HOW CHINA BECAME THE WORLD’S FACTORY

Book Excerpt taken from 'The Global Trade Paradigm' by

Arun Kumar

While China today is known as the world’s factory, its success is built on the foundation of investments in agriculture in the Mao era. Deng capitalized on this in his initial years in power, between 1978 and 1984 During this period, as agriculture transitioned from collective farms to a household responsibility system, the investments in irrigation, farmer education, fertilizer production and use and extension services started bearing fruit Grain yield per unit area increased by 42.8 per cent, the total output of grain increased by 33.6 per cent, and real agricultural value-added increased by 52 6 per cent It was this jump in agricultural production that laid the foundations for growth in manufacturing.

Another key was decentralizing decision-making Provincial and local governments received increasing authority over investment approvals, fiscal resources and policies. This process had again started in Mao’s time, but the capriciousness of the Cultural Revolution had constrained it from yielding results Once stability returned under Deng’s reformist policies, provinces, municipalities and counties were allowed, even encouraged, to experiment with reforms in specific areas Successful experiments then became official policy and were quickly adopted throughout the country During Mao’s regime, even a suggestion of any foreign influence, especially Western, was not just frowned upon but could have drastic consequences for the individual concerned However, realizing that China needed global investments and know-how in manufacturing, Deng led the Chinese government to enact the Equity Joint Venture Law in 1979 The law allowed FDI into China for the first time since the Communist Revolution in 1949 Though the radicals criticized it, Deng was too powerful by then for any reversal of policy.

Another critical reform was the dismantling of internal barriers to the movement of goods, labour and capital. In the case of labour, the hukou system was gradually relaxed, allowing for a massive movement of ‘illegal’ migrants from rural to urban areas; today such migrants comprise well over a third of the total labor force This opened up possibilities for acquiring cluster and urbanization economies of scale, affecting the amount and location of domestic and foreign investments. Around the same time, US and China normalized diplomatic relations (suspended after the CCP’s triumph in the Chinese civil war) with President Richard Nixon’s historic visit to China in 1971.

On 1 March 1979, the two nations completed the process by opening embassies in each other’s capitals. In 1980, Deng supported the ‘Four Modernizations’ originally launched by Zhou Enlai in 1976, focusing on the economy agriculture, industry, science and technology, and defence Under its Equity Joint Venture Law, China established four special economic zones (SEZs) Shenzhen, Zhuhai, Xiamen and Shantou to allow FDI This was gradually extended over the next decade, with the government enacting several laws and regulations, giving tax and other incentives to encourage FDI inflows. The approach in these early years towards FDI was cautious, reflected in the fact that between 1979 and 1991, FDI inflows into China averaged US$1 8 billion annually. Even the pro-democracy student protests in Tiananmen Square in 1989 and the international opprobrium that followed only proved to be a temporary speedbreaker

Starting in 1992 considered by most experts to be the second phase of liberalization China began opening up most of the country and most sectors to FDI, whilst enacting a series of regulations easing restrictions on overseas investors. The results were dramatic. In 1992, inflows of FDI into China reached US$11 billion, doubling the figure for 1991 In 1993, inflows doubled again, reaching US$27 5 billion The high growth of FDI inflows continued from 1994 to 1997. The financial crisis of 1999/2000 that hit

East Asian economies hard was a temporary speed bump. But the surge in FDI became a flood after China joined the WTO in 2002. From US$46 9 billion in 2001, FDI flows into China skyrocketed, touching US$333 billion in 2021, according to World Bank data

According to a study by the Australian National University (ANU), until the Global Financial Crisis (GFC) of 2009, FDI inflows went overwhelmingly toward China’s manufacturing sector. From 2010, this trend slowed, even as FDI in services started picking up, and by 2014 had surpassed the annual investment in manufacturing

The spurt of FDI in manufacturing from 1992 onwards transformed China into a global factory and eventually an economic superpower By 2013, according to an article in Atlantic magazine on 5 August 2013, China was manufacturing 90 per cent of the world’s personal computers, 80 per cent of its air conditioners, 70 per cent of its mobile phones, 63 per cent of its shoes, and 60 per cent of its cement; and had 45 per cent of the global shipbuilding capacity In the initial phase, these manufacturing plants were directly owned by foreign companies or contract manufacturers. Very soon, Chinese companies emerged as competitors to their global counterparts, going on to dominate several sectors Chinese companies also started acquiring global giants. The most iconic of these takeovers were Lenovo’s acquisition of IBM’s personal computing division in 2005 and the Zhejiang Geely Holding Group’s acquisition of the Swedish carmaker Volvo (then owned by the Ford Motor Company) in 2010.

According to the United Nations Statistics Division, China’s share of global manufacturing output in 2018 stood at 28 4 per cent, almost equal to that of the US, Japan and Germany combined. According to the Chinese government, this share had risen to 30 per cent by 2021 While this is a significant achievement, it must also be noted that the population of these three countries combined is less than half of

China’s This indicates that despite its vaunted progress in manufacturing, China’s labour productivity in the manufacturing sector is still significantly lower than in the West This has implications for competitiveness and growth prospects in the future

Nevertheless, this manufacturing prowess has resulted in a spectacular rise of Chinese companies In 1990, when Fortune magazine first published its Global 500 compilation a list of the largest companies in the world no Chinese company featured in it By 2008, there were twenty-nine Chinese companies, with a combined revenue of US$1 1 trillion In 2022, the Global 500 list included 136 Chinese companies, the largest group from any one nation. That year China overtook the US, which had 124 such companies In 2021 the year on which the 2022 ranking is based Fortune Global 500 companies from Greater China (including nine firms from Taiwan) posted a record US$11.5 trillion in revenue, accounting for 31 per cent of the US$37.8 trillion total revenue for all companies on the list and topping, for the first time, the US$11 2 trillion revenue reported by US firms

The rise in the brand value of Chinese companies, as measured by the BrandFinance Global 500 ranking, is even more impressive In 2008, the brand value, as judged by BrandFinance, of the Chinese companies featuring in its list was US$60 billion. By 2022, it had risen more than twenty times to US$1 6 trillion