Understanding the Chinese Economies

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  4. Understanding the Chinese Economies

The Chinese government, wishing to take advantage of this capital inflow, set up a great number of economic development zones in the coastal regions. Some of them, like Shenzhen, are still major poles of attraction for foreign investment. Investors were attracted by favourable policies, the nature of the labour force, and the Chinese market. In addition, the common language and cultural proximity, along with shared attitudes towards combining political connections with business, encouraged this source of investment.

During this phase, two-thirds of foreign investment was in the hands of small and medium-sized firms from Hong Kong and Taiwan. These made use of labour-intensive production to assemble imported parts and re-export them to supply the international market. This system received the blessing of local officials, since this economic gold also blessed them with great decision-making powers.

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The enterprises involved did not represent direct competition, either with the China-based township and village enterprises or with the private or state-owned ones. On the other, hand they contributed towards improving the trade balance and towards increasing employment and incomes. Moreover, the demand arising from this poorly paid labour force was directed towards the low-quality products from the communal and the state-owned enterprises. These profited from the growth in domestic demand, and still do. That is why all these enterprises survived throughout this period, despite producing goods which were in many ways outdated See Figure 1.

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But the Asian crisis of modified the underlying situation. The developed economies reduced their orders placed with Chinese enterprises, while the latter remained essentially geared to the supply of overseas markets. Simultaneously, the new rates of exchange restored a degree of competitive advantage to the other Asian countries, by making their production costs attractive again So this second engine for growth no longer worked. The third phase of development began at this juncture, with the arrival of FDI funds from industrialised countries like the United States, Japan and Europe.

The Chinese government reacted extremely fast, by adopting a whole range of measures to attract this foreign investment. The huge campaign in favour of entry into the WTO must be understood in this context.

That is why WTO membership became the main objective of official policy. Forthcoming events like the Peking Olympic Games in , and the Shanghai Universal Exhibition in , provide an additional seductive appeal to international investors. As a consequence of the spectacular take-off in international investment, capital inflow from Taiwan and Hong Kong has picked up again, and continues to be an important part of the overall FDI in China See Figure 2.

In the s, income from exports stimulated domestic demand for basic consumer goods. In the s, exports gave a stimulus to the demand for sophisticated electronic consumer goods, particularly household equipment, making the export trade a major engine for growth. In the second half of the s, China set about stimulating demand in the sphere of tourism, real estate, and car production. In these ways, the reforms launched by Deng Xiaoping have paved the way for expansion in both consumption and production.


He was commenting on a little-known article by Alwyn Young 14 and his article concludes that Asia has achieved remarkable growth rates without any corresponding increase in productivity. In his view, these growth rates were more the outcome of mobilising available resources than of increasing efficiency. Essentially, China has been following this model of accumulation, with variations of its own. Source: Zhongguo tongji nianjian , op. Figure 3: Industrial production by type of enterprises, Comparison between China and Guangdong billion of yuans.

Secondly, given the size of the Chinese economy and the importance of regional disparities, a single wave of investment is simply not enough. Thirdly, the Chinese state has a powerful capacity for mobilising resources, and has been able to make use of the structures of production which were actually introduced to ensure social and political stability.

This mode of economic organisation lies at the very heart of its current difficulties. Our view is that these causes are to be found in the systems of production.

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With each wave of resource mobilisation, there have arisen new enterprises with their own distinct systems of production. It is these which have engendered the growth in production and returns on investment. These enterprises grew up in the early s, and operate as private companies, but for reasons of ideological acceptability they are officially registered as collective enterprises They work with raw materials and employ low-cost labour, and are concentrated in various sectors of production, which they quickly came to dominate A good example of this is the Yueqing enterprise in Shuikou Guangdong province.

Starting as a tap manufacturing plant, it modernised and became the organising centre of a myriad of small plumbing firms. Consequently, Shuikou township is now at the head of a whole industrial sector selling to the entire country.


China’s debt disease might wreck its uncrashable housing market

A large number of other enterprises have set themselves up along the same lines, both in Guangdong and in the rest of China. Well known brand names like Legend, TCL, Hai'er, Konka and Galanz are similar enterprises that arose with the first phase of expansion, and prospered mostly because their status as collective enterprises gave them access to public funds see Figure 3.

Galanz in Shunde, a town close to Canton, is typical. The Europeans made their own rapid calculations and accepted the offer. They transferred all their equipment and production lines to Shunde, including their assembly technology. How has that been possible?

Understanding the Chinese Economies

I took over their production techniques and set up a system of three eight-hour shifts, which works out at a hour week. The Galanz factories produce on behalf of two hundred multinational firms from every quarter of the globe. The Chinese enterprise takes care of the manufacturing end while the technology, brand name, and marketing remain in the hands of the foreign multinationals.

It is striking how quickly the enterprise has grown, which is why it is a frequently cited example. The quest for increased turnover is a constant factor, with the enterprises taking advantage of their low production costs. In addition, such enterprises actively seek out foreign partners to ensure access to technology and market outlets. What the Chinese enterprises are looking for is this technology transfer, both material in the form of products, equipment, and processes and organisational quality control and management skills.

Industries producing textiles and clothing, electronics and electrical household goods, were relocated to the Pearl River delta. These enterprises share some features with those of the first wave, but they also have some specifics of their own.

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  • Firstly, the investors not only established the enterprises, but brought with them their own networks of suppliers and customers. The Taiwanese and Hong Kong enterprises which set themselves up on the mainland to take advantage of low production costs, were backed by more than thirty years experience as suppliers to the multinationals. In addition, they have their own way of doing business, to which the entrepreneurs from Guangdong were quick to adapt. Secondly, they had more complex production techniques, even in the case of less sophisticated industries like shoes, clothing and basic electrical goods.

    Thirdly, these overseas Chinese established strong ties with mainland officials and local government bodies. They brought the local power structures into the very operations of their own systems of production. More effectively still, in an increasing number of cases, the local authorities appealed to them to help strengthen technological development and to launch technical education initiatives such as practical demonstrations, technical training, and apprenticeship schemes.

    There were also centres to promote technological innovation, aimed at providing technical know-how to enterprises in a particular sector of production for example, shoes and underwear in Nanhai. In the industrialised world such centres are usually organised by the chambers of commerce or public education bodies.

    In China, they are handled by the joint enterprises, to which a foreign partner brings both its expertise and its market. There are reckoned to be another thirty million potential migrants in the inland provinces, which guarantees continuing low labour costs. The foreign enterprises have easily been able to make use of this situation, turning the whole area into one huge factory, with intense local concentrations according to the type of products. Shunde is the main centre in China for the manufacture of electrical household goods, Ronggui is the largest centre in the world for air-conditioning unit production, Shaxi is the centre for leisure wear, Humen Dongguan for clothing, etc.

    Dongguan is a relatively small town which serves as a centre of production for a great number of specialised products: coffee, computer mice, and other computer components. The industrialisation of Dongguan began in the early s, well ahead of the surge in the second wave of investment in the rest of the country, thanks to the relocation of industries from Hong Kong The driving force behind its growth has been the manufacture of OEM products for its clients. Since , Dongguan has attracted numerous Taiwanese enterprises specialising in information technology and shoes, and these have built up a network of local suppliers to reduce the time and cost expended in purchasing raw materials and parts, while meeting the standards set by the needs of international clients.

    The supply networks provide a link between local and foreign enterprises. They are all members of a single constituted system of production: customers, suppliers and manufacturing units are all closely integrated, and the whole system benefits from the comparative advantage of cheap labour. The parameters are set by the global market, and contributions from the local authorities in terms of innovations or technical support are minimal.

    The key question confronting these systems of production is how to move on from the stage of providing low-cost assembly to foreign customers, to become complete OEM suppliers, or even achieve ODM Own Design Manufacture status Production costs were relatively high in comparison with other regions of China. Foreign enterprises were being set up in China with their own supplier networks, and some regions were becoming direct competitors. In Suzhou, close to Shanghai, a number of firms have taken advantage of the cheaper local labour and the availability of direct links with the multinationals.

    The Shanghai and Zhejiang region has entered into direct competition with Guangdong The exhaustion of the model of production in Dongguan is due to the difficulty in upgrading the systems of production. This illustrates a key point in the theory of industrial development, namely that the creation of enterprises is a process quite distinct from their development see Figure 1 The four hundred largest of these have investments in China.


    These investments are often focused on the Shanghai region. Table 1: Basic indicators of foreign companies. China is the world's fifth largest producer of gold and in the early 21st century became an important producer and exporter of rare metals needed in high-technology industries.