Chapter 3 – Industry and the rise of the export economy

China has a strategic location:

- Good neighbors: Taiwan, Korea and Japan [the 3 pillars growth model]
- Hong Kong [quick access to information since it’s a financial hub and a common trading platform
- Timing: Open up to trade just at the moment when the shipping was able for global production
chains, spanning multiple countries through reduction in long0distance shipping cost
- A “Killer app”: An electronic manufacturing base

Policies that made China successful:

- Special Economic Zones – ShenZhen
o Maximized opportunities for exporters
- Entering WTO – boosting exports
- High investment in infrastructure: low labor and land cost

Limitations with the model:

1. Heavy reliance on direct investment by foreign multinationals
a. Where majority of the export production are gained by foreign firms
2. Low labour costs, good infrastructure
a. “80% quality for 60% of the price”: Chinese firms are at a disadvantage in trying to

China’s strategy for developing its industry

1. Steady reallocation of resources
a. Away from state to private sector = efficiency
2. Refinement of a large state role in economic management
a. Implement policies aimed at maximizing exports: “industrial policies” to promote particular
industry and strong centralized control of the financial system

Industrialization process
- Heavy reliance on foreign investment (until 2006)
- Government began to shift to policies that aim to reduce dependence on foreign investment and build
up the capacities of domestic firms

Benefits of FDI
- Technology, production technique and management skills brought by foreign firms have helped
domestic companies to grow

Problem with each leaders’ policies through the years:

1. Mao ZeDong (before 1978):
a. Overly reliant on capital intensive heavy industry while production of consumer goods and
supplies of basic goods were minimal
b. Should be labour intensive as they have plenty of cheap labor
c. All industry are owned by SOEs, few incentives to improve efficiency
2. Deng Xiaoping industrial policies to improve Mao ZeDong:
a. Shift from capital intensive heavy industry to labor intensive light industry
b. Focus on light industrial exports to generate foreign exchange needed to import capital
equipment
c. Establishment of special economic zones (SEZ) to allow foreign companies to set up factories on
preferential terms
d. Price reforms to reduce the power of central planners and increase the role of the market
e. Increase no of private enterprises
Consequences
a. Rapid increase in consumer demand and inflation staggered up to 20%
b. Price reforms: products had two prices: a low plan price and a high market price
c. Officials bought shortage goods and resold them at a higher price
3. Jiang ZeMin:
a. Focus on attracting FDI to invest in fixed investment like infrastructure, technology
b. Attracting MNC and boost competition
4. Hu JinTao:
a. Promoted large scale infrastructure projects, provided additional protections for SOEs and
slowed the pace of market reforms
b. Didn’t focus on export promotion
c. Try to make Chinese companies to be more innovative under the “Indigenous Innovation” policy
includes subsidizing R&D, rewards for filing patents and creating technical standards
5. Xi JinPing:
a. Deregulation and price liberalization
b. Heavy industry are supported by infrastructure investment
c. “One belt one road” new transport infrastructure along two routes
i. Overland route through Central Asia to Europe
ii. Route through South and Southeast Asia to the Middle East
d. Shift from secondary to tertiary sector, reform SOEs with private shareholders

Failure of industrial policy

- The auto industry: Failed to reduce the number of automakers with three state-owned companies
dominate the industry
- The electronics industry: majority of electronics activity in China remains final-stage assemble
(profit margins are thin)
o They are technology followers, not technology leaders

1. Artificially low exchange rate that lead to China’s export boom (Not really): only set to regulate capital
flow rather than boosting exports

2. Low interest rates to subsidize heavy industrial growth (Not really): industrial firms financed their
expansion largely by reinvesting their own profits rather than taking out new loans

3. Artificially low energy prices to promote industrial growth (Not really): government goal was to reduce
volatility in order for businesses to be able to predict the prices for electricity and fuels so that there will be
more large-scale capital investments