Chinas Integration into the World Economy: An Assessment of Industrial Development

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Chinas Integration into the World Economy
An Assessment of Industrial Development

• Xingmin Yin
• China Centre for Economic Studies
• Fudan University, Shanghai, 200433, China
• Email yinxingmin_at_hotmail.com
• A Conference of the Fridrich-Ebert-Foundation and
  the CIDE
• South-South The Transpacific Race to the Bottom
• Mexico-City, 30-31 of October,2003

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Contents

• Introduction
• Basic Features of Macroeconomic Management
• The Role of FDI to Industrial Development
• The Contribution of External Trade to
  Industrialization
• The Progress of Industrial Sophistication
• Some Issues for Future

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I. Introduction

• China is a developing country with huge
  population. Its GDP per capita in 2001 was only
  1000 at official exchange rate, and about 3300
  by using PPP.
• During past 25 years, the big change in Chinese
  industry and economy was taken place and had an
  extraordinary influence on the world economy.
• The rise of China as a major trade player and
  industrial power raises many issues for China as
  well as developing countries.
• The importance of macro-management in economic
  development.
• The success of export-orientation strategy or
  import liberalization strategy.
• The development targets for labor-intensive or
  technology-intensive industries.
• The role of industrial sophistication to Chinas
  integration to the would economy.

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II. Basic Features of Macroeconomic Management

• The macro scorecard for China is remarkably
  strong on an absolute as well as on a relative
  scale.
• Three aspects of Chinas performance are
  especially worthy to note.
• Its GDP growth rate over 25 years is among the
  highest one on record.
• Although the pace of expansion was unusually
  rapid, inflationary pressure was largely absent
  in the most years. In the first half of the
  1990s, the over-heated economy caused about 10
  percent of inflation rate, and inflation has been
  held in check in the later 1990s.
• Industry has remained the leading sector since
  1984. During the 1990s, industry has grown by
  above 10 percent annum.
• After 25 years of exceptional growth, China has
  become a major player in the world economy. The
  success of Chinas economic growth may be
  inferred into two distinguished strategies
  integration into the World, and industrialization
  based on technological sophistication.

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Growth Rates of Chinas GNP, Industry, Service
and CPI (1978-2002)

• Note Growth rates are based on comparable price.
• Source 2003 Statistical Yearbook of China.

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Composition of GDP and Employment by Sector in
China

• Industry is the largest sector in terms of GDP.
• The role of agriculture to GDP has decreased from
  27.1 in 1990 to 15.4 in 2002.
• The rural labor force still accounts for 50 of
  the national employment, by decreasing 20
  percentage points in the past 25 years.

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III. The Role of FDI and Industrial Development

• Until the 1980s China received the small amount
  of foreign direct investment (FDI) and its
  exports and imports were structured around
  self-reliance and home-grown technologies. The
  amount of foreign direct investment that flowed
  into China was 23.34 billion in 1979-1991.
• Starting in 1992, FDI in China moved onto a
  higher plane, and commitment rose from 4.4
  billion in 1991 to over 37 billion in 1995, and
  further soared to a 45 billion in 1997. This
  trend has persisted for several years. FDI
  increased to nearly 55 billion in 2002. at this
  year, China became the largest country of
  absorbing FDI in the world, which accounted for
  8.1 percent of the world FDI (651 billion).
  During the period of 1992-2002, the FDI amount of
  370 billion has flowed into China.
• The dominant sector invested by foreign capital
  has been Chinese manufacture industry, by
  accounting for about 60-70 in the last decade.
• Major international makers of high-technology
  products are accelerating the shift of production
  to China since the second half of the 1990s.
• The movement of foreign capital and technology
  into China are making Chinas industry towards
  the sophistication of structure and increasing
  technological competitiveness in the world market.

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The Growth of Foreign Direct Investment in China
(1984-2000)

• The amount of FDI reached at 23.34 billion in
  the period of 1979-1991.
• The amount of FDI reached at 370.00 billion in
  the period of 1992-2002.

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The Ratio of FDI in Manufacturing to the Total in
China
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International Comparison of Trade and FDI
Unit billion. the figures in 2001.
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IV. The Contribution of External Trade to
Industrialization

• Chinas trade liberalization was part of a wider
  strategy of achieving stability and efficient
  resource allocation in the past 25 years,
  especially in the last 10 years.
• The pursuit of a policy of industrialization took
  a gradual liberalization in tariffs and import
  quota controls as a means of integrating into the
  world economy. Chinas import/GDP ratio back in
  1978 was 5.17 percent. Since 1978 or so, the
  figure has been in excess of 20 percent (in
  2002).
• Trade has been substantially liberalized in the
  1990s. The average tariff has been brought down
  from 55.6 percent in 1982 to 44.1 percent in
  1991, and further to 13 percent for industrial
  products in 2001, with the prospect under a new
  tariff regulation to lower than 9.4 percent by
  2005.
• By reducing tariffs and increasing industrial
  competitiveness, China has converted itself from
  an importer to an exporter of certain
  technological products, for example, until the
  middle of the 1990s, China imported household
  electric appliances, but it is gradually turning
  into an exporter of these products since around
  of the late 1990s.

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The Timetable of Trade Liberalizations

• It is well-known proposition that reducing
  certain tariffs, as opposed to eliminating all of
  them, is a more practical way for China to join
  the world trade system. The above table gives an
  impression of the openness of the Chinese
  economy.
• The import tariffs on various categories will be
  decreased in the Chinas entry of WTO, such as
  the tariffs on vehicles and its parts will be
  reduced to 25 and 10 respectively by 2005.

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Brief Assessment on Chinas Trade Performance

• Chinas external trade increased from 20.04
  billion in 1978 to 135.7 billion in 1991, and
  soared to 620.79 billion in 2002, rising up to
  the sixth of the world trade rankings.
• The share of manufactured products increased from
  37 of merchandise exports in 1985 to 91 in
  2002, and within manufactured goods the
  composition shifted toward capital goods, which
  are usually more technology intensive than light
  manufactures such as textiles, food processing
  and garments.
• The implications of Chinas entry into the WTO
  suggest that China will benefit from the
  expansion of labor-intensive industries such as
  textiles and garments, in which its global market
  share is expected to increase significantly. The
  export of textiles increased from 49.83 billion
  in 2000 to 57.85 billion in 2002, increasing by
  16.1 however, the export of machinery and
  electronic goods increased from 72.89 billion to
  126.98 billion, increasing by 74, at the same
  period.
• In 2002 the ranking of machinery and electronic
  products grew to the top with 126.98 billion,
  higher than that of miscellaneous products with
  101.15 billion. This statistics shows just how
  rapidly the exports expanded in the machinery and
  electronics sectors in China.

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External Trade Performance in China (1978-2002)
Sources Statistical Yearbook of China, various
issues.
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Implications for Trade Growth in Technological
Industries

• The structure of Chinas external trade has been
  undergoing a significant change with the
  broadening boom of investment in China from
  overseas during the last decade.
• It is distinguished feature that the export of
  machinery and electronic goods increased
  dramatically from 0.84 billion in 1980 to 7.15
  billion in 1991, and to 126.98 billion in 2002.
  At the same period, the import of these
  industrial products also increased from 5.12
  billion to 19.6 billion, and to 137.01 billion.
  Obviously, the gap between exports and imports in
  the machinery and electronic goods is getting
  narrowed bit by bit.
• The ratio of export of machinery and electronic
  goods to its import was 36.48 percent in 1991,
  and changed into 92.68 percent in 2002.
• This comparison clearly implies that the
  availability of imported intermediate goods and
  of technology, whether licensed or embodied in
  imported capital goods, is an important source
  for improving export capability in manufactured
  products.
• Chinas success at exporting, has let to current
  account surpluses since 1994. In fact, current
  account surpluses averaging 2.7 percent of GNP in
  the period of 1994-2002. It had accumulated close
  to 286.41 billion in reserves in 2002. By the
  September of this year, Chinas reserves
  increased to as high as 360 billion.

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External Trade in Machinery, Electric and
Electronic Goods(1980-2002)
Sources Statistical Yearbook of China, various
issues.
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V. The Progress of Industrial Sophistication

• In tandem with the changes in Chinas trade
  structure, its industrial structure is going
  through a major change. The increased investment
  in China since 1992 led to a tremendous expansion
  of Chinas industrial production capacity.
• Foreign direct investment in China came with
  experts of advanced facilities and machinery as
  well as technologies from advanced countries
  around the world.
• Domestic investment also increased very fast in
  this period, investment in capital construction
  increased from 8.98 billion in 1991 to 25.35
  billion in 2002, and investment in innovation
  projects increased from 12.14 billion to 42.57
  billion at the same period. Within the period of
  1991-2002, the total investment in capital
  construction reached at 196.43 billion, and
  279.46 billion for innovation projects.
• The huge investment accumulated both from FDI and
  domestic capital has expanded industrial
  capacities, especially in technology-intensive
  sectors.

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Chinas Manufacturing Investment(1991-2002)
Unit billion. Sources Statistical Yearbook of
China, various issues.
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The Changes of Manufacturing structure in
1980-2002

• The change of Group A has generally decreased
  their share of manufactured output. The textiles
  dramatically reduced its ratio to the total
  manufactured output from 16.97 in 1980 to 9.51
  in 1995, and 6.48 in 2002 and food processing
  also decreased its ratio to 6.8 by 2002.
• Machinery industry experienced a big drop in its
  share of manufactured output between 1980 and
  1995, but still kept its about 7 of output
  share. Chemical and steel industries only reduced
  one percentage point respectively.
• Rapid growth in technological industry is the
  most obvious feature of recent industry activity.
  New industries have expanded their capacity very
  rapidly in the period of 1980-2002,particularly
  in the past eight years.
• Transport equipment increased its ratio to
  manufactured output from 4.18 in 1980 to 6.23
  in 1995, and further to 8.50 in 2002.
• While the biggest winner in the industrial
  restructuring is the electronics industry, which
  jumped from 1.85 in 1980 to 5.22 in 1995, up to
  11.48 in 2002.

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Sophistication of Chinas Manufacturing Structure
(1980-2002)
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The Growth of Industrial Labor Productivity

• Chinas integration into the world economy also
  tends to be the period where total factor
  productivity growth is unusually high. It is
  calculated that the high growth rate can be
  attributed to increases in capital and total
  factor productivity (TFP).
• The decomposition of economic growth rates
  between 1979 and 1998 attributes 3.8 of the 9.7
  growth to capital, 1.1 to labor, 1.1 to
  education, and3.6 to TFP.
• A picture of improved results such as growing
  exports, higher output, decreasing labor force
  and increased RD expenditure can be observed.
• Industry labor force decreased from 102.19
  million persons in 1992 to 91.55 million in 2002.
  And industrial output tripled in this period.
  This clearly shows the rise of labor productivity
  in Chinese industry.
• The industrial growth is based on higher
  productivity rather than expanded resource
  consumption.

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Increasing Rates of Industrial Labor Force and
Industrial Output
Unit of million persons.
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VI. Some Issues for Future

• Three new issues in Chinas integration
  to the world economy should be discussed very
  broadly in the future.
• The rapid and pervasive import penetration is
  likely to have a positive effect on developing
  economy, trade liberalization in China has made
  this lesson clear.
• It may be pointed out that Chinas external
  balance can support liberalization without the
  risk of a foreign exchange crisis, tariffs should
  be taken down to much lower than that of todays
  expectation.
• What will be the real impact on Chinese
  economy caused by the trade liberalization?

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Some Issues for Future

• The increased investment brought out the
  great benefit for the sophistication of Chinese
  industry and the export competitiveness. The
  results of this practice of industrial
  sophistication seem to be very complicated in the
  case of employment.
• A. With the introduction of more high
  technologies, Chinas overall manufacturing labor
  force was decreased considerably from 37.09
  million persons in 1998 to 29.07 million persons
  in 2002, even though electronics industry
  increased its employment from 1.34 million
  persons to 1.55 million persons at the same
  period.
• B. The bulk of labor force is still in
  agriculture, for instance, labor force in
  agriculture still accounts for 50 percent of
  Chinese employment in the year of 2002. Indeed,
  much of the economy has not yet benefited from
  the diffusion of new technology.
• How to resolve the above contradictory
  issues? The resolution may be taken by the
  Chinese government as follows industrialization
  strategy.

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Some Issues for Future

• Obviously, the high-speed industrialization
  strategy will be kept and extended by various
  levels of the local government in China.
  Therefore, China as global production base in
  this century seems to be underway. Chinas
  industrial capacity is nevertheless small in
  relation to the nations enormous population. The
  problem of this strategy may bring about the
  following issues
• How to tackle with overcapacity in some
  industrial sectors?
• Industrial pollution is a serious problem as a
  result of rapid industrialization and
  urbanization.
• How to shift from a resource-intensive
  development pattern to a sustainable development
  model?
• How to cooperate with other developing countries
  in global industrialization?

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• Thank You!