted to adjust the tempo of globalisation to suit its own needs. If there is anything that can be learned from China and globalisation then it is the fact that China was able to make the right decisions at the right time.
He Fan is Director of the Research Institute of Maritime Silk Road (RIMS) and Professor, HSBC Business School Peking University. Zhu He and Li Chaohui are both at RIMS. This article is part of a series by Chinese economists facilitated by the Institute of Chinese Studies, Delhi