China's Transition to a Global Economy

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China’s Transition to a Global Economy Edited by Michael Webber, Mark Wang and Zhu Ying

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China’s Transition to a Global Economy

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Other books by Michael Webber IMPACT OF UNCERTAINTY ON LOCATION CHRISTALLER CENTRAL PLACE THEORY: An Introductory Statement (with N. Alao et al.) INFORMATION THEORY AND SPATIAL STRUCTURE EXPLANATION, PREDICTION AND PLANNING: The Lowry Model INDUSTRIAL LOCATION GLOBAL RESTRUCTURING: The Australian Experience (with R. Fagan) RESTRUCTURING INDUSTRY IN VICTORIA AND AUSTRALIA PUTTING THE PEOPLE LAST (with M. L. Crooks) THE GOLDEN AGE ILLUSION (with D. L. Rigby) REFASHIONING THE RAG TRADE: Internationalising Australia’s Textiles, Clothing and Footwear Industries (with S. Weller)

Also by Mark Wang MEGA URBAN REGIONS IN CHINA

Also by Zhu Ying DANCE AND COMMUNICATION IN CHINESE CULTURE (with Dong et al.) LAW AND LABOUR MARKET REGULATION IN EAST ASIA (with Cooney et al.)

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China’s Transition to a Global Economy Edited by

Michael Webber School of Anthropology, Geography and Environmental Studies University of Melbourne Australia

Mark Wang School of Anthropology, Geography and Environmental Studies University of Melbourne Australia

and

Zhu Ying Department of Management University of Melbourne Australia

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Editorial Matter and Selection and Chapters 1–7 and 11 © Michael Webber, Mark Wang and Zhu Ying 2002 Chapters 8–10 © Palgrave MacMillan Ltd 2002 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author(s) has/have asserted his/her/their right(s) to be identified as the author(s) of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2002 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN 1–4039–0167–8 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data China’s transition to a global economy / edited by Michael Webber, Mark Wang, and Zhu Ying p. cm. Includes bibliographical references and index. ISBN 1–4039–0167–8 1. China – Economic policy – 2000– 2. China – Economic conditions – 2000– . 3. Structural adjustment (Economic policy) – China. 4. Industries – China. 5. Investments, Foreign – China. 6. Globalization – Economic aspects – China. 7. China – Foreign economic relations. I. Webber, Michael John. II. Wang, Mark, 1960– III. Zhu, Ying, Ph. D HC427.95 .C45 2002 330.951¢06 – dc21 2002026953 10 9 8 7 11 10 09 08

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Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham and Eastbourne

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Contents List of Tables

viii

List of Figures

x

Notes on the Contributors

xi

List of Abbreviations

xii

1 Knocking on WTO’s Door Michael Webber, Mark Wang and Zhu Ying 1. The questions 2. The global framework 3. National characteristics 4. Towards answers 2 Managed Openness: Opening China’s Door Mark Wang, Michael Webber and Zhu Ying 1. Introduction 2. Balanced trade through exporting ‘made-in-China’ products 3. Human resource exports and overseas contract projects 4. Capital flows 5. Technology trade and diffusion 6 Conclusion 3 China Goes Out: Investing Overseas Mark Wang, Michael Webber and Zhu Ying 1. Introduction 2. FDI from China’s neighbours 3. Spatial patterns and structural features of China’s outward investment 4. Gradually going out 5. The motives for Chinese investment overseas 6. What is next? 4 Making Markets Michael Webber, Mark Wang and Zhu Ying 1. Naming social change 2. Changes between centre and locality v

1 1 3 6 10 14 14 16 19 23 24 28 31 31 33 37 42 50 57 61 62 66

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Contents

3. 4. 5. 6. 7.

Rural markets Urban markets Migration: linking rural and urban markets Conclusion 1: developing markets Conclusion 2: regionalisation

70 79 84 88 90

5 Foreign Direct Investment and Labour Relations Zhu Ying, Michael Webber and Mark Wang 1. Introduction 2. Globalisation and labour relations 3. FDI and its impact on labour relations 4. Problems in FOEs 5. Government response and new legal framework 6. Conclusion

93

6 China’s Puzzle Game: Four Spatial Shifts of Development Mark Wang, Michael Webber and Zhu Ying 1. The first two shifts – equity: Maoist geo-strategic legacy 2. The third shift: Deng’s legacy 3. The fourth shift: equity and efficiency 4. Beyond the puzzle 7 Reconfiguring the Microgeography of China: Special Economic Zones Zhu Ying, Michael Webber and Mark Wang 1. Introduction 2. The history and function of special economic zones 3. The characteristics of SEZs 4. The role of SEZs in transition 5. Conclusion: towards globalisation 8 High and New Technology Industrial Development Zones Wang Jici and Mark Wang 1. Background 2. Proliferation of HNTIDZs 3. Signs of development 4. An interpretation of HNTIDZs 5. Fundamental dilemmas in China’s hi-tech development 6. Conclusion 9 Structural Adjustment: Creating a New Textile Industry Wei Houkai, Shen Zhiyu and Mark Wang 1. Introduction 2. What was wrong?

93 95 97 104 107 110 113 117 129 136 141 143 143 145 150 160 166 168 169 174 179 181 186 188 191 191 192

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Contents vii

3. What has been done? 4. What are the next challenges? 10 The Trajectory of the Personal Computer Industry Wang Jici and Mark Wang 1. Introduction 2. The PC industry in China 3. Capturing new opportunities: a global perspective 4. Exploring new paths of growth: Zhongguan Cun Electronic Street 5. Booming PC-related SMEs in western Pearl River delta 6. Conclusion: market forces, creating clusters and north–south movements

199 201 205 205 207 210 211 217 223

11 Conclusions: Opening the Gate to the World Economy Michael Webber, Mark Wang and Zhu Ying 1. Engaging the global economy 2. Transition, adjustment and late industrialisation 3. Regions under globalisation 4. Paths to a globalised economy

226 228 235 238 241

References

244

Index

259

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List of Tables 2.1

Labour exports and completed contracted overseas projects, China, 1999 2.2 Major import sources and export markets of China’s technology products and equipment, 1997 2.3 Technology exports as a proportion of imports, China 1979–97 3.1 Characteristics of FDI by selected east Asian countries, 1996 3.2 Motives for Japanese firms’ FDI, selected years 3.3 Estimates of China’s FDI outflow ($US billion) 3.4 Chinese enterprises’ investment in selected regions and countries ($US million) 3.5 Average size of China’s non-trading overseas investment projects in major regions and selected countries ($US million) 3.6 Overseas investment of Chinese enterprises by stage 3.7 Number of Chinese overseas investment enterprises by sector and region (1991) 3.8 China’s overseas investment by sector in 1997 3.9 Summary of survey results for 100 overseas enterprises (2000) 3.10 A stage model of China’s overseas investment 4.1 Sectoral and ownership structure of employment, 1978 and 1998 4.2 State-controlled prices in China, mid-1990s 5.1 Urban employment, by enterprise ownership, 1986–98 5.2 Employment by sector and gender, FOEs, 1996 5.3 Average yearly wages of urban labour force since 1985 (RMB) 6.1 China’s major shifts in regional development priorities 6.2 Output of major industrial products, China, India and the USA, 1949 6.3 Coast and inland regions’ share of total industrial output, China 1950–55 (%) 6.4 Ratio of investment in capital construction between coast and inland China (coast = 1) viii

22 26 27 34 38 39 40

41 44 47 48 51 60 81 83 99 100 102 115 117 123 124

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List of Tables ix

6.5

6.6 6.7 6.8 7.1 8.1 8.2 9.1 9.2 9.3 9.4 10.1 10.2 10.3 10.4

Percentage of China’s total investment of capital construction in selected provinces of coast and Third Front regions, 1969–72 Number of large cities and urban population, 1953–78 Comparison of capital return ratios, China, coast and Third Front regions, 1978 Chinese government plans for macro regions in seventh Five-Year Plan (1986–90) Main social and economic indicators of four SEZs, 1999 Reform of science and technology education systems in China Performance and characteristics of 52 national HNTIDZs, 1997 The status of the textile industry in China’s national economy Deficits of state-owned (above township level) textile enterprises, 1997 Comparison of state-owned and foreign-funded textiles and clothing industries, 1999 China’s SOTEs reform targets and fulfilment, 1996–2000 China and global PC markets PC market in China (million sets), 1995–97 China’s PC market share, 1996 The distribution of PC-related products manufacturing in Dong’guan city, Pearl River delta

127 128 128 132 149 171 176 194 196 198 199 208 208 209 220

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List of Figures 2.1 Openness in China, 1978–99 2.2 Trade and foreign investment, China, 1978–99 2.3 Number of countries that have signed labour supply or project contracts with China, 1978–99 2.4 Value of overseas contracted projects and of the wages of exported labour, China, 1978–99 2.5 Number of Chinese students who have studied overseas and number who have returned, 1978–97 3.1 China’s approval procedure for overseas investment projects 4.1 Indexes of agricultural production, China, 1961–2000 4.2 Labourers’ remuneration as a proportion of rural household production and cash expenditures as a proportion of rural total expenditure, provinces of China, 1999 4.3 Relative levels of commodity production among rural households, provinces of China, 1999 4.4 Employment in state-owned and collective enterprises as a proportion of all urban employment, provinces of China, 1999 4.5 Average rural and urban per capita incomes, China, 1978–99 6.1 Major industrial centres in China, 1949 6.2 Location of China’s 156 key projects, 1953–57 6.3 Indexes of gross regional domestic product (1950 = 100) 6.4 Location of the Third Front projects 6.5 Proportion of China’s capital construction investment: coast, inland, and Third Front regions 6.6 Location of three macro regions in China 6.7 Spatial sequence of China’s opening since 1978 7.1 Location of China’s various development zones 9.1 China’s exports of textile and garments, 1978–2000 ($US billion, percentage) 10.1 The location of Zhongguan Cun in Beijing 10.2 Location of PC-related products manufacturing in Dong’guan City, Pearl River delta, China x

16 17 20 21 23 49 72

77 78

82 87 119 121 122 125 126 131 134 144 195 213 219

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Notes on the Contributors Wang Jici is Professor of Geography at Beijing University, Beijing. She has written exensively on Chinese technology policy and hightechnology industrial policy. Mark Wang is Senior Lecturer, School of Anthropology, Geography and Environmental Studies at the University of Melbourne. He writes about urban development in China. Michael Webber is Professor of Geography at the University of Melbourne. He is Interested in industrial restructuring and the conditions under which people work. He is now applying this interest to the development of labour markets in China. Zhu Ying is Senior Lecturer in the Department of Management at the University of Melbourne. He now studies the evolution of human resource management in China and Vietnam. Wei Houkai is Associate Professor at the Institute of Industrial Economics, Chinese Academy of Social Sciences, Beijing. He has written widely in Chinese on China’s regional development strategy and industrial economy. Shen Zhiyu is Associate Professor at the Institute of Industrial Economics, Chinese Academy of Social Sciences, Beijing. He is a specialist on China’s enterprise management and industrial organisation.

xi

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List of Abbreviations CAS COE DPE EPZ ETDZ FDI FEER FFE FOE GDP HNTIDZ JV LDC MNC MNE MOFTEC NIE R&D RMB SEZ SME SOE SOTE TNC TVE

Chinese Academy of Sciences Collective-owned enterprise Domestic private enterprise Export processing zone Economic and Technological Development Zone Foreign direct investment Far Eastern Economic Review Foreign funded enterprise Foreign owned enterprise Gross domestic product High and New Technology Industrial Development Zone Joint venture Less developed country Multinational corporation Multinational enterprise Ministry of Foreign Trade and Economic Cooperation Newly industrialised country Research and development Renminbi Special economic zone Small and medium enterprise State-owned enterprise State-owned textile enterprise Transnational corporation Township and village enterprise

xii

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1 Knocking on WTO’s Door Michael Webber, Mark Wang and Zhu Ying

1. The questions The last 200 years have witnessed two distinct approaches to the creation of a globalised economy. The first, which reached its fullest expression in the first decade of the twentieth century, was founded on political domination: on colonialism and the use of force to open up markets in developing countries to the products of the economies of western Europe and north America. China struggled against this form of globalisation. The second approach has been more subtle. Since the Second World War, the USA and western Europe in particular have led the way in creating a single space over which capital, commodities, organisations, information and (to a lesser extent) people may more freely roam. Until the late 1970s, China largely ignored and was excluded from these new global forms of economic organisation; since the late 1970s, China has not had to borrow from the IMF and so – unlike virtually all other developing countries – has not had to submit to their control over economic and social policy; yet by September 2001, the world’s pre-eminent regulator of trade, the World Trade Organisation (WTO), had agreed on terms for the admission of China. China’s new approach to the global economy since 1978 has coincided with what has been widely interpreted as a period of profound reorganisation of the economy. Like other former Communist countries, China has since 1978 experimented with a variety of market-oriented forms of economic organisation. Unlike most other former Communist countries, China has experienced rapid economic growth and relatively few social or political dislocations (for contrasting views on the reasons for China’s special performance see Singh 1991 and Sachs and Woo 1

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2 China’s Transition to a Global Economy

1994). Furthermore, China managed to escape the most serious consequences of the post-1997 Asian financial crisis more readily than did its neighbours. Some commentators believe that China cannot continue to grow rapidly unless there are deep and radical political, social and economic reforms. Yet the government and some other commentators evidently think that the recent partial, hesitant and experimental approach to markets and global economic forms will continue to offer a socially acceptable path to a prosperous future. China’s recent economic history and the debate over China’s possible futures give rise to the two empirical questions we address in this book: how and to what extent has China sought to engage with this global economy that is now emerging? What does this engagement mean for economic life in China? These are questions pertaining to the discourse of China. However, as Cartier (2002) has recently pointed out, the vitality and relevance of the discourses of area studies need to be informed by contemporary concepts from the social sciences. Thus, to approach these questions we appeal to recent theoretical debates in economic geography about globalisation. Three concerns in particular figure prominently: about the meaning and significance of globalisation for people’s lives; about one component of globalisation – the transition in some countries from socialism to capitalism; and about the interrelations between globalisation and creation of place and region. The concept of globalisation provides the fundamental lens through which we understand recent political and economic change in China. The changes in China since 1978 reflect not only actions of governments to alter the conditions under which production and exchange occur, and the actions of individuals and firms to modify those conditions; they also reflect new ways in which international and Chinese firms are organising themselves to do business. However, globalisation is a contested concept (for a critical review see Hirst and Thompson 1996), entailing debates over both its origins (international and internal causes, government and business interests, transitions in newly market economies and restructuring in existing ones) and its consequences (for equality of well-being, local political and economic control, the place of markets in regulating economic life and the characteristics of places). What does the story of post-1978 China say to these debates? In particular, what are the forms and processes of globalisation in a developing economy that has been outside IMF and World Bank control? Does the category of transition economy provide useful precepts for interpreting the recent historical economic geography of China? How have regions been formed and reformed as China has

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Knocking on WTO’s Door 3

globalised and at what scales? These are questions pertaining to the discourse of social science.

2. The global framework Globalisation refers to the development of an economy and forms of governance that span much of the world (Webber 2000). Such a development reflects a variety of processes: the integration of financial and currency markets across the entire world; the integration of production, trade and capital formation across national boundaries in global corporations; the emergence of functions of global governance that partially regulate national economic, social and environmental policies; and the imposition of market relations into spheres of cultural and social life previously immune from market pressures. One element of globalisation is the integration of financial and currency markets across the entire world (Daly and Logan 1989; Corbridge et al. 1994). Cox (1994), for example, argues that, whereas the Bretton Woods system attempted to balance the demands of a liberal world market with the domestic responsibilities of states, by 1975 this compromise had shifted towards a subordination of domestic economies to the perceived exigencies of a global economy. Finance, decoupled from real production, has come to dominate production and to impose short term financial gain not long term industrial development as the criterion of success (Stanford 1999). To Cox (1987), international finance is the principal agency of conformity to the world order and the principal regulator of the political and productive organisation of the world economy. Key ways in which this power of finance over states is exemplified include the ratings given to governments’ bond and other issues by international credit rating agencies; fluctuations in exchange rates in response to short term (and often statistically inaccurate) trade reports from government statistical agencies (Ravenhill 1994: 90); and the effects of international financial movements on the currencies and economies of east and southeast Asian states since 1997 (see the papers in the special issue of Geoforum, 2001). A second element of globalisation involves the integration of production, trade and capital formation across national boundaries in global corporations. This means not simply an increasing ratio of trade to production (the data presented by Hirst and Thompson 1996) but the tendency to integrate production and investment decisions across national boundaries: as Bryan and Rafferty (1999) put it, globalisation refers to a unified system of calculation to which all economic decisions

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are subjected. So, it is argued, the power of a single state to control, and of civil actors (including trade unions) to confront, business has been weakened as cross border production has been extended and investment strikes made increasingly feasible. At their most extreme, such claims invoke the collapse of the nation state as a basic organising principle of the global economy (Ohmae 1995; but see the critique of such an extreme view by Hirst and Thompson 1996). In their most politically potent form, such claims invoke the idea that as companies become global in their reach, so workers in China (and Bangladesh and other countries) provide low cost (low wage) competition to the products of western workers. Thirdly, the emerging functions of global governance are partially regulating national economic, social and environmental policies. The institutions of global governance (including the OECD, Bank for International Settlements, IMF, G7, WTO and APEC) are important in several ways. First, such institutions as the OECD, G7 and APEC in effect lead a process of interstate consensus formation about the needs of the world economy, though participation in this process is hierarchically structured. The regular reports of such organisations as the OECD about the state of national economies are used politically either to justify policies of neo-liberalism or to berate governments for excessive interference in the operations of markets. Institutions like the OECD, then, serve to propagate an international consensus about appropriate economic and social policies. Secondly, the BIS, IMF and WTO and similar organisations rely on power derived from treaty obligations and their power to offer or deny access to financial resources. The power of the IMF and World Bank over developing nations – even such large nations as Brazil – has forced important changes in their development strategies, often involving major changes in rates of economic growth and income distribution (Schaeffer 1997). The interactions between the power of these institutions and the power of individual states are illustrated by the protracted negotiations between the USA and the European Union on the one hand and China on the other, over China’s admission to the WTO. However, not all the boundaries that are crossed by globalisation are lines on a map. The concept of globalisation is also used to refer to the tendency for the market to assimilate more and more spheres which in the past have been in the realm of non-market relations (Hinkson 1996). The most potent images of this tendency are the increasing involvement of the media in the remaking of countries’ cultural relations (Peet 1991), especially in sport, but they include also the marketisation of health, education and welfare. The precise terms vary: corporatisation

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of government services; privatisation of services; professionalisation and commercialisation in sport and other cultural activities. In China, this tendency is exemplified most significantly by attempts to re-make the economy away from its domination by planning and state owned enterprises towards more market-oriented forms of economy and private forms of business. These apparently different processes are united into an overarching category called globalisation by the difference that they make to the relations between people involved in producing goods and services. The cultural, economic, political and social processes of societies define a variety of social relations – between genders, within households, within production, for example – and create a variety of forms of difference (Fincher and Jacobs 1998; Gibson-Graham 1996). Within an economy, however, a characteristic social relation is its system of valuation. In this sense globalisation occurs as market forms of valuation are applied to wider and wider areas of daily life. More and more things become commodities: objects are produced in order to be sold, the value of which is set on a market. Of course, no actual society is monopolised by market forms of valuation: even in the USA, the government still distributes some forms of medical service on the basis of need rather than capacity to pay, household members continue to produce goods for each other without expecting payment, and the sale and purchase of many commodities are subject to market imperfections (as, for example, labour markets are segmented). Globalisation reduces such non-market allocations and forms of valuation. Consequently, globalisation proceeds as valuations in different places or different sectors become subject to the same disciplines, to become more similar in magnitude. As barriers to trade and investment fall, this corporation here must compete on price and quality with that corporation there: our way of making things must compete with your way. As places compete because corporations demand equal productivity and production standards in different places, and as states are increasingly subject to the same pressures from the institutions of global governance – so the demands made of working people are being made more equally in different societies. Globalisation, that is, represents the enlargement of the sphere of a common value system. As such the concept integrates the two forms of economic and social change that have occurred within China – opening up and marketisation. Furthermore, the process of change may be assessed through the degree to which labour and other commodities are progressively becoming more uniformly controlled by markets across

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sectors and regions. Of course, this assessment needs to be supplemented with other widely used economic indicators, such as gross domestic (or national) product, the rate of emergence of particular industries or occupations (most commonly, some forms of information technology), and China’s changing ability to feed its population (Heilig 1999). Important as these indicators are, the key concept through which we dissect globalisation is the concept of market values, as set in increasingly broadly defined markets.

3. National characteristics As the older global form was dismantled by the countries of western Europe and north America after the Second World War and the new global form gradually emerged, so the countries of the world have adopted a variety of responses to the pressures and opportunities created by this new form of organisation of the global economy. Within individual countries particular patterns of policy have been followed that privilege this or that version of globalisation. Hence, the more aggressive liberalisation and globalisation of New Zealand contrasts with the more cautious approach adopted by Australia; the deregulated liberalism of the USA stands apart from the regulatory Keynesianism of Japan. Such different choices mean that the present form and power of globalisation are not sufficient to determine unique national responses to globalisation. States have different national interests, which lead them into different responses to the global economy (Martin 1994), and different internal conditions, which influence political responses to globalisation (Webber 2000). States’ responses to the global economy thus depend not only on conditions within the global economy, but also on circumstances within the country, on strategic decisions and future expectations. Among the internal conditions that affect the response of the state to the global economy are the structure of class and fractional interests inherited from the past. It may be true that internationalisation of the economy has been necessary; it does not follow that there is only one path to an international economy. The development of a global economy is thus the history of political, social and economic changes within individual countries. In particular, the political, social and economic changes within China over the past quarter of a century cannot usefully be judged against theoretical criteria deduced from the principles of orthodox economics. Countries are not featureless tables, newly delivered from homogenising forms of factory production, and onto which can be laid abstract principles of

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economic organisation. Geography, history and the constraints of an embedded social system all mean that such theoretical judgements do not help understand what happened and what is possible. Nor is it true that all countries face the same degree of geopolitical freedom with which to choose an approach to the global economy. Indeed, outside western Europe and north America (and such satellites as Australia and New Zealand), a free approach to the global economy has been rare. Three groups of approaches can be identified. First are the economies in transition from one form of economic organisation to another. The literature about transition proposes to understand change as a unidirectional process, the replacement of socialist forms of allocation by market forms (Kornai 1992). In the light of economic pressures throughout the 1970s (and in some cases political pressures), the formerly socialist countries of Eastern Europe, the former USSR and, later, China set in train processes of economic, political and social change (Yamin and Batstone 1995). Departing from socialism to avoid imminent chaos, most countries chose to reform once and for all, quickly replacing all their mechanisms of economic planning by market mechanisms (Solimano 1994). This method of reform has been widely commended (Nolan 1993). These transitions were triggered by political and economic failures of the socialist system of the Soviet sphere, and change in one country stimulated subsequent changes in others. The processes were often overseen by western European or American advisors, whose blueprints for transforming these societies into liberal, market economies justify the term transition. Yet other countries, especially in Africa, Latin America and the Indian subcontinent, have approached market forms of economic organisation and opened their economies to global goods, money and ideas under the auspices of the agencies of international financial governance, particularly the International Monetary Fund and the World Bank (Fitzgerald 2000; Killick et al. 1998). Subject to the vagaries of international commodity and capital prices, the countries were one by one forced to borrow from the lenders of last resort, on terms that mandated marketisation and economic opening. These so-called structural adjustment programmes have dictated the abolition of many programmes of social welfare, local forms of economic development and policies of local economic protection (Schaeffer 1997). The third approach to the global economy is represented by the late industrialising economies of northeast Asia, notably Japan, South Korea and Taiwan. At least until the financial crisis of 1997, the crucial controls over growth in the east Asian newly industrialised economies

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have been national accumulation strategies and nationally directed investment policies – within the context of a changing global political economy. In first Japan and then Korea and Taiwan the state has exercised a political will to develop. This will reflects local class structures and perceptions of geopolitical conditions, including market access and the Cold War (Webber and Rigby 1996). Certainly these states have used global capital to finance their development programmes, commonly to permit national firms to grow; but the programmes were indigenous rather than driven by foreign direct investment. Many other countries sought to initiate such programmes – including India and Brazil – but they have proved relatively unsuccessful (Amsden 1989 and Wade 1990 identify some of the conditions of success for late industrialisers). The importance of the Chinese case for our understanding of processes of globalisation lies in the fact that China has not followed any single one of these approaches. Most obviously, globalisation in China has not been mandated by some outside-determined structural adjustment programme. Thus, unlike virtually all the other developing countries, the Chinese government has had a certain freedom from external constraint. Likewise, in contrast to the situation in eastern Europe and the USSR, China’s transformation from a planned to a market economy was not forced by a political or economic crisis of the whole socialist system (Perkins 1994), though, as Zhu (1992) has noted, the Maoist period ended in challenges rather than obvious success. Indeed, lacking an externally defined blueprint of the goal towards which reforms were directed, it is not obvious that transition is an appropriate conceptualisation of recent change in China. Thus, in contrast to Structural Adjustment Programmes and the transition models and despite ongoing criticism, China has opted to reform gradually and partially, by ‘crossing the river while groping for the stones’ (Linge and Forbes 1990), seeking to exploit both existing socialist and introduced capitalist structures. Patterns of institutional change have been regular and cumulative, rather than drastic or once and for all. Instead of rapidly entering the market and theoretically eliminating central plan and control, incremental adjustments have been made (Field 1995). This strategy of gradualism implies the coexistence of centralised political control and market-oriented firms, of state-owned enterprises and capitalist foreign-funded firms, and has long been a focus for Chinese studies (Goldman 1994). Reform has not been simply a spontaneous process nor purely government-led. For example, some experiments in the household responsibility system were initiated during the early 1970s in Anhui and

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Sichuan provinces and social practice in many localities sanctioned the blurring of legal boundaries between private and collective enterprise. Yet many economic reforms in China did originate within the socialist leadership and Party advisors, who made calculated decisions to introduce market mechanisms gradually, since evidence seemed to support calls for less central planning (Naughton 1996). Over the years, China’s reformist elites have supplied crucial leadership in the process of reform, especially in providing strategic directions, legalising selected local experiments, setting out priorities, re-orienting ideology, advancing broad policy initiatives and building pro-reform coalitions (Zhang 2000). Thus, for example, experiments in the household responsibility system were encouraged by local leaders and then championed by the central government. International reserves and access to foreign capital from overseas Chinese provided the Party with the financial support to develop and manage the transformation (Perkins 1994: 200). The degree of success of China’s gradualist approach in agriculture and industry has been debated (contrast Singh 1991 to Sachs and Woo 1994; compare Walder 1996). Tensions created by the forces propelling a country into reform have the potential to destroy an economy, as many eastern European and Soviet countries have discovered (Cook and Nixson 1995). Although China’s political, social and economic changes in agriculture and industry have been characterised by periods of economic disorganisation and decline (Fewsmith 1994), they have been far less detrimental to social and economic conditions than in most other post-socialist countries. Internal opposition to the economic changes has been contained as the Chinese state has established itself as a socialist market economy with hybrid characteristics (Zhou 1997). Thus, in contrast to the models of structural adjustment and transition, crucial Chinese characteristics are gradualism and local determination. However, the Chinese approach to the global economy is distinctive in another sense, for it involves a particular mix of the four characteristic processes of globalisation. As we have indicated, there has been substantial change in the direction of marketisation of the economy; there has also been a great deal of effort to open China’s door in order to facilitate the integration of production, trade and capital formation across China’s borders. These are the two arenas of policy in which globalisation has been most advanced in China. On the other hand, the implications of the institutions of global governance for economic life in China have been so far remarkably few. The IMF has imposed no structural adjustments, since China has not had to borrow. The World Bank is an active lender to China, but

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apparently with little political effect. The formation of the WTO has the potential to cause the government to modify China’s trade and property regimes, but few of these modifications are yet apparent. Only now is China proposing to make its tax rates spatially uniform in order to accord with WTO rules (Asian Wall Street Journal, 6 June 2001). Equally, the global financial system is more important to China through its effects on other countries than through its direct effect on China. China’s currency remains untraded, so a principal source of uncertainty in economic policy is so far avoided. There exist relatively small stock markets in China, but they have little effect on economic life yet. (Equally, outside Pudong, Shenzhen and Hong Kong, central financial districts have not developed in Chinese cities.) Some financial institutions did indeed fail in the 1990s, but apparently for local reasons rather than because of international linkages. But these are of little importance compared to the changes in the competitiveness of exports after the east Asian financial crisis of 1997. For the moment in China, then, globalisation is most potent through marketisation and through trade and capital flows. This is not to say that further opening up may not increase financial uncertainty – for example if the currency becomes convertible – nor that membership of the WTO will not bring significant changes to the organisation of business life. At present, though, marketisation and the integration of production, trade and capital markets are more significant, and these are the arenas upon which we concentrate in this book. Financial integration and global governance are less salient. These characteristics – gradualism, internal determination and a downplaying of financial integration and global governance – are resonant of theories of late industrialisation, particularly as practised in northeast Asia. This is the model towards which China appears to have been groping, though modified by different internal conditions and by the changes that have occurred in the global economy since the early industrialisation of Korea and Taiwan in the 1960s and 1970s. And yet, China has not managed to construct the form of banking system that was so important in Korea and Taiwan, and it has had to manage the reform of a socialist economy. This is not, then, simply the history of yet another east Asian late industrialiser.

4. Towards answers Like others before us, we answer the question about China’s approach to the global economy by identifying a gradual and partial approach,

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one that emphasises the addition of market oriented forms of organisation on top of existing, more socialist forms of organisation. Furthermore, China is particular in that the global economy is represented in China largely through the development of market forms of organisation and through the growth of international flows of commodities and direct investment, rather than through the institutions of the global financial market or of global governance. We also question whether globalisation within China – its opening and increasing marketisation – means that China is treading slowly along a path that leads to a western, liberal market form of economy. It has clearly not been the intention of the government that China develops such economic forms. Although the recent economic history of China offers some parallels to the theory of late industrialisation, China starts from a different place than Korea and Taiwan, and maintains an ideology of socialist characteristics. Globalisation reflects not only the characteristics of class and production relations within China, but also the rearrangements of industries, corporations and other institutions on a global scale. And as it proceeds, globalisation affects the ability of the state to chart the future course of the Chinese economy. These changes have themselves redefined China. By China we mean first the territorial political unit. Obviously this definition of China has both changed and been disputed over the past quarter of a century. Changes to the practical definition of China include the accession of Hong Kong in 1997 and Macau in 1999. The most important continuing disputes concern the inclusion of Tibet and Taiwan within China. However, by China we also mean the individuals, civil organisations, classes, enterprises, governments and the interests of and relationships between these entitities that together constitute the society. The processes of marketisation and globalisation have set in train less obvious but deeper changes to this meaning of China. As the global economy has evolved and as both the powers of the central government and the spatial arrangements of power have been transformed, so China is changing. Importantly, as China changes, so the internal pressures for and the nature of continuing change themselves become modified. By regarding China as a fluid category rather than static, the way is opened to identify the manner in which the processes of social, political and economic change are path dependent, reflecting the changes that have already taken place. As marketisation and opening up proceed, commodities and people’s work are more and more bought and sold on conditions that reflect impersonal, market forms of valuation rather than the personal valua-

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tions of individuals. Yet this process of globalisation is partial and uneven, proceeding at different paces in the sectors and regions of the country. Thus the tendency for systems of valuation to converge (between sectors, between regions and between China and the rest of the world) is yet incomplete. Indeed, the government has sought to manage the unevenness of market reforms and economic development and to resolve the contradictions between competing systems of valuation by explicitly redefining regional powers and regional boundaries. Commonly, reforms have been at first localised. Globalisation within China is therefore not only a history of process, sometimes sectoral, but is also explicitly regional. That is, it is not simply that regions are being reformed and regional differences are persisting while China’s economy has globalised (compare Cox 1997); rather, processes of regional redefinition have fundamentally underpinned China’s approach to globalisation. It is this attempt to manipulate regions in order to manage the tensions between different systems of valuation that most obviously differentiates China’s recent economic history from that of the east Asian late industrialisers. The global economy, the central government, the country’s regional formations and competing systems of valuation are in a complex, unstructured dance. Revolving and interacting, each nudges the others in particular directions before being jolted in turn. In each region, systems of valuation compete: markets compete with – for example – household production, state planning, nepotism, cooperative production and local corporatism. This competition occurs in a variety of arenas: enterprises of the different forms compete to attract resources (including labour) and to sell their products or services; individuals abandon some forms of activity in favour of others; different systems appeal in different degrees to governments, depending on their capacity to dispense revenues or power, to ameliorate social conflict, or to deliver on the promise of economic growth. The result of this competition depends on influences from the global economy, on stimuli from other regions within China, and above all on the pre-existing regional structure of individual, sectional and class interests. The effect is a new division of activities between the various ways of organising social life within the region and so a new structure of interests, a rescaling of powers between local, provincial and central authorities, and new impacts on global and other regional economies. Supervising and sometimes encouraging the competition is the central government, which seeks to set terms by defining the boundary conditions for interregional and international pressures, the allowable forms of valuation and the

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competition between them. Yet the power of the central government to manage this process itself depends on the evolution of the system. We develop these ideas in three forms of analysis. The book begins by examining three aspects of China’s approach to the global economy. Since that approach has so far been largely confined to liberalising trade and investment flows and to the development of market forms of economy, Chapters 2 to 4 examine in turn flows across China’s borders; Chinese overseas investment; and marketisation of the economy. These chapters provide the empirical foundation for understanding the degree to which China’s economy has become globalised (that is, market, oriented and open). In order to understand the meaning of that openness for some aspects of people’s lives, Chapter 5 illustrates the impact of foreign direct investment on the labour market. Secondly, however, while approaching the global economy, the government has sought to manipulate the geography of economic development, both at the macro scale and more locally, in order to resolve some of the tensions between different forms of valuation. We therefore examine three aspects of this attempt to alter the spatial structure of economic development in Chapters 6 to 8: the changing emphases of regional policy; the particular role of special economic zones; and the deployment of regional high technology zones as tools of economic development. These studies are succeeded by two iconic examples of the implications of globalisation for industrial sectors and the people who work in them. Chapter 9 recounts the story of the restructuring of a traditional industry (textiles), and Chapter 10 examines the development of a new industry in China, the personal computer industry. Finally, in Chapter 11, we return to an overt discussion of the issues that we have raised in this chapter: the nature of globalisation in China and its implications for debates over the meaning of globalisation.

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2 Managed Openness: Opening China’s Door Mark Wang, Michael Webber and Zhu Ying

1. Introduction Since the late 1970s, marketisation and opening up have acted as twin engines which have brought China dramatic change. It is commonly understood that reform (gaige) refers to a series of socio-economic and political changes: from central planning with Stalinist principles to a socialist market economy or a market economy with Chinese characteristics, and from domination of state ownership to coexistence of state, collective, private and even foreign ownerships. The changes have affected every aspect of Chinese society and covered (if unequally) almost every corner of China: from rural to urban, from coast to inland (Wang M 1998). Opening up has also brought China into the world economic system (Economy and Oksenberg 1999). China has since the mid 1990s been the second largest host country for foreign direct investment after the USA. China’s foreign exchange reserves reached over $US15 billion by the end of August 1999. Foreign direct investment (FDI) in China has played a catalytic role in the development of a market-based economy. FDI and special economic zones have also contributed to the greater integration of China into the world economy through joint ventures with domestic firms (Pomfret 1996; Panagariya 1993). Two important indicators of opening are thus marketisation and trade or investment flows. But what does opening up (duiwai kaifang) mean in Chinese? For years, it has been narrowly defined or understood as China’s desire to attract FDI, transnational corporations and joint ventures into China or to promote China’s exports. Overwhelmingly, the existing literature about China’s opening up has been devoted to China’s foreign trade, 14

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its special economic zones (SEZs) and open areas (Sun 1998; Zhan 1993; Shirk 1994). The Chinese term duiwai kaifang itself refers to opening up to the outside of the world, not so much implying that China itself goes out or invests overseas. This one-way thinking has dominated the academic research agenda and media debates in China. The debates about how to adjust opening up policies and how to assess the role of SEZs in the 1980s (more export-oriented or domestic-market-oriented?) gradually shifted in the early 1990s towards discussions of the sectors in which and the degree to which TNCs should be allowed to participate in the economy (gradually more sectors were permitted to foreign investors). More recently, the central government has called for a larger scale development in inland China and promised more flexible and privileged policies for inland China, opening up wider regions for FDI (People’s Daily, 8 April 2000). Each debate led to greater openness, but all concerned how China should let the world in. The question of how China should go out is simply seen as about how to promote ‘Made-inChina’ products – exports – to earn foreign currency. Only recently has research on China’s open door policy been directed at understanding how going out is not simply waiting for FDI and transnational corporations to enter China (Zhan 1995; Wei 1996). No one denies that China’s door has been opened widely since its economic changes were initiated in the late 1970s. This chapter provides empirical evidence about the internationalisation of the Chinese economy, particularly since 1978. The index commonly used to measure a country’s openness is the value of total international trade (imports plus exports) as a percentage of a country’s total GDP (Penn World Table 1996). This is not a comprehensive index because China is not just exporting made-in-China products but also investing overseas (see Chapter 3). China is, in addition, exporting its skilled labour and bidding for overseas projects. All these have been a part of China’s ongoing worldwide strategy. Therefore, this chapter will also use other indexes to reflect the degree of China’s openness. The openness will be measured on four dimensions: commodity flows (trade), human resource flows (mainly labour exports; tourists to and from China will not be covered), capital flows, and technology transfer. This chapter focuses on neither the motivations for nor the mechanisms of China’s labour export; nor does it discuss policy formation in great detail; rather the chapter provides evidence about China’s changing degree of openness to global markets. This chapter thus delineates one aspect of China’s approach to globalisation – the integration of commodity and capital markets (and of markets for labour and technology).

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2. Balanced trade through exporting ‘made-in-China’ products Trade and its role in China’s opening up has been a most frequently quoted and well-studied area. By 1997, in terms of both total imports and total exports, China had become the tenth largest trading country in the world. China’s importance in world trade will increase, as the total value of its trade is estimated to exceed $US400 billion by the year 2000 and double that by 2010 (Shi 1999). A standard measure of openness is the Penn World Table’s openness index. This indicates that China has experienced a gradually and steadily increasing openness since the open door policy was adopted in the late 1970s (Figure 2.1). However, the trend to increasing openness was halted in both the late 1980s (as the government sought to restrain the growth of imports) and the late 1990s (as both exports and imports were restrained). Total exports as a percentage of China’s GDP increased from about ten per cent in 1978 to over one third in the late 1990s. China’s average annual rate of growth of exports during the period 1978–96 was 16 per cent, much faster than its GDP growth rate (9.9 per cent) over the same time. It is still debatable whether exports precede FDI flows or whether FDI leads to export increases, or more precisely what type of exports are related to FDI flows (Jun and Singh 1996). But China’s growth of exports has been accompanied by increased FDI inflows (Figure 2.2). The tran-

45 40

Percentage

35 30 25 20 15 10 5 0

1975

1980

1985

1990

1995

Year Figure 2.1 Openness in China, 1978–99 Note: openness is defined as (exports + imports)/2 as a percentage of GDP. Source: SSB 2000.

2000

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Managed Openness 17 180

Exports: imports

160

FDI used

Percentage

140 120

Manufactured Foreign funded

100 80 60 40 20 0

1975

1980

1985

1990

1995

2000

Year Figure 2.2 Trade and foreign investment, China, 1978–99 Notes: The series exports: imports is the ratio of the value of exports to the value of imports, expressed as a percentage. The data on FDI are investments made rather than investments approved, expressed as a percentage of total investment. ‘Manufactured’ represents the percentage of China’s exports that are manufactured. ‘Foreign funded’ is the percentage of China’s exports that are produced by foreign funded firms (including wholly foreign owned firms, equity joint ventures and cooperative ventures). Sources: Import and export data before 1979 were obtained from MOFTEC, and the data since 1980 have been obtained from Customs Statistics. Foreign investment data from SSB Statistical Yearbook of China 2000: 605. Manufactured export data from SSB Statistical Yearbook of China 1997. Data on exports from foreign funded enterprises from Pomfret 1997.

sition from import substitution to export orientation since 1978 has not resulted in imbalances between imports and exports, except for short periods: over the years, the Chinese government has managed to maintain its import-export balance, and during the period 1978–98, China’s export: import ratio was 1 : 0.946. In general, the government has operated a fundamental foreign trade policy, that is: to maintain a balance between imports and exports. The export expansion is aimed at importing the advanced technology and equipment needed in economic construction, materials in short supply domestically and necessary consumer goods. Under the circumstance of too rapid increase in imports, anaemic growth of exports and the emergence of a trade deficit, we try to reach a balance through active export expansion instead of passive import reduction (MOFTEC 1999; Lardy 1992).

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Imports have been regulated. Just like other Asian late-industrialising countries during their take-off into industrialisation, the Chinese government has set import priorities: to import important materials required for China’s economic development; to import advanced technical equipment and important raw materials in short supply domestically; and to protect infant industries according to international trade practice. The government has similarly sought to expand exports, particularly of manufactured goods (MOFTEC 1999). Enterprises have been encouraged to raise the quality and grade of export products by means of further processing. To change the composition of exports towards high value-added products, the government has encouraged enterprises to shift from exporting mainly roughly-processed products to trading in more finely-processed products. Specific policies to encourage the growth of exports include: • an export commodities development fund for a few commodities vulnerable to price fluctuations in the international market. The fund is intended to balance losses against profits in a bid to ensure a steady increase of export and production capabilities; • a credit policy favourable to export development. The policy gives priority to guaranteeing the export loans of foreign trade enterprises, which have become the backbone of China’s export sector. Foreignfunded firms in the late 1990s contributed over 40 per cent of China’s total exports (MOFTEC 1999) (Figure 2.2). As a consequence, over the years, the share of manufactured goods in the total value of exports increased from less than 50 per cent in 1980 to over 85 per cent in 1997 (Figure 2.2). One of the direct benefits of exporting more manufactured goods is the growth of employment. At current productivity levels, every 100 million yuan RMB ($US12 million) of manufactured exports provide 12,000 new jobs in China (SSB 1999b). During and since the 1997 financial crisis in Asia, China has found it difficult to maintain its level of exports. On the one side, countries hit by the crisis, which are important trading partners of China, are importing less. On the other side, those countries are all seeking to boost their own exports, particularly the export of labour-intensive products. The pace of expansion of China’s exports has certainly slowed, yet its export sectors have outperformed those of all the other economies in the region. From 1997 onwards, China’s exports remained at $US180 billion. Particularly worth noting is that such growth was achieved

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Managed Openness 19

when the Asian financial storm triggered massive devaluations in the other Asian currencies, while the RMB maintained a stable value. One of the strategies by which to overcome the challenge to China’s export sectors from the financial crisis is to diversify export markets. According to its macro foreign trade and economic cooperation strategy, China wishes to restructure its foreign trade and economic cooperation sector into a multi-channel, multi-layer and multi-modal pattern combining commodity, technology, capital and labour services (MOFTEC 1999). Actually, its exports to markets beyond east Asia have enjoyed rapid growth since the Asian crisis (SSB 1999c). Machinery and electronic exports, especially technology-based large equipment (complete plants and high-tech products) have shown strong growth, thanks to their high technology content, added value and strong competitiveness.

3. Human resource exports and overseas contract projects The second dimension of China’s openness concerns flows of human resources. Exports of the labour force and overseas project contracts both earn foreign currency. These are two interlocking categories. China’s internationally exported workers are mainly skilled. They are the Chinese engineers, doctors, experts and a great number of skilled workers as well as attendants who have gone to work in countries with limited supply of skilled labour. For example, in Singapore, China’s skilled labour ‘keeps Singapore’s technical wheels turning’ (FEER 18 March 1999: 54–5). Overseas contracted projects are also related to Chinese exports of labour. According to the State Statistical Bureau, contracted projects with foreign countries are ‘projects undertaken by Chinese contractors through a bidding process’. They include civil engineering construction projects financed by foreign investors; construction projects for Chinese diplomatic missions, trade offices and other institutions stationed abroad; overseas projects financed by the Chinese government through its foreign-aid programmes or technical assistance and chargeable to the owners (such as photographic surveying, geological prospecting, development zone programming, personnel training); construction projects in China financed by foreign investment; subcontracted projects taken up by Chinese contractors within a joint umbrella project with foreign contractors; and housing development projects (SSB 1997). The export of labour is a sensitive issue. The Chinese government seeks to ensure that those workers engaged in labour corporations or contracting projects will return to China after the

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Number

fulfilment of the contracts so that the host countries’ immigration offices do not complain. The Chinese government has formulated preferential policies and measures in providing preferential loans, tax exemptions or reductions and guarantees to support and encourage the development of overseas contracting and labour cooperation (MOFTEC 1999). Both labour export and overseas contracting projects are tightly organised. The Chinese government has also acted as an organiser or semi-organiser. Most bidding companies and labour export companies are under the leadership of a ministry of the central or a provincial government (sometimes even of a local government). The central government has also established a training and examination system for the people who seek to work overseas. It requests the departments and enterprises concerned to examine the ethical, technical skills and health condition of the workers so as to raise their quality. The government strictly prohibits illegal emigration and unlawful activities through the channel of official labour service provision (MOFTEC 1999). When labour export and contracted projects were beginning, the Middle East was targeted, since most of the countries in that region faced shortages of labour. Now almost every country in this world has hired skilled Chinese workers or has contracted projects organised or bid for by the Chinese government. The number of countries that have signed contracts for Chinese labour exports and that have contracted projects with China increased from eight in 1979 to 187 in 1999 (Figure 2.3). In 1998, over 325,000 Chinese worked overseas. The value of export labour and contracted projects rose from $US1 million in 1979

200 180 160 140 120 100 80 60 40 20 0 1975

1980

1985

1990

1995

2000

Year

Figure 2.3 Number of countries that have signed labour supply or project contracts with China, 1978–99 Source: SSB 2000.

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Managed Openness 21

to $US11.4 billion in 1997, equivalent to over 6 per cent of the value of China’s total commodity exports (Figure 2.4). The geography of Chinese labour export and overseas contracting projects demonstrates an interesting pattern. Asia has been the major destination for China’s exports of labour and its overseas contracted projects. Over 60 per cent of contracted projects and Chinese labour working overseas were in Asia. (Likewise about 53 per cent of China’s commodity exports were sent to Asia in 1998.) But the next two largest destinations were Africa and inside China, each with over 13 per cent of the value. (The projects and labour service inside China were mainly for construction projects in China financed by foreign sources.) Although Asia also dominated China’s export markets, the second tier of export markets does not include Africa; rather, in 1998, 22 per cent of exports were sent to North America and 18 per cent to Europe. Table 2.1 illustrates an additional feature of the spatial distribution of Chinese exported labour and overseas contracted projects. In countries or regions where labour costs are high, more income is earned from labour export than from projects. By contrast, in less developed countries and regions, more income is earned from projects than from exports of labour. In North America and Europe, income was dominated by labour exports, while in less developed countries of Asia and Africa, income derived predominantly from contracted projects. Although labour exports and contracted projects in most cases are interlocking, less developed countries are more interested in Chinese contracting 9000 8000

Contract value Wages

$US billions

7000 6000 5000 4000 3000 2000 1000 0 1975

1980

1985

1990

1995

2000

Year Figure 2.4 Value of overseas contracted projects and of the wages of exported labour, China, 1978–99 Sources: World Investment Report 1998; SSB 2000.

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Table 2.1 Labour exports and completed contracted overseas projects, China 1999 Region

Total ($US million)

Percentage

Category (2)

Complete projects

Labour export

Design and consulting

Asia Africa N. America Europe Oceania L. America Others (1)

6,900 2,019 322 489 150 153 52

77 93 34 49 67 68 70

22 7 63 50 32 32 30

1 0 3 1 1 0 0

PL P LP P+L PL PL PL

World total

10,085

77

22

1

PL

Notes: (1) mainly other international organisations. (2) P = Project dominant type; L = Labour Export dominant type; PL = Project as primary and Labour Export as secondary; LP = Labour Export as primary and Project as secondary; P + L = Project and Labour Export are equally important. Since some data overlap, the regional sum does not match the world total. Source: SSB 2000.

their projects than in cheap Chinese labour. This pattern is especially clear within Asia. Chinese labour exports were mainly directed to those Asian countries with higher labour costs or to countries with a scarcity of labour, such as Japan, Maldives, Israel, Jordan, Amen, and Singapore. However, contracted projects were mainly in those countries over which China has a comparative advantage in technology or engineering, such as Vietnam, Laos, Mongolia, Philippines, Burma, Thailand, Malaysia, Pakistan and Bangladesh (SSB 1999c). Perhaps the most significant human resource flowing between China and the rest of the world is the category of Chinese students who were sent to overseas universities or research institutions for further study. (They are all called Chinese students even though some of them are visiting academics or people who have already graduated.) As a part of Deng Xiaoping’s opening up strategy, to send Chinese students overseas was seen as an important and quick way to grasp the advanced technology and know-how of western countries. Over the last 20 years, China has increasingly sent students to study at overseas universities, even though the return rate to China was only about 40 per cent (Figure 2.5). Recently, local governments like Shanghai, Shenzhen and Beijing offer those returned students (in information technology and

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25000

Number

20000

Number abroad Number returned

15000 10000 5000 0 1975

1980

1985

1990

1995

2000

Year Figure 2.5 Number of Chinese students who have studied overseas and number who have returned, 1978–97 Source: Statistical Yearbook of China 1998: 685.

other sectors in high demand) over ten times the average Chinese salary (FEER 11 March 1999: 50–1). For example, between 1993 and 1998, over 620 ‘students’ holding overseas passports or ‘green cards’ (permanent residence in a foreign country) established 621 firms in Shanghai, including high-tech and information technology, bio-engineering, new materials and law firms (Cai 1999). Taiwan experienced a similar brain drain in the 1960s and 1970s. Then the flow of students from Taiwan reversed, as students and entrepreneurs returned from the United States to help create Taiwan’s hi-tech industry after the mid-1980s (FEER 11 March 1999: 50–1). With tens of thousands of mainland Chinese now working in Silicon Valley and other hi-tech centres in North America, returnees could help China’s programme to upgrade its technology. Of course, China has a long way to go before it can hope to repeat Taiwan’s reverse brain drain, but the potential to boost China’s technical development is huge. The Chinese students’ potential contribution to China’s modernisation programme, particularly to technological catch-up, is under-researched.

4. Capital flows The third dimension of China’s openness concerns capital flows, both in and out of the country. There has been much research about FDI inward flow, joint ventures in China and Chinese government policies towards FDI. In brief, three

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distinctive stages of FDI in China can be identified. First, the period of 1979 to 1985 was an initial stage, when annual FDI averaged around $US1 billion. Then the period of 1986–91 was a transitional stage with annual FDI averaging $US3.1 billion. Thirdly, the post-1991 period has witnessed a dramatic increase of FDI inflow, from $US11 billion in 1992 to $US50 billion in 1999. This rapid growth of FDI has made China since 1993 the second largest recipient of foreign investment in the world, with over $US150 billion of foreign exchange reserves (SSB 1999b). However, there has been much less research of China’s outward investment. In fact, China is not only the second largest host country for FDI in the world, but it has also emerged as an important home country for FDI. Although many argue that China’s overseas FDI data have been underestimated, China’s FDI during 1992–97 still reached $US17 billion, more than the total outward FDI of South America ($15 billion) and four times more than Africa total ($4 billion) (Wall 1996; World Investment Report 1998). China is a late but rapidly developing source of foreign direct investment (for more detail see Chapter 3).

5. Technology trade and diffusion The fourth dimension of China’s openness is its technology trade and capacity to transfer technology. It is well known that technology diffusion and transfer have been problematic for LDCs that have adopted export-oriented development strategies. Commonly, developing country hosts of TNCs are in a disadvantaged position and depend upon advanced countries for technology and know-how, with limited opportunities to increase their capacity for technology innovation and re-export of technology products (Kumar 1998). Similarly, large multinational corporations have an often overwhelming influence on particular industries of host countries, and even entire economies, especially the small developing countries. Successful late industrialisers, like Japan, Korea and Taiwan in the twentieth century, have all had to design careful policies to ensure that the technological capacity of local industry rises. Like its east Asian neighbours, and unlike many other developing countries, China has designed policies to ensure that it can gain access to technology by hosting TNCs. The government has used China’s huge domestic market as a bargaining tool. Those projects that offer potential technological diffusion or technological access for China are encouraged and offered privileges. China’s experience in technology trade and transfer or re-export of technology-added

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products seem to confirm the model provided by Japan, Korea and Taiwan, where the government’s role has been fundamental. The central government set up a clear guideline for the introduction of new technology. The central aim is to renovate existing enterprises directly and to enhance the capacities of those enterprises to digest, absorb and innovate the introduced technologies (Wu Z 1999). Various ways have been adopted such as licensing trade, cooperative production, cooperative design, technological service, consultancy and importing key equipment and complete plants. Particular targets are the sophistication and the applicability of the imported technologies so that China can obtain better economic and social returns through digestion and absorption. The central government has offered preferential interest rates and preferential taxation policies to the enterprises engaged in technology trade. The targeted industries have been machine building, electronics, chemical industries and, most recently, information technology. Foreign enterprises, when making investments in China often bring in sophisticated technologies, and so may enjoy various preferences in accordance with relevant laws and relations (Wu Z 1999; MOFTEC 1999). Over the years, developed countries and Asian newly industrialised economies (NIEs), such as South Korea, Hong Kong, Singapore and Taiwan, have been the major sources of technology and know-how. Developed countries accounted for about 90 per cent of supplies of technology and equipment while the four Asian NIEs provided the remaining 10 per cent in China. Among the developed countries, Japan and Canada were China’s top two suppliers of technology products and equipment (Table 2.2). After a technology has been introduced within a plant in China, it is another matter to absorb that technology so as to increase China’s own capacity for technological innovation. The results over the last two decades have been impressive. For example, the production of such household appliances as colour televisions, rice cookers and refrigerators was dominated by foreign brands when the technologies were first introduced in the early 1980s. But after five years of technology transfer and absorption, China’s household appliance products were of similar quality. Now, Chinese brands have roughly 90 per cent of the domestic market for refrigerators and washing machines, 70–80 per cent of the market for air-conditioners and 60 per cent for colour televisions (FEER 4 March 1999: 10–12). The next step after absorbing technology for the domestic market is to export technology-intensive manufactures overseas to the global

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Table 2.2 Major import sources and export markets of China’s technology products and equipment, 1997 Import Technology, equipment

Export $US 15.9 billion

Category: Equipment Technology

85.9% 14.1%

Top ten sources: Japan Canada USA Germany Russia S. Korea France Sweden Italy Hong Kong

21.3% 17.6% 11.4% 9.9% 6.8% 5.4% 4.2% 4.1% 3.8% 3.3%

Technology, equipment

$US 5.5 billion

Category: Equipment High-tech products Technology services Others

69.8% 22.2% 4.6% 3.4%

Top ten markets: Hong Kong USA Denmark Germany Iran Japan Syria Burma Singapore Egypt

14.5% 11.7% 11.6% 7.8% 6.2% 4.6% 3.4% 3.2% 3.1% 2.7%

Source: SSB 1999c.

market. The export of goods with high technical content can boost China’s economy, because it raises the average labour productivity of exports (by increasing the capital: labour ratio in exports), bringing vastly increased merchandise exports and greater opportunities for trade in services (MOFTEC 1999; CASS 1998). Therefore, the Chinese government has taken great care to make China’s technology-intensive industries one of the important links of the international industrial technology chain and to raise the country’s share in global technology exports. Internationally prevailing credit policy has been granted in supporting technology exports, such as seller’s or buyer’s credit for the export of technologies and complete plants. For example, refrigerator production lines were introduced into China in the early 1980s. After some years’ absorption and renovation, a ‘Made-in-China’ refrigerator no longer meant just cheap, but also implied good quality. The central government established a development fund for key export products (the refrigerator is one of them) in

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Managed Openness 27 Table 2.3 Technology exports as a proportion of imports, China 1979–97 1979–85

1979–88

1989

1997

0.9%

3.2%

30.1%

74.3%*

Note: * if equipment is excluded, the ratio is 34.6%. Sources: Pre-1990 data from Li et al. 1992. Data for 1997 from SSB 1999c.

order to earn higher levels of foreign exchange. Enterprises are rewarded with 0.035 Yuan RMB ($0.004) for every US dollar made by exporting. This policy has had good results. Haier, one of China’s leading homeappliance producers, already supplies more than 60 per cent of Japan’s imported washing machines, and in the USA the Haier brand holds a 20 per cent market share for 36-litre to 180-litre refrigerators (FEER 15 April 1999: 82). As one of the principal components of China’s foreign trade, the trade in technology has shown a strong upward trend since the beginning of the 1980s. The trade has been growing at an average 40 per cent each year in the 1990s, far exceeding the growth rate of trade in goods. As a proportion of its imports of higher technology products, China’s exports of higher technology goods increased from less than 1 per cent in the early 1980s to nearly 75 per cent in recent years (Table 2.3). Currently, the export markets for Chinese technology products and equipment are largely in developing countries. Developed countries only account for about a third of total technology exports from China while developing countries have become major markets for China’s technology products and equipment (Table 2.2). Developed countries are, however, the major source of imported technologies. The technology transferred from China includes not merely Chinese medicine, herbs and specialty food, but telecommunications equipment, transport equipment and home appliances. No doubt the import of technologies and equipment has helped to narrow the gap between productive techniques in China and the international level of advanced technology. China’s experience in importing technologies and equipment and then, after digesting, exporting advanced products to less developed countries shows that technological imports are merely a means. The current Chinese government view of technology is that it is the route to economic development. The

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recent target has been internet development. The government has shifted from an earlier suspicious view of the internet (afraid of losing control over access to foreign media and foreign propaganda) towards encouraging development of the internet as a convenient tool for business and trade (not necessarily a means open to foreign investors). It is estimated that the number of internet users in China grew from two million in 1999 to ten million in 2000; at that rate China would become second largest internet-using country in the next two or three years, after only the United States (FEER 4 March 1999: 10–12). The internet has been one of the key elements of the Chinese government’s strategy to foster a knowledge economy, which is believed to ‘give developing countries a huge opportunity’ (People’s Daily 10 October 1999) and to make China more competitive in fast changing global markets. The Asian economic crisis alarmed the Chinese leadership, making it clear that ‘competing on cost in low-end manufacturing can not propel sustained growth’ and that ‘China must shift into technologically sensitive fields’ (FEER 4 March 1999: 10–12). China has already connected its relatively developed territories – the eastern provinces along the coast – into the www, and it has been reported that 94 per cent of current internet users were located in these eastern provinces. It remains a question whether the internet is indeed an effective short cut to prosperity in the knowledge economy. A related question is the concern about the increasing regional gap between the coast and inland regions. Deng’s ‘let the coast get rich first’ policy has already created an imbalanced coast–inland economic development pattern, and the current ‘let the coast develop the knowledge economy first’ will further worsen that regional gap.

6. Conclusion In sum, China has certainly become more marketised and more open to the world over the years since 1978. China’s open door policy should not be interpreted as simply a one-way approach. It has both inwards and outwards elements. By its open door policy, China has gradually integrated itself into the world economic system. But China has been able to overcome its high dependence on foreign inputs only by raising its own capacity for technological innovation and by government measures to promote exports. Still, the government has not only actively encouraged FDI into China, imported high technology and knowhow for China’s industrial upgrading, but also invested overseas and exported its products with technology content to the outside world.

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Managed Openness 29

It can be concluded that China’s opening up has not been just for openness itself. Its opening was more selective, and an airlock was retained between world and domestic prices (Lardy 1992). China has used its openness as a tool to search for access to sources of technology or to expand its export performance. China has managed to balance its inward and outward openness. Over the years, its trade with the rest of world has been generally in balance. Imports have been used to increase China’s export capacity in the areas China needs badly (particularly technology). Its technology import–digest–export model provides one example for developing countries to improve their technological capacity in selected areas of industry. However, China has what most developing countries lack: a huge domestic market, which offers a buffer against fluctuating global markets and lessens dependence on overseas markets. This market – together with independence from structural adjustment policies – has made it possible for China to bargain for the technology it needs, to control the pace of its opening and to balance its trade. In many of these respects, China’s experience (so far) of the opening up has made it seem much more like an east Asian late industrialiser than an economy in transition to a liberal trading regime or a structurally adjusted developing economy. The state has played a strong and continuing role in managing China’s openness. In the early 1980s, that role was overt, as trade was conducted through state trading corporations, and controls over inward and outward investment were tight. Later, the central government took the lead in opening up the economy to the movement of commodities, people, capital and technology and in reducing the degree of formal control over many of those flows. The prospects offered by this relaxation of control were taken up by individuals, enterprises and other governments, both inside China and out – though as we shall see these opportunities were regionally delimited. A new category of actor was being created: people, enterprises and governments that depended for their income on this new, open economy; another new category of actor comprised those who sought to take part in this new process of wealth creation. By the late 1990s, the central government retained direct control only over international financial and banking activities and the larger investments, but still actively sought to encourage particular sectoral and geographic directions of trade and investment. Even so, SOEs remain important players in the linkages that have been established across China’s borders; equally many provincial corporations continue to provide strategic leadership in linking their provincial economies to global markets for commodities, people, capital and technology. Both

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the central and provincial arms of the state are seeking to direct the form of China’s linkages to the rest of the world in a continuing effort to make existing forms of activity more profitable and to introduce new, more capital- and knowledge-intensive forms of activity.

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3 China Goes Out: Investing Overseas Mark Wang, Michael Webber and Zhu Ying

1. Introduction In recent years, the term ‘made-in-China’ has become a symbol of China’s involvement in economic globalisation (Chapter 2). China’s openness since its economic reforms started in the late 1970s has led many transnational corporations (TNCs) to select China as one of the major destinations to which manufacturing facilities are relocated (Pearson 1999; Weidenbaum 1996). Both the scale and the impact of this openness to investment have been significant. China became the world’s second largest FDI receipt nation by the mid-1990s (Sun 1998; Zhan 1995). Foreign-funded enterprises have played a catalytic role in the process of opening China’s economy, contributing about half of China’s foreign trade since the mid-1990s (Economy and Oksenberg 1999). By 1999, China held over $US15 billion in foreign exchange reserves (the second largest in the world). However, these statistics tell just one side of the story about China’s open door policy. It has over-shadowed the other side of China’s openness: outward investment. Actually, the Chinese government has not simply put its effort into promoting ‘made-in-China’ products to earn foreign currency or into encouraging foreign inward capital. Over the years, Chinese firms have been gradually turning to other countries. In the last two decades, the Chinese government has actively encouraged its manufacturers to invest overseas, deliberately and strategically organising transnational activities (CASS 1998). So far, little academic attention in English literature has been given to China’s offshore plants and FDI outflow, even though China has had the largest FDI outflow among developing countries since the early 1990s (World Investment Report 1998). Generally speaking, research on 31

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FDI has been a popular topic – including the formulation of theory about the determinants of and motives for FDI (Dunning and Narula 1996; Dunning 1981), FDI in east Asia (Mason 1998) and in developing countries (Kumar 1998; Jun and Singh 1996), the effects of FDI on home countries’ employment (Agarwal 1997), and the implications of depending on FDI (Reich 1990). But little research attention has been paid to China’s overseas investment, in particular, Chinese governmentinitiated (CGI) overseas investment. The most relevant work on CGI outward investment has been done by Zhan (1993; 1995) and McDermont and Huang (1996). They show that access to foreign markets and to a stable supply of resources are the major motives for Chinese overseas investments. Other research has tended to focus on single sectors or small geographical areas, such as mining (Liu et al. 1993, Findlay 1994, and EAAU 1995) or textiles and clothing (Crowley et al. 1989), and on mainland Chinese investment in Hong Kong (Fung 1996). Within China, research has identified the need for FDI outflows (Chen and Zhang 1995; Xie 1994), policy issues (Liu et al. 1993; Liu and Yuan 1997), how China should establish general trading companies (after the manner of Japanese sogo shosha) through FDI outflow (Fang 1996) and how Chinese firms should select overseas partners (Yang 1996). This chapter describes how China has gone out. It examines the motivations for and spatial distribution of CGI transnational corporations (TNCs), mainly not trading enterprises, by evaluating official statistics and an array of relevant studies and commentaries. It poses the question: to what degree is China expected to follow the patterns of other Asian developing countries (including Japan), or will it forge its own particular patterns of FDI? This chapter thus explicitly examines the usefulness of the concept of east Asian late industrialisers for understanding China’s overseas investment behaviour. The chapter begins by reviewing the literature on Asian FDI since the Second World War. This section provides the information with which to evaluate the similarity between CGI FDI and the overseas investment of Japan and the ‘little Japans’ (Korea, Taiwan, Hong Kong and Singapore). The third section describes the spatial patterns and scale of China’s offshore plants. The fourth section discusses China’s gradual approach towards its overseas operations. The motives for CGI FDI are analysed in the fifth section. The final section discusses the potential of China’s overseas investment and concludes that China’s TNCs have been motivated not only by traditional determinants but also by the pressures of globalisation and regionalisation. Overseas investment

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China Goes Out 33

has expanded carefully within blocs. More importantly, there have been political and strategic considerations behind China’s decisions to invest overseas.

2. FDI from China’s neighbours The existing literature about the destinations of FDI commonly identifies three sets of factors (Dunning 1993; World Investment Report 1998; Coyne 1995). The first set includes policies that attract FDI, such as economic, political and social stability, favourable rules for entry and operation, and sympathetic treatment of foreign affiliates. Host countries’ policies about tax, the functioning and structure of markets, and the coherence of FDI and trade policies are also categorised in this set of determinants. The second group of factors are economic. These range from market and resource or asset availability (such as raw materials, cheap skilled or unskilled labour) through technological, innovatory and other created assets or physical infrastructure (such as port facilities, roads, power and telecommunications). The third set of factors refers to efficiency: cheap resources, assets and such other inputs as transport, communication and other intermediate products. The set also includes image-building and after-investment services. However, these analyses are too general to explain fully the most important determinants of an individual country’s overseas investment. FDI from a single source country may be motivated by different factors at different times. Furthermore, the geography of FDI is changing. In the colonial era, FDI flowed largely from developed-country firms to developing countries; after the Second World War, direct investment flowed largely from developed to other developed countries; more recently, flows are increasingly by developing-country firms to developed and to other developing countries (Dunning 2000). A specific manifestation of this process has been the rise of FDI from east Asia. Despite the Asian financial crisis of 1997–99, this region continues to provide a significant and growing component of the world’s FDI. A review of the motives and characteristics of FDI from this region provides the background for answering the central question: to what degree has CGI FDI followed patterns established by Japan and the Asian ‘little Japans’ (South Korea, Taiwan, Hong Kong and Singapore)? East Asian FDI is geographically heterogeneous. Mirza (2000) identifies four types of TNCs in east Asia (Table 3.1). The first type is represented by Asian large conglomerates or large industrial groups in comparatively advanced industries such as auto-

Large chaebols

Manuf’g Commerce Mining Others

China & ASEAN N America Europe S America Other

Type of firm

Sectors/ Industries

Location of FDI 31% 15% 4% 6%

China ASEAN N America Other Asia Europe Others

Manuf’g Finance Commerce Others

35% 20% 16% 6% 3% 20%

60% 25% 6% 9%

Mainly SMEs, few large firms (Acer & Tatung)

27.3 billion

Taiwan

China ASEAN N America Europe Oceania

Large conglomerates in financial services, property & infrastructure

SMEs (manufacturing) large (services)

112.2 billion*

Hong Kong

ASEAN Other Asia Europe N America/ Oceania Others

Finance Manuf’g Commerce Real estate Others

Mainly large firms

37.5 billion

Singapore

14%

47% 16% 20% 3%

50% 25% 10% 7% 8%

ASEAN Oceania Africa N America China Europe Other Asia

Finance/real estate Manuf’g Agro-indus Others

33% 25% 16% 9% 9% 8% 2%

19% 6% 13%

52%

Large resourcebased firms

12.3 billion

Malaysia

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44%

56% 20% 6% 18%

13.7 billion

FDI ($US)

South Korea

34

Table 3.1 Characteristics of FDI by selected east Asian countries, 1996

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Markets in industrialised countries Growing opportunities in Asia-Pacific markets Rising costs of production at home Resource seeking Ethnic Koreans in USA, China & Kazakhstan

Motives

Currency appreciation Rising costs of production at home Growing opportunities in Asia Pacific markets

China Malaysia Thailand Vietnam Indonesia Philippines Rising costs of production at home Growing opportunities in Asia–Pacific Conglomerate opportunism

China Indonesia Thailand Singapore Vietnam Rising costs of production at home Small domestic market Growing opportunities in Asia–Pacific Access to western country markets Government regionalisation policy

Malaysia Hong Kong Indonesia China Thailand Vietnam, India Soaring labour costs in Malaysia Small local market Growing opportunities in Asia–Pacific Government encouragement for regional economic integration

China Indonesia Philippines Cambodia

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Notes: SMEs are small and medium-sized enterprises. * about 60–70% by Hong Kong companies. ** data from Tang et al. 1999. Source: adapted from Mirza 2000: 215–17.

US UK Indonesia Vietnam Malaysia Philippines

Location of FDI in manuf’g

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mobiles, electronics and speciality chemicals. Large conglomerates in different countries have different characteristic forms: from South Korea’s large chaebols like Samsung and Daewoo, Singapore’s stateowned enterprises (SOEs), to Malaysia’s larger resource-based firms. These TNCs mainly invest within Asia because of their relatively low technologies as compared to major western and Japanese TNCs, even though they are largely globally oriented with regard to sales. Such investments as they make in North America and western Europe are often motivated by the desire to acquire technology (Mirza 2000). A second type of east Asian TNC includes multi-sector, diversified conglomerates from Hong Kong, Malaysia and Singapore. These include many ‘overseas Chinese’ conglomerates, investing in sectors such as finance, tourism, construction and property. The third type of FDI is made by many small and medium-sized enterprises. Most are located within the region, reflecting a spill-over process of regionalisation (Chen 1999). The opening up of China’s economic space and the transparent economic success of the Asian NIEs in upgrading and restructuring their indigenous production sectors have combined to deepen the economic interdependence between the nations (Oh 1996). Small and medium-sized enterprises are active in the process of regional economic integration, comprising a large share of the TNCs of the Asian tigers of Taiwan, Hong Kong, and South Korea. Under the pressure of production costs at home, some have relocated to China and ASEAN in order to take advantage of cheap labour. For example, many small and medium-sized Taiwanese enterprises moved their entire production facilities to mainland China and maintain only small sales offices in Taiwan (Rowley and Lewis 1996). South Korea firms in Shandong offer another example (La Croix et al. 1995). The localisation of international investment within the region reflects cultural–ethnic familiarity and geographical proximity, as well as cheaper labour. The fourth type of overseas investment is made by many Chinese state owned enterprises. They are primarily engaged in state-determined transnational activities, though their activities are under-researched. No detail was given about the nature and characteristics of this type of TNCs, but Mirza predicts that in the future these SOEs may evolve into one or other of the first two types listed above. Thus, it is clear that at least the first three types of TNCs have different motives. Even so, two of the central motives are common: the rising costs of production at home and growing opportunities in the Asia-Pacific region (Table 3.1). China and ASEAN are thus ideal host locations for investment from other Asian economies. They have been

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China Goes Out 37

viewed as the locations with the highest global profitability in investment (Kozul-Wright and Rowthorn 1998). Such motives fuel another common characteristic of east Asian FDI: geographical proximity between host and home countries. For example, South Korea, Taiwan and Hong Kong firms have all selected China as the major destinations of FDI, while ASEAN was Singapore and Malaysia’s main host region for their FDI (Table 3.1). Notwithstanding the significance of foreign investment from Hong Kong, Malaysia, Singapore, South Korea and Taiwan, Japanese firms are the primary source of FDI in Asia. They have been prompted to invest overseas mainly to penetrate foreign markets. Their secondary motive changed from seeking natural resources in 1977, to collecting patent and other information in 1990, and then in 1999 to seeking strategic assets and building global networks (Table 3.2). In east Asia, Japanese TNCs have gradually created production chains to connect Japan with the Asian NIEs, ASEAN countries, China and Vietnam. Their FDI serves as a driving force for Japanese business linkages in the region (Edgington and Hayter 2000). To what degree do the characteristics of Chinese FDI differ from these patterns? The involvement of the Chinese government in CGI projects complicates the history of investment by Chinese corporations, but it should still be possible to identify motives and geographical patterns. Are the characteristic locations similar to or different from those displayed by other east Asian TNCs?

3. Spatial patterns and structural features of China’s outward investment It is difficult to obtain accurate data about FDI flows out of China as most data are provided by the Chinese central government, which registers only those overseas investment projects it has approved or recorded. According to EAAU (1997), some Chinese scholars estimate that the real value of China’s overseas investment by non-trading enterprises may exceed $US40 billion, rather than the registered amount of $US21 billion. Individual investment, private investment and some SOE investment are not included in these data sets. Therefore, it has been argued that the government-recorded data significantly underestimate the real size of China’s outward FDI. These unregistered investments have become more important as unregistered outflows have risen dramatically over the years. In the early 1990s, for example, over half of the direct investment projects were not registered by the Chinese gov-

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Table 3.2 Motives for Japanese firms’ FDI, selected years Periods

Motivations

1950s–1960s

Mainly natural resource seeking Overseas market

1977

1990

1998

(54.5%)

Natural resource seeking

(15.8%)

Globalisation of production Cheap labour

(12.5%)

Export to third country Host country’s preferable policy Others

(3.5%) (2.1%)

(1.7%)

(9.8%)

Overseas market Patent & information collection Cheap labour

(30.9%) (13.2%)

Dividend profit Buying back to Japan

(5.7%) (5.3%)

(10.8%)

(5.2%)

Export to third country Host country’s preferable policy

(10.4%)

Natural resource seeking Others

(6.2%)

Overseas market

(30.3%)

Global network building Patent & information collection Cheap labour Buying back to Japan

(18.6%) (12.0%)

(8.2%) (4.7%)

(5.7%)

Export to 3rd country Commodity R&D

(4.6%)

Host country’s preferable policy Others

(3.5%)

(3.7%)

(14.4%)

Source: Based on Li G 1998.

ernment (EAAU 1995). Such underestimates are reflected in significant errors in the reporting of China’s balance of payments. The omission by 1985 was $US90 million, and reached over $US15 billion by the end of 1996 (Table 3.3). For the purpose of this chapter, however, these omissions are not serious. Officially approved projects do largely represent the Chinese government’s intention and its strategic considerations,

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China Goes Out 39 Table 3.3 Estimates of China’s FDI outflow ($US billion) Year

Foreign investment in China

Registered FDI outflow

Omission in balance of payments

1979–83 1985 1989 1990 1992 1993 1994 1995 1996 1997 1998

14.4 4.7 10.1 10.3 19.2 39.0 43.2 48.1 55.3 63.9 58.9

0.046 (1984–85) 0.13 *0.75 *0.75 4.0 4.4 2.0 2.0 2.1 2.5 Ÿ 6.3

0.09 **3.30 3.13 5.70 9.80 9.77 17.81 15.56 16.95 12.80

Notes: Investment data in this table represent the flow of investments including cash and in kind (equipment, semi-processed products or raw materials). According to Liu et al. (1993), the total FDI outflow during 1986–91 was $US4500 million, and average annual FDI outflow from 1986 to 1991 was $US750 million. ** World Investment Report 1998. Ÿ according to FEER 15 April 1999: 82, some 5666 Chinese enterprises (including tradeenterprises) had invested a total of $US6.3 billion overseas in 1998. Sources: SSB various years China Statistical Yearbook.

and under-reporting does not obscure the nature of the Chinese government’s overseas investment behaviour. Unlike most other Asian developing countries, the location of China’s FDI has not been Asia-dominated. Until recently, China has targeted Australia, Canada, the USA, and Hong Kong as the main host countries for its FDI. For example, up to 1990, the top two targeted countries for China’s FDI were Australia and the USA, although its Asian neighbours were also important host nations (Table 3.4). In particular, Australia’s natural resources had attracted the largest share of China’s overseas investment projects, including the Portland Aluminium Smelter in Victoria, and the Mt Channar iron ore mine in Western Australia. In the 1990s, however, Canada became the largest target country. According to a 1997 OECD study, China by the end of 1994 had committed more funds in Canada than in any other country, some $518 million (including trading enterprises). The average investment per project ($6.8 million), was also larger than that in any other country. In 1996, according to the Chinese Ministry of Foreign Trade and Economic Cooperation (MOFTEC), 21 per cent of mainland China’s outward foreign

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Table 3.4 Chinese enterprises’ investment in selected regions and countries ($US million) 1978–90 North America of which Canada and USA Asia of which Hong Kong Africa South America Oceania of which Australia Former USSR EU Middle East Eastern Europe TOTAL

341.7 53.0 288.7 191.1 98.9 50.4 56.6 321.1 309.2 26.8 30.8 12.7 0.5

1991–97 (33.2%) (0.5%) (28.1%) (18.6%) (9.6%) (4.9%) (5.5%) (31.2%) (30.1%) (2.6%) (3.0%) (1.2%) (0.0%)

1028.7 (100.0%)

385.3 298.6 86.7 299.9 118.8 200.4 164.6 99.2 20.1 82.6 53.3 10.3 6.8

1978–97 (29.2%) (22.6%) (6.6%) (22.7%) (9.0%) (15.2%) (12.5%) (7.5%) (1.5%) (6.3%) (4.0%) (0.8%) (0.5%)

1319.9 (100.0%)

727.0 351.6 375.4 491.0 217.7 250.8 221.2 420.3 329.3 109.4 84.1 23.0 7.3

(31.1%) (15.0%) (16.1%) (21.0%) (9.3%) (10.7%) (9.5%) (18.0%) (14.1%) (4.7%) (3.6%) (1.0%) (0.3%)

2335.1 (100.0%)

Notes: Investment data in this table include investment in capital and in kind (equipment, semi-processed products or raw materials). Data may be slightly different from those in other tables since different statistical sources and categories are used. Sources: SSB various years, China’s Foreign Economic Trade Yearbook.

investment flowed to Canada, compared with 19 per cent to the US and 18 per cent to Australia (again including trading enterprises). Chinese firms invested in Canada’s resource and real estate sectors. The largest projects were operated by China’s giants, such as China International Trust Investment Corporation’s (CITIC) investment in a saw mill in Edison, Alberta; and China National Petroleum Corporation’s (CNPC) stake in an oil extraction project in the Alberta oilsands. Many Chinese organisations have also set up representative offices to seek investment projects in Canada, particularly in the oil and gas, minerals, forestry products, and hotel sectors. China’s investment strategy in Canada is to secure long-term stable supplies of the raw materials it lacks; the economic and political situation in Canada is familiar to potential Chinese investors (Canada’s Window on China 2000). Since 1990, China’s FDI has exhibited a lower degree of spatial concentration than before. Overseas investment was diversified and directed to other targeted regions as well. Asia, Africa, South America and the former USSR registered the most rapid pace of growth (Table 3.4). While about one-third of China’s FDI was concentrated in Australia before 1990, only 22 per cent of Chinese enterprises’ overseas investment was located in Canada in the 1990s. Furthermore, the geog-

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China Goes Out 41 Table 3.5 Average size of China’s non-trading overseas investment projects in major regions and selected countries ($US million) Region/ country WORLD

1979–90

1991–97

2.99

1.82

Oceania – Australia

19.39 25.14

1.37 0.76

N. America – USA – Canada

2.89 3.30 1.84

4.01 1.36 15.14

S. America

1.77

3.00

Region/ Country

1979–90

1991–97

Asia – Hong Kong

1.33 1.41

1.37 3.47

Middle East

0.93

7.24

Africa

0.89

4.40

Former USSR

1.82

0.67

EU

1.22

0.73

Notes: Investment data in this table are the flow of investment including cash and in kind (equipment, semi-processed products or raw materials). The average size of each project is calculated from total investment (if not wholly owned, including all investment both from Chinese enterprises and their local partners) divided by the number of firms. Source: SSB various years Foreign Trade and Economy Yearbook.

raphy of China’s overseas investment has changed. The most recently released official survey conducted by MOFTEC reveals that, among a hundred surveyed overseas enterprises, more than half selected Africa and SE Asia as their top priority region for investment (Research team of MOFTEC’s overseas manufacturing project, 2000). (The motives for FDI have also changed, as we shall see in later sections.) Typically Chinese overseas enterprises are small. By 1997, of 2140 overseas enterprises, only 100 had investments of more than $US5 million each; about 1920 had invested less than $US1 million each (Ding and Wu 1998). The average size of each investment project was only $US1.2 million, compared with $US6 million for investments from developed countries, $US2.6 million for investments from Asian NIEs and $US1.4 million for investments from the former USSR (Wei 1996). These Chinese enterprises, sometimes husband-and-wife firms, were called ‘Chinese guerillas’. Only investment projects in Australia (in the 1980s) and Canada (in the 1990s) were large: these Chinese enterprises involved in natural resource development were backed financially by the Chinese government. For example, China International Trust and Investment Corporation (CITIC) was the China State Council’s pet firm (Table 3.5). In the 1990s, less developed countries received relatively large Chinese investment projects, including Africa and the Middle East where Chinese manufacturers established processing plants (for details, see later sections).

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Small individual overseas investments are also characteristic of other Asian economies, such as Hong Kong and Taiwan (Redding 1990). Small firms from Taiwan and Hong Kong invested mainly in mainland China (exploiting their family connections) and most of their investment was in labour-intensive sectors (La Croix et al. 1995). Uncertainties about the stability of the relationship between the mainland and Taiwan may also lead firms to make small investments. As Chen and Zhang (1995) show, Taiwan’s average FDI per project in mainland China was only $US1.4 million in 1992 whereas investment projects in the SE Asian countries of Thailand, Malaysia, Indonesia, and the Philippines during 1959–92 averaged $US40 million (McVey 1992; Chen T 1998). Thus, China’s overseas investments are smaller in scale than the FDI projects of other countries (perhaps excluding some investments in China itself). It is not understood why China’s FDI projects are small, and what prevents China’s offshore plants from expanding.

4. Gradually going out The setting up of overseas operations by Chinese enterprises is a relatively new phenomenon and FDI by Chinese corporations is still small. China views itself as a developing country and it is impossible to invest in every sector and every country. It must be selective and prioritise. As in economic reform, the Chinese government’s approach toward TNCs can also be described as gradualism – it has cautiously liberalised its restrictions and regulations. So far, three stages of overseas investment can be broadly identified. Stage I: Testing the water (1979–85) – Chinese restaurants Beginning in 1979, when outward investment was new in China, only a few selected state-owned trading companies, international economic and technology corporations started to invest overseas, mostly based on their existing overseas trade connections. Almost one-third of Chinese overseas operations were in Hong Kong and Macao and another one third were in the USA, Japan and Thailand (Chen and Zhang 1995; Liu and He 1993). The very first TNC was actually established in late 1979, jointly operated by the Beijing Friendship Store Service Company and a Tokyo company. They opened a Beijing food restaurant in Tokyo and also trained qualified Chinese-food cooks for Japan. The company exported technology and equipment for the Beijing food industry (Liu 1997). This is typical early Chinese FDI: restaurant-oriented FDI.

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Until 1983, the approval of all outward FDI projects was highly centralised in Beijing. All overseas investment projects had to be approved by the State Council (Liu and He 1993: 1272). But after 1983, the State Council decentralised approval and administration of overseas enterprises to the ministry level; the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) has been the key player ever since (Liu and He 1993). Simultaneously, the approval procedures for small projects and projects in which the Chinese contribution was in kind (made-in-China equipment or materials from China) were relaxed (Zhan 1995). Overseas investment rapidly expanded in 1984–85. The outflow of capital from China totalled $US130 million, almost three times the total of the previous five years (Liu and He 1993). Nevertheless this period was still viewed as an experimental stage. Indeed, by 1985, only 143 Chinese enterprises had established operations overseas; they had invested $US170 million, less than 3 per cent of China’s total inflow of FDI (Table 3.6). Each year, about 20 Chinese enterprises set up operations overseas. These operations were mostly in the service sector, particularly Chinese restaurants, located mainly in the major cities or Chinatowns of host countries, such as the USA, Japan and Thailand. Investment in other service sectors, such as construction and shipping, was located largely in Hong Kong and Macao. For example, one of China’s two major international shipping companies was headquartered in Hong Kong. Meanwhile, a few financial insurance companies were established in Hong Kong, the USA and Japan, mainly to simplify foreign operations in China (Liu 1997). Stage II: Take-off (1986–90) – natural resource hunting The results of the experimental stage of investing overseas encouraged the Chinese government to initiate more aggressive steps toward outward investment and in the mid-1980s the central government facilitated more rapid growth of outward FDI. Approval procedures and the administration of non-trade-related outward FDI were simplified and relaxed in 1985. This period witnessed rapid growth in China’s overseas investment. About 620 newly established Chinese enterprises invested in over 90 countries with total investment of over $US860 million (Table 3.6). Each year, an average of 100 new enterprises were established, compared with about 20 in previous years. Even so, according to the World Investment Report, China’s share of global TNCs remained insignificant. For example, during the period 1982–89, China accounted for only 0.1 per cent of the global total of $US1500 billion of TNCs. However, the rate

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Table 3.6 Overseas investment of Chinese enterprises by stage Year

Number of enterprises

Number of host countries

Investment from China ($US million)

Key sectors of Chinese overseas TNCs

1979–85

143

45

170

Targeted sectors: – service sector (mainly restaurants) Others: –construction contracts – shipping and financial services

1986–90

621

90

860

Targeted sectors: – exploitation of natural resources Others: – construction contracts – assembling (TCF industry) – service sector

1991 1992 1993

n.a. 355 294

n.a. 134 136

367 4000 4400

1994

104

2000

1995

119

2000

1996 1997

103 158

142 144

1400 n.a.

160 n.a.

Targeted sectors: – assembling and manufacturing (TCF, light industry, machinery) – household electrical appliances – food processing (Li and Ding 1999) Others: – exploitation of natural resources – construction contracts – service sector Targeted sectors: – manufacturing (electronics and machinery) – high-tech (aerospace industry, laser communications, bio-engineering) Others: – exploitation of natural resources – construction contracts – service sector

1998 1999 2000–

Ÿ

2110 2500 Ÿ

6300 n.a.

Notes: Investment data in this table are the flow of investments including cash and in kind (equipment, semi-processed products or raw materials). FDI data in this table include only overseas investments that are registered/approved by the Chinese central government. Key sectors of Chinese overseas TNCs are based on authors’ estimates, drawing on various sources. Sources: Data for 1998 from MingPao, 12 February 1999. Data for 1979–90 from Weng 1997. Data for 1991 from SSB 1992 China Foreign Trade and Economic Cooperation Yearbook. Data for 1992–97 from World Investment Report. Ÿ from FEER 15 April 1999.

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of growth of China’s outward FDI was dramatic. The world’s TNCs grew at an annual rate of 29 per cent while China’s grew at 42 per cent (Liu the He 1993: 1251). The nature of overseas operations changed in this second stage – from Chinese restaurants to natural resource exploitation. During this period, natural resource development projects dominated China’s overseas investment agenda, though assembly and transport as well as other service sectors were also important. Large Chinese SOEs, such as the China International Trust and Investment Corporation (CITIC), Capital Steel Complex, and China Chemical Industrial Import and Export Corporation, were some of the key natural resource exploiters. Of the newly established overseas firms, 50 per cent were in Asia and 18 per cent in Africa. But developed countries attracted most of the attention of Chinese investors (Weng 1997; Liu 1997). Australia was targeted as the single most important host country for natural resource development projects. In fact, from 1979 to 1990, of a total investment of $US309 million from China, Australia attracted about one-third (SSB 1998). China’s two giant natural resource development projects in Australia – the Portland Aluminium Smelter in Victoria and iron ore mining in Western Australia – have been cited as textbook examples of China’s successful overseas investment. Almost all Chinese publications about overseas investment success quote these two examples (Tang et al. 1999). Stage III: Rapid growth (1991–present) – beyond natural resource hunting Since 1991, the Chinese government has further liberalised its overseas investment approval process. Compared with the gradual liberalisation of overseas investment regulations in previous periods, the 1991 policy change represented a ‘great leap forward’. This time, the central government encouraged its manufacturing enterprises to use the so-called ‘two resources and two markets’ strategy: targeting both domestic and international markets and seeking resources (of capital, know-how, raw materials and information) both domestically and globally. In 1993, the approval procedures and administration were further decentralised: local government and large enterprises were offered more decision making power and privileges (Zhan 1995). The methods by which the Chinese government promoted investment overseas included ‘tax incentives, subsidies and privileged access to the domestic market for goods produced abroad by Chinese foreign affiliates’ (Zhan 1995: 70). Tax incentives include a tax exemption for

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the first five years of a project and taxes of only 20 per cent on earnings thereafter (MOFTEC 2000). In contrast to its resource hunting of the previous period, the Chinese government after 1991 selected several mature manufacturing sectors to establish overseas operations. Among the manufacturing sectors, machinery and electronics industries were at the top of the list. Enterprises classified as export enterprises (foreign trade companies, industrial and trading companies, export-oriented production enterprises, enterprise groupings, enterprises of high and new technologies and other qualified economic entities) were encouraged to tap the international market actively and raise the competitiveness of Chinese-made machinery and electronic products on the international market, by setting up manufacturing enterprises and service networks. They have also been given new privileges. These include: first, those that make investments in kind are exempt from paying a security deposit (about 5 per cent of the value of the proposed investment) to the government; and second, proposed investments of less than $US1 million are exempt from the approval procedures (Zhan 1995). Such a strategic reorientation changed the sectoral distribution of CGI overseas investment. For example, in 1991, over 60 per cent was in the resource development sector (Liu and He 1993) but by 1997, only 31 per cent of investment was in resource development, with 23 per cent in the tertiary sector and 46 per cent in manufacturing and agriculture (Tables 3.7 and 3.8). After 20 years of crossing the river by feeling the stones, the Chinese government has gradually improved its system of monitoring and regulating overseas investment (mainly by large SOEs). The Chinese government still has a strong influence in directing where and in what sectors its large enterprises invest overseas. The enterprises are encouraged to invest in the state’s selected priority sectors and targeted regions. To fulfil such goals, the Ministry of Foreign Trade and Economic Corporation (MOFTEC) and the State Economics and Commerce Commission (SECC) are appointed as the key players. Figure 3.1 shows a clear division of labour between these two ministries. Applications for overseas investment by provincial or prefecture-level state-owned enterprises are first submitted to provincial departments of Foreign Trade and Economic Cooperation and Economics and Commerce, then to the State Economics and Commerce Commission. State-level SOEs submit their applications directly to the SECC. The SECC is mainly in charge of (i) assessing whether an overseas investment project falls within the priority sectors of the Chinese government; (ii) assessing parent firms’

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China Goes Out 47 Table 3.7 Number of China’s overseas investment enterprises by sector and region (1991) Middle East Manufacturing, plantation farming Contracted projects Natural resource development Technology processingtrade** Transportation Finance and Insurance Restaurants Consultancy Medical service Others Total

Africa

EU & Oceania

North America

Asia*

Total

10

50

169

72

108

410

3

10

42

10

17

83

0

15

10

19

27

71

5

2

38

29

23

97

0 0

2 0

23 6

15 4

7 3

47 13

10 3 3 0

18 2 3 4

23 32 3 11

60 17 6 21

28 24 3 17

139 78 18 53

34

106

358

253

257

1008

Notes: * excluding Middle East. ** This category seeks technology and know-how. Source: Liu et al. 1993: 1255.

business status inside China, including business potential, size of investment, available capital sources, product structures. The next stage of assessment is by MOFTEC which emphasises the host country or region – whether the country or region is on the list of targeted countries, whether it is politically stable and the potential of the local market. During the assessment period, the business and commerce sections of Chinese embassies or consulates are asked to evaluate and assess every potential project. In addition, in order to speed up the approval procedure, the State Council sets clear deadlines for each of the government organisations (Figure 3.1). However, relaxed regulation of overseas investment brought with it a new problem: profit leaking – whereby state assets and profits were illegally transferred to private owners’ pockets (Hang 1996). In many countries, a government cannot be registered as the legal representative of a company (Liu 1998). The registration form requires an owner’s name that is not the Chinese government. Therefore, most of China’s SOEs

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Table 3.8 China’s overseas investment by sector in 1997 Number of enterprises Manufacturing Natural resource development Agriculture Restaurants and tourism Contracted projects and labour export Transportation After-sale service Consultancy and others Sub-total Trade Total

Investment from China ($US million)

Investment distribution (%)

71 10

75.02 63.12

38.6 31.7

8 6

14.12 11.22

7.2 5.7

21

7.80

4.0

12 9 21

3.08 2.87 18.99

1.6 1.5 9.7

158 153

196.22 142.59

100.0 –

311

338.81

–

Notes: Investment data in this table are the flow of investment including cash and in kind (equipment, semi-processed products or raw materials). Data in this table may be slightly different from those in other tables as sources are different. Source: Tang et al. 1999: 268.

(owned by the Chinese government) had to be registered under an individual name – in most cases, under the name of an executive. Thus the executives became the legal owners of China’s state-owned property located in another country. This arrangement made it possible for the executives to transfer the profits and assets of China’s SOEs’ overseas operations to their private pockets. Such illegal transfers were facilitated by the imperfect auditing system of most of China’s TNCs. For most Chinese overseas operations, neither Chinese accounting nor effective auditing systems existed (Liu 1998). The executives were therefore the first group of people to get rich quickly. These arrangements may partially explain why up to 1993, 45 per cent of all Chinese enterprises investing overseas were unprofitable (about 28 per cent just breakingeven and 17 per cent losing money) (Zhang 1998). The executives made their operations just break even and transferred the rest of their profits to private bank accounts. The scale of such profit leaking is impressive. For example, in 1990 alone, over 10 billion RMB ($US1.2 billion) was estimated to have been

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State level SOEs

Provincial or prefecturelevel SOEs

Provincial EACC/FTEC# within 10 days State EACC# Economic & business section, PRC embassy/ consulate general

within 10 days within 3 days

Assessment focus: 1) Does the overseas investment project belong to state’s priority sectors? 2) Parent firm’s business status inside China

within 10 days State FTEC# within 10 days

Assessment focus: 1) Is the overseas investment project in state’s priority countries or regions? 2) Assess the host country’s investment conditions

decision

Figure 3.1 China’s approval procedure for overseas investment projects Note: MOFTEC – Ministry of Foreign Trade and Economic Cooperation; SEACC – State Economic and Commerce Commission. Source: The figure is based on PRC State Council’s government documents. State Council initiated the procedure in 1999. It applied to those Chinese firms that wanted to establish overseas processing and assembling of materials and semi-processed goods brought from China in 1999.

illegally transferred to private pockets (including trade and non-trade enterprises) (Zhang L 1998). The profit leaking led the Chinese government to slow the pace of overseas investment and to re-regulate overseas operations, leading to wide fluctuations in the levels of overseas investment in the early 1990s. For example, when the strategy of two markets and two resources was adopted in 1991, it generated a big increase in investment in 1992 and 1993, over $US4000 million each year, the highest since 1978 (Table 3.6). However, the pace was slowed from 1994 to 1997 when the central government readjusted its regulations and established a more effective auditing system (Jiefang Daily, 13 November 1999). Since 1997, an additional item has been added to the annual audit – deficit status. A firm’s permit to operate overseas will be terminated if it has been in deficit for three years running (MOFTEC 2000). It is not clear whether profit leaking has become insignificant, but the statistical data show that of all overseas enterprises, the pro-

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portion that were unprofitable enterprises dropped from 45 per cent in 1993 to only 13–17 per cent in 1999 (FEER 15 April 1999: 82).

5. The motives for Chinese investment overseas The logic of setting up plants offshore is not simple. Each individual case is different. The current Chinese government’s considerations are many-fold, though a few key motivations can be identified. Table 3.9 indicates that in 2000 Chinese enterprises had moved towards new priority regions, different from those in the 1980s and early 1990s. Developing countries, such as Africa, southeast Asia and South America, have become the main target regions. Compared with Japanese offshore investment, China’s motives are interesting. China’s motivations for its offshore plants are complex and very different from those in 1960s Japan (compare Table 3.2). They appear to combine Japan’s major motivations in both the 1960s and 1990s (eg, securing supplies of natural resources and taking over overseas markets), but in addition, some reflect China’s strategic considerations. We call them motivations with Chinese characteristics. 5.1 Domestic/conventional factors Many internal forces pushed Chinese enterprises to establish overseas operations. Sluggish domestic demand due to overproduction forced enterprises such as machinery and electronic appliance manufacturers, to look to outside world markets. After two decades of industrialisation, China’s industrial capacity has exceeded its domestic demand. Overproduction has led in turn to stockpiling. For example, by the mid1990s, stockpiled goods in SOEs alone reached 400 billion RMB ($US50 billion), about 5 per cent of China’s GDP (SSB 1998). An industrial survey in China shows that currently about 500 kinds of industrial products in China are being manufactured at less than 60 per cent of production capacity (FEER 15 April 1999: 82). Some of China’s formerly strong sectors in which demand was high suffer stockpiling as well. In China’s textile industry since the mid 1990s capacity has exceeded production by about 40 per cent, and over 60 per cent of colour TV production capacity has been surplus. Almost every sector of home appliance production has been operating below capacity: over twothirds of air conditioner factories cannot operate, and the production of washing machines was 43.4 per cent of capacity (CASS 1998). On the other hand, China’s rapid industrialisation programme needs to secure adequate supplies of natural resources. This need is not

8.7%: East Europe 4.0%: Others

8.0%: Central Asia

7.6%: overseas banks or investment promotion organisations

25.9%: own overseas trading firms or representatives, exhibitions

66.5%: MOFTEC/commercial consulates in Chinese embassies or consulates

Source of information to select host location?

Notes: Number of the surveyed enterprises was 170, about 60 per cent of them replied. MOFTEC: China’s Ministry of Foreign Trade and Economic Cooperation. Source: Research team of MOFTEC’s overseas manufacturing project 2000.

8.4%: cheap land and proximity to raw materials.

22.5%: cheap labour

9.3%: Middle East

18.0%: Latin America

20.0%: SE Asia

32.0%: Africa

Where is your priority region?

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9.3%: high competition to export from China

12.1%: export to third country

14.5%: sluggish demand in China

28.7%: relatively small investment

32.0%: privilege policies in host country

47.1%: taking over overseas markets

16.9%: better profit return

Most attractive factor in host country?

Why invest overseas?

Table 3.9 Summary of survey results for 100 overseas enterprises (2000)

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reflected in the survey result of Table 3.9 but is clearly stated in interviews with managers of China’s giants in Australia (CITIC Melbourne executive, February 2000). The capacity to secure stable supplies of raw materials that cannot be sourced adequately in China has been an objective shared with many other northeast Asian countries, including Japan in the 1960s and early 1970s (Redies 1990). As discussed above, in the late 1980s, Australia’s natural resources became the single most important focus of China’s overseas investment. Channar iron ore mine and Portland Aluminium Smelter, for example, have been successful. Every year, tens of thousands of tons of high-grade iron ore are sent from Western Australia to China. In this case, the high quality natural resource is the most attractive factor: Australian iron ore has over 60 per cent iron content, and it has been estimated that if a similar grade and scale of iron ore deposit was developed in China, the total cost would be eight times the amount that China has invested in Australia (Liu and He 1993: 1255). The total cost per ton of pure iron ore in Australia is only one-fortieth of the cost of similar ore in China (Zheng 1994). Such a huge cost gap explains why China selected Australia as its source of resources. Australia’s mineral resources are not only relatively cheap but Australia has also been a stable suppler. Although inland China has iron ore resources and other raw materials to supply the rapidly growing coastal regions, there has been a conflict between the coast and inland districts over the supply and demand of raw materials. Such tensions were reflected in the 1980s’ wool and cotton wars, when the coast region fought for inland China’s wool and cotton supply and the inland sought to protect its cotton and wool exports from the coast region. For example, Gansu province in inland China, an important wool producer, previously supplied its wool to long-established carpet factories on the coast. Now it has become China’s second largest carpet producer. To guarantee the value-added operation within its boundaries, border guards and other protectionist measures were used to make sure wool was not exported to the coast region (Cannon and Jenkins 1990). In recent years, the inland provinces have been gradually increasing their own manufacturing capacities to process local raw materials, rather than act as a raw material basket for industry in China’s coastal cities and regions of Shanghai, Beijing, Tianjing, Guangzhou and the Pearl River Delta. The coast turns to overseas markets as an alternative (Young et al. 1996). From the central government’s perspective, China has to find stable and cheap raw material sources to meet its rapid industrialisation needs, especially in a fluctuating global market. The coastal industries

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therefore have had to seek stable and cheap raw material suppliers outside China. Another strategically important natural resource that China will need in the future is oil. As yet it imports only a small amount of oil. However, China’s future needs for large supplies of petroleum are comparable to those of Japan and the USA. As China’s economy has grown, the average living standard has improved: the Chinese new rich view the automobile as a symbol of their social status, while the Chinese government, like Japan and South Korea before, views it as a leading sector of economic growth. As a result, the consumption of petroleum is increasing dramatically: ‘one dimension of China’s involvement in international affairs is the sudden and rapid growth of participation by Chinese companies in the international petroleum arena, both for oil imports and for investments overseas’ (FEER 14 May 1998: 37). China’s domestic petroleum resources are far from sufficient to sustain economic growth. Increasingly, the Chinese government has decided to let China’s state petroleum companies seek access to overseas supplies of oil and gas through investment rather than through purchases on the international market alone (FEER 14 May 1998: 37). As a result, China has entered the arena of global petroleum politics. Exploration and production projects in at least 20 countries have been signed, of which the most significant are in Russia (a gas field in Siberia), the central Asian republics, especially Kazakhstan (where China already has two oil fields) and Turkmenistan (which has vast gas resources) (FEER 14 May 1998: 37). In the Middle East, China has filled the vacuum left by western governments and companies that continue to isolate Iran and Iraq. Although China’s investments in the Gulf region have been limited so far, the Gulf States now provide almost 40 per cent of China’s crude oil imports. This dependence, coupled with China’s activities in both Iran and Iraq, has resulted in China’s position in the Middle East being greatly enhanced since the time of the Gulf War (FEER 14 May 1998: 37). 5.2 1990s overseas export-led motives In these respects, China’s overseas natural resource investments are motivated in much the same way as Japan’s investments in the 1960s and 1970s. However, other forces that drive Chinese firms to establish offshore plants resemble those that motivated Japanese companies in the 1980s and 1990s (even though China and Japan are at different stages of development). As shown in Table 3.9, among the four main reasons why Chinese enterprises invest overseas are to take over over-

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seas markets and to export to third countries. In fact, as foreign trade has reached 35 per cent of GDP in recent years (SSB 1999), one consideration has been the need to respond to high overseas tariffs and the formation of trading blocks. Offshore plants that use Chinese-made materials escape the stiff import quotas imposed on Chinese goods by countries like the USA. When governments restrict the markets for ‘made-in-China’ products that are exported directly from China, Chinese firms have moved the final stage of manufacturing processes to the market (such as the USA) or else they locate in a third country and then export to the market. For example, China’s textiles, clothing and footwear products have limited access to the US market, at least until China becomes a member of WTO; some of China’s TFC firms have therefore invested in Australia and then exported ‘Made-inAustralia’ products to the USA (Liu and He 1993). Chinese firms have also sought to access industrialised markets by penetrating regional blocs. Increasing economic regionalisation and trade protection has been a major barrier to Chinese products entering these markets. Regional blocs range from free trade areas and free trade zones to tariff unions, common markets and the European Union. The most important blocs are North American Free Trade Agreement (NAFTA) and the EU, whence the most developed technologies are sourced. The formation of these two blocs limits the access of some ‘made-in-China’ products to the individual countries within the groups. The Chinese government realised the urgency of special investments even before the formation of these two major regional blocks and has accelerated its investment in these regions. As a result, many Chinese enterprises established overseas operations in North America and Europe, and also in other countries whose exports to these markets were not restricted (Liu and He 1993: 1271). For instance, the Shanghai Textile Industry Bureau established the Hong Kong-Shanghai Textile Ltd in Mauritius in the early 1990s because the EU did not impose quotas on textile products from Mauritius (Wei 1996; Giao 1996). In addition, some offshore plants have established assembly lines for local markets as well as for third country markets. For example, in the early 1990s, the Shanghai Bicycle Group established two factories in Brazil and a joint venture with Ghana for the local market and nearby countries (Liu and He 1993: 1256). The Guangzhou Number 1 Cigarette Factory established a cigarette factory in Cambodia, using raw materials and equipment imported from China, and took over about 80 per cent of Cambodia’s cigarette market. Similarly, the Shanghai Guangdian company set up a black and white TV factory in South Africa, taking

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over about half the local market (Hai 1999). There are many similar examples in which China has a comparative advantage over the host countries because of China’s successful industrialisation programme in the last 20 years. 5.3 Motivations with Chinese characteristics Chinese investment in offshore plants is also motivated by other important forces. The overseas investment projects of most small and medium-sized parent firms are often associated with overseas Chinese in the host nations. Thus, a high proportion of Chinese investment overseas is in the form of joint ventures with local partners, most of whom are overseas Chinese (Wang 1997; Liu 1997). This is an underresearched issue: it is not clear why small and medium-sized overseas investment projects (but not CGI projects) seek overseas Chinese as their joint venture partners. Government initiated FDI has more important motives that distinguish it from investment flows of other east Asian countries. Two groups of political and strategic motivations are the key to understanding Chinese government initiated overseas investment projects. First, there is a cluster of motives associated with access to technology. China has set different priorities for its overseas operations in different parts of world. Industrialised countries have been crucial for China’s access to new technology and patent information through joint ventures. China has long sought access to high technology overseas, to channel high technology and equipment back to China (Zhan 1995). China requires high technology and information due to the limited transfer of technology from foreign joint ventures in China (Qiao 1996). Although the contribution of foreign investment to China’s social and economic growth has mostly been regarded as positive, the actual levels of technology transfer have been limited (Kumar 1998): market and technical information has largely been controlled by foreign TNCs. Foreign firms and corporations control market information and refuse to transfer technology. To catch up with the world’s advanced industrial nations, China needs to expand its international market, to raise money and, more importantly, to gain access to patents and technology information. China has sought access to new technology and patent information by walking on two legs: obtaining technology from two main sources. One source is domestic, through the establishment of high technology parks and transfer of technology from joint ventures with TNCs in China (see Chapter 8). So far, the Chinese central and local governments

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have set up many high-tech parks in many cities to attract foreign companies to set up technology intensive manufacturing firms, and to use Chinese skills and to transfer Chinese university research into industrial sectors (Simon and Goldman 1989). Most recently, according to Beijing University students, the government has even encouraged university students to participate in high-tech industry sectors before they graduate. The second source of technology and patent information has been through licensing trade, cooperative production, cooperative design, technology services, consultancy and import of key equipment and complete plants. Some of China’s FDI has been geared towards access to key technologies and distribution channels. These investments have often been insignificant in monetary terms, but potentially of enormous strategic importance (MOFTEC 2000). Developing countries, however, were mainly viewed as markets for China’s technology products. Like its neighbours, Japan and the Asian NIEs, China has established offshore plants in less developed countries, in which China has comparative advantages in exporting its technology products. As shown in Table 3.9, the overwhelming majority of China’s overseas enterprises that were surveyed indicated that they preferred to invest in developing countries, particularly Africa, southeast Asia, and Latin America. In fact, Chinese assembly lines in most underdeveloped countries can outcompete products made both by the underdeveloped host nations and by industrialised countries. Whereas consumers in those host countries cannot afford the more expensive western or Japanese products, they can afford Chinese products. As Table 3.9 shows, Chinese enterprises are targeting less developed regions to gain higher rates of return than are available at home. Meanwhile, to secure its position in developing countries’ markets, the Chinese government has linked its official development assistance to FDI by encouraging recipient countries to use its foreign aid to establish joint ventures with Chinese companies. Indeed, this has been the major form of Chinese transnational activity in Africa in recent years: investment (particularly in kind) has been linked to the export of equipment, parts, raw materials and technology from China (Tang et al. 1999). Secondly, however, some foreign investment is associated with political goals. Perhaps the most unproductive type of investment has involved projects related to political goals. China successfully used economic and diplomatic tools to secure African and other developing countries’ support for its UN permanent membership in the early 1970s and to mobilise against American politicisation of the human rights issue (Li and Ding 1999). In recent years, responding to Taiwan’s ‘money

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diplomacy’, China has tried to contain Taiwan by restricting its independence and attempting to isolate it, in part by manipulating offshore investment projects (Fan 1998; Li and Ding 1999). Thus, after the former Taiwan president, Lee Teng-hui’s ‘state-to-state’ declaration about mainland and Taiwan relations in 1999, the mainland government has worked even harder to isolate Taiwan and reduce Taiwan’s diplomatic space. China has made politically-motivated overseas investment projects, particularly in Central America and Africa, where some countries have for a long time relied on aid from Taiwan. For example, South Africa has shifted its allegiance, and Panama has shifted its legation to Beijing because of growing trade with China and promises of large investments from the mainland (FEER 21 October 1999: 28–9). It is expected that the battle between two sides over international recognition will become intense.

6. What is next? After over 20-years of a partially open door, China has not only become an important host for FDI, but also a significant source of FDI. Chinese government initiated FDI is a complex venture. This chapter has demonstrated that China’s TNCs have been motivated not only by traditional determinants – such as the search for resources, markets and efficiency – but also by the pressures of globalisation and regionalisation (including the penetration of regional trade blocs, such as the EU and NAFTA). More importantly, political and strategic considerations often underlie China’s decision to invest overseas. In particular, the contest with Taiwan to win diplomatic recognition has been given high priority when China is selecting locations for its overseas investment. The use of FDI as a tool in containing Taiwan does not have an economic rationale. In some respects, the motives underlying Chinas overseas investments are similar to those of Japan in both its early and current stages as well as other east Asian developing countries. Access to Australian and Canadian raw materials, for example, reflects investments of Japan two decades earlier or of South Korea in Russia’s far east. Equally, east Asian countries have commonly had to respond to protectionism and prepare for an era of protectionist trading blocs. China’s penetration of regional trading blocs is similar to that Japan and South Korea decades earlier. After the rapid appreciation of the Yen in the mid-1980s, many Japanese TNCs transferred production to North America, the EU, and other countries in Asia. On the other hand, South Korean FDI in

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North America and the EU was until recently mainly a defensive response to protectionism (McDermott 1998). Even China’s geopolitical motivations parallel the Singapore government’s strategies about regionalisation (Oh 1996). However, several aspects of China’s FDI reflect purely Chinese characteristics. The most important characteristic concerns the role of the government. China’s investment overseas has been one element of a broader process of restructuring and political activities in which the government, rather than corporations alone, plays an important role. The government has acted to provide information: according to Table 3.9, about three-quarters of China’s overseas enterprises were guided by information from the government bodies when selecting overseas investment projects. But the government has also acted as regulator. In particular, the Chinese government’s strategic directions are normally implemented through its large transnational firms; government direction underpins oil and mineral exploitation projects and projects aimed at limiting Taiwan’s diplomatic space. For most Asian countries, the rising costs of production at home and growing opportunities in the Asian Pacific region led them to select China and ASEAN countries as hosts for FDI. China and ASEAN were viewed as locations with the highest global profitability of investment. Such motivation leads to another common characteristic of east Asian FDI: geographical proximity. Thus, the happenstance that the costs of labour were vastly different within neighbouring countries has provided the basis for the development of a weak functional region – linked by ownership (investment) and trade – focused on Japan with sub-foci in Korea and Taiwan. China’s FDI, however, was not motivated by host countries’ cheap labour but to control natural resources, promote exports, and acquire technology and expertise. CGI FDI selected not just neighbours but resource rich nations (including Australia and Canada); more recently, China has diversified towards other developing countries (Table 3.9). Chinese companies face many hurdles and problems in pursuing their overseas ambitions. The escape of assets (taozi) from their overseas operations creates problems for headquarters. They have also to adjust to different regulatory environments, which are often more transparent than those to which firms are used in China. Companies that want to participate in overseas ventures lack information about other places and potential partners. They have asked the government to provide an information service similar to that provided by sogo shosha for their companies in Japan (Herbig 1995). However, those difficulties cannot stop the increasing participation of

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large Chinese enterprises in globalisation. China has been a recipient of FDI for so long. Yet it is starting to invest heavily in other countries. Although China’s economy is not as large as Japan’s, the potential for further outward FDI is huge. The Chinese government’s strategic plan for the next few years is to transfer its overseas manufacturing from guerillas (many small size companies) to enterprise groups (several large corporations merged as an enterprise group). The strategy of ‘grasp the large, release the small’, spelled out during the 15th Communist Party Congress in 1998, is intended to regroup China’s best state enterprises, creating organisations that mirror Germany’s giant multinationals or South Korea’s business groups (chaebols). These large enterprise groups will be China’s major players in the international market (Zhang Z 1998). For example, in the oil industry, China is forming two mega firms (China National Petroleum Corporation and Sinopec) to mirror multinationals like British Petroleum and America’s Amoco. The two giants have already knocked at the international market door by investing heavily in oil rich regions (FEER 14 May 1999: 37). Similarly, Qingdao Haier, a market leader in refrigerators, air-conditioners and the like, is forging ahead with plans to set up factories in Southeast Asia and Eastern Europe (FEER 14 May 1998: 37). Now there is much less regulation than formerly of Chinese manufacturers that set up assembly plants overseas (FEER 15 April 1999: 82). Although the Chinese government has long encouraged its enterprises to go abroad, the government offered little financial aid or bank loans to Chinese firms. The new policies and measures include: 1. establishing an Export Development Fund and giving preferential access to export loans to companies that set up assembly lines abroad and export components; 2. allowing enterprises to reinvest all profits from overseas assembly operations for the first five years (a big departure from the previous policy); 3. paying two percentage points of the interest on foreign-exchange bank loans; and 4. simplifying procedures for companies sending staff overseas (FEER 15 April 1999: 82). According to Dunning’s (1993) FDI stage model, China’s overseas investment is in transition from Stage two to Stage three (Table 3.10). China entered Stage one in the early 1980s, and for a period had a much larger inward than outward FDI flow. But in the last 10 years, China has entered a stage in which the outward flow has been increasing more

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Table 3.10 A stage model of China’s overseas investment

Per capita income ($US) Inward flow Outward flow Net outward flow China’s status

Stage 1

Stage 2

Stage 3

Stage 4

> Out 1980–99 Inward FDI exceeded outward

Slow down Rapid growth In = Out 2000–2030? Outward FDI growing faster than inward

Very slow Slow down In < Out Post-2030?

Source: Per capita income and FDI flow directions were modified from Dunning (1993).

rapidly than the inward flow. According to the Asian NIEs experience, it takes about 30 years to make the transition from Stage two to three (Xie 1994). Perhaps, by the mid-2010s, China will reach a stage in which FDI outflow is almost equivalent to its inward flows, depending on membership of the WTO and the growth of its economy. Then it may take another 30 years to reach Stage four, when according to the long term plan, China’s per capita income will reach the middle level of developed countries. The world economy has grown and changed since the Asian NIEs were developing growth strategies in the 1950s and 1960s and when Japan was growing so fast. The precise forms of engagement with the global economy are thus different for China in the 1980s and 1990s than they were for those late industrialisers. Instead of an export-led engagement supplemented by a search for secure supplies of raw materials, that characterised late industrialising growth models in the 1960s, China has exhibited much higher levels of foreign direct investment – both inward and outward – and its outward investment sometimes reflects new considerations. But the state-led and strategic management of links to the global economy are characteristics that all the east and southeast Asian late industrialisers have at some stage shared. The search for an escape from the limits of a comparative advantage-determined role in the world economy has underpinned the strategies of all these states during the formative years of their industrialisation, differentiating them from both the structural adjustment countries and the transitional economies of eastern Europe.

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4 Making Markets Michael Webber, Mark Wang and Zhu Ying

Together with the integration of production, trade and capital flows, globalisation in China is principally reflected in the progressive marketisation of systems of production and distribution. Increasingly, markets are being used to allocate labour and to reward that labour. The development of markets reflects a twin process – of the replacement of subsistence production by production for markets and of the replacement of state-directed production by market-directed production. Both forms of development have occurred in China over the past 50 years, but globalisation in the 1980s and 1990s really centres on the replacement of social norms by market norms of production and distribution. Since 1978 the development of a market economy can be divided into three stages, marked by: 1. the Third Plenary Session of the Eleventh Party Central Committee, at the end of 1978. This saw an attempt to decentralise control, mainly in rural areas, marking the emergence of the household responsibility system and of township government; 2. the Third Plenary Session of the Twelfth Party Central Committee, in October 1984. This saw the focus shift to urban areas. There were key changes to the mode of operation of SOEs, including their market orientation, as well as reductions in the extent of price controls and changes to the system of taxation; 3. the Fourteenth National People’s Congress, following Deng’s tour of southern China (January–February 1992), in October 1992. This set the goal that China should become a socialist market economy. There was envisaged an array of forms of ownership (including SOEs). The market was to be the fundamental way of allocating resources, tempered by considerations of fairness and of social responsibility. 61

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The geography of marketisation reflects three overarching distinctions. First, there is an urban : rural difference. The pace of change in cities and in the countryside has been different, as first agriculture and then industry have been the focus of government attention. Furthermore, the pressures for and the barriers against change to market forms of economy are different in the two types of location. Secondly, there is a difference according to locality. The central government has sanctioned market forms of economy earlier in some provinces than in others. Likewise, some provincial officials have pushed hard to develop market forms of organisation; in other provinces, officials have resisted the development of markets. Thirdly, however, the relations between the provinces and the centre have been redefined, as systems of generating revenue have been altered and as the relative powers of the two levels of government have gradually shifted. The first and third of these distinctions (urban : rural and central : provincial) are about the content of marketisation; differences according to locality are about the extent of marketisation. But first we must reflect on such key terms as ‘reform’, ‘transition’ and ‘market’.

1. Naming social change Among orthodox economists it is common to represent the changes in policy since 1978 as a progressive marketisation of the Chinese economy and to call them ‘reform’ or ‘transition’. However, all of the elements of this characterisation – markets, China, reform and transition – are problematic and therefore need to be explained. First, the characterisation regards ‘China’ as an unproblematic category. However, the meaning of ‘China’ needs be questioned, on several grounds. In the first place, globalisation is redefining the meaning of national economies as the boundaries that formerly defined places are becoming more porous (Bryan and Rafferty 1999). Increasing amounts of money, commodities and people move across China’s boundaries every day and the relative power of the central and provincial governments to regulate these flows has altered (see Chapters 2 and 3). Equally, political power within China has been redistributed. While the central government remains politically preeminent, it has given up some power over markets and over cross-boundary flows. The degree of central planning has palpably reduced since the mid 1970s. Markets, and so the decisions of corporations and of individuals, play a more important role now than they once did. Furthermore, the central government has lost power relative to the provinces, in particular by giving up to the

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provinces some of its rights to regulate and by providing the provinces an increasing share of total tax revenues. Thirdly, the process of change within China has been highly uneven over space, partly because of conscious government decision, and partly despite some attempts to distribute change more equally (see Chapter 6). Although governments since 1978 have sought, like their predecessors, to ossify the divide between urban and rural China, they have introduced a new ideology of regional difference. The coast has been inspired to lead marketisation and economic growth in China, in a process that has encouraged spatial divergence of standards of well being and forms of work. These processes of change in the meaning of ‘China’ – for example, the unleashing of new market forms of activity and the redefinition of the relations between centre and province – themselves create new categories of economic activity and conspire to alter the constellation of powers within the country, generating different coalitions of support for or resistance to further change. ‘China’ is a fluid category, not one that has remained constant since 1978. Likewise, the word ‘reform’ carries the meaning of a change that is for the better: to reform is to improve. It seems preferable for social scientists to adopt a more neutral vocabulary, so we write of changes in policy, or of transformation. In similar vein, the concept of ‘transition’ needs to be questioned. A transition is a path from one state to another future (but well defined) state. Thus, after the event or if there exists a blueprint for the change, we may speak of a transition from a socialist economy to a market economy. But to speak now of a transition within China is to assume that the future form of the economy is known (Stark 1992); in general, the literature about transition assumes that in the future the Chinese economy will adopt a capitalist market of the kind understood in Western Europe or North America. But that cannot now be known. We do not know what the future form of the Chinese economy will be. Nor, for that matter, have the new policies followed a well-designed blueprint, intended to challenge the basic socialist system. Rather, the new policies have been pragmatic, refocusing attention on improved living standards and catching up with developed countries. To a large extent, Chinese economic policy since 1978 can be better regarded as offering opportunities to new forms of organisation while leaving the existing forms intact. These opportunities represent a series of experiments, some of which were adopted more comprehensively in the light of their compatibility with or their ability to out-compete existing forms of economic organisation. ‘Transition’, then, is not a useful way of character-

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ising the social, political and economic changes that have been occurring within China (Szelenyi 1998). Finally, the notion of marketisation needs to be clarified. Several explicit attempts have been made to assess the degree to which transforming societies like China have become market oriented (see, for example, Chen et al. 2000; Fforde and de Vylder 1996; Smart 2000). The evidence from these attempts is that it is useful to distinguish two different forms of markets. First, we may identify a process through which commodity markets become generalised. This process is one in which transactions become essentially voluntary or autonomous, based on private calculations of costs and benefits, rather than centrally planned (Fforde and de Vylder 1996: 29–45). Decisionmaking rights are decentralised: agents acquire the freedom and ability to make these calculations and to act on them; enterprises become autonomous rather than simply something like a branch plant of a multidivision (state) corporation. In a commodity market economy, these individuals and enterprises compete to buy and sell, on the basis of prices that are set by relative levels of supply and demand. The agents have self-responsibility for the results of their decisions (the incentive), and self-interest, rationally acting for the benefit of oneself (Chen et al. 2000). A society in which commodity markets are generalised may contain a variety of forms of production unit and a variety of modes of social behaviour. Small-scale farmers, who rely on their own and their household labour, make their own production decisions and sell for an urban market, comprise one such set of agents. Township and village enterprises, employing local citizens and producing for a small, provincial market, comprise another set of such agents. Equally, another set of such agents are state-owned enterprises that, given goals by their government owners, are left to make their own production and marketing decisions (such might be, for example, government corporations in western economies). If individuals could decide for themselves to farm, work for the township or work for the state, then a society of such agents would be one in which commodity markets were generalised, though it would be quite different from the form of market society that exists in western countries. Such variety in the forms of commodity market economies leads to the definition of the second form of market economy, the capitalist market economy (Smart 2000). Societies in which capitalist markets are generalised are those in which critical decisions about the organisation of production reflect a distinction between capital and labour (Webber

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and Rigby 1996 analyse these concepts in some detail). Capital is a store of value that is deployed in production in order that it grows. A capitalist enterprise is thus one that makes and is responsible for its own decisions in order to enlarge its net worth (by means of profits). Capitalists are those who control capitalist enterprises and – in their pure form – internalise the motives of these enterprises. Labour is the capacity of people to work; it is a commodity, sold on the labour market, by individuals to capitalist enterprises. Workers are those who sell their labour and – in their pure form – have only their labour to sell. No market economy is a pure capitalist market economy. All actual societies contain enterprises that are not motivated by profit (households, family production units and cooperatives being the most common). Most actual workers have assets other than simply their labour to sell. Most owners of enterprises are motivated by other concerns than simply profit. Yet capitalist enterprises are clearly different from small-scale independent household farmers, township enterprises and market oriented state-owned enterprises. This difference is centred on the manner in which firms hire, organise and fire labour. In particular, the people who work in non-capitalist enterprises find their labour increasingly marketed, increasingly becoming a commodity. The degree to which people’s labour is subject to capitalist market controls depends on: 1. Their access to or ownership of other productive assets, such as land, equipment and social contacts. People who do not own such assets depend solely upon paid work for their livelihood and so must accept the conditions under which work is offered; their labour is more marketed than that of people who own such assets; 2. Whether they are hired or fired in accordance with competitive market rules. Other systems of job allocation, such as personal contacts, job sharing principles, or job protection rules, represent lesser degrees of market control; 3. The degree of profit orientation of the enterprise – the hardness of its budget and the significance of profit rather than other social goals, for example. Higher degrees of profit orientation correspond to greater degrees of marketisation. In China, different forms of work imply different degrees to which labour is subject to market controls, ranging from independent commodity producing peasant households, varieties of government employees, those who work for collective or state owned enterprises,

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through to those workers who are employed in foreign funded and domestic private enterprises (who may have effectively given up their rights to use land for agriculture and who are hired and fired within a functioning labour market). A third set of shifts may be involved in the emergence of a market economy. Fforde and de Vylder (1996) argue that a transition from a centrally planned to a market economy requires that the legal infrastructure of society change, as property rights are defined, to give people and firms the right to decide as well as to share the surplus. Chen et al. (2000) refer to such changes as contractualisation, legalisation and orderliness, the means through which the behaviour of economic subjects is made credible. This argument has equally been applied to the development of capitalist markets in England (North and Weingast 1989). Yet such institutions hardly exist in China (Smart 2000). Furthermore, as Oi (1999: 1–16) has observed, such property rights do not have to be assigned only to private individuals or companies. In China, a key innovation was to assign property rights over surplus revenues to local governments in the 1980s. However, these rights were not assigned by law, but only by government policy; local governments lacked security in this sense, just as private enterprises in China still lack secure and clear property rights and yet have grown rapidly in the 1990s. (The rule of law is gradually extending in China and the rights of private business being increasingly recognised.) These items of legal infrastructure thus may not be necessary for the emergence and proliferation of capitalist market forms; in any event, they represent (supposed) preconditions for, rather than the existence of, such forms. With these distinctions in mind, we can attempt to assess the history and geography of the development of a market economy in China.

2. Changes between centre and locality The financial system has been remodelled several times since 1980 (Shi Z 1998b). First, in 1980, central and local authorities were made responsible for collecting certain types of revenue and covering certain expenditures, which in most cases made the provinces responsible for handing over fixed sums (or shares, sometimes) of revenue to the centre. In 1985, this revenue sharing system was remodelled and a system of taxing enterprise was set up, replacing the earlier system in which enterprises handed over their profits to the government. By 1988, the responsibilities of local, provincial and central government for collecting revenue were defined; and local and provincial governments were made respon-

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sible for providing fixed revenue sums to the next higher tier of government. In effect, a system of cascading taxation revenues was established, whereby townships provided a certain proportion of revenues to the counties; these passed on a certain proportion of their revenues to the provinces; and in turn, provinces passed on a certain proportion of revenues to the centre (Oi 1999). These changes certainly stimulated local decisionmaking power over local finance and reduced the degree of central control over provinces and localities. But it weakened the central government’s capacity to manage the macroeconomy and allocated all growth in revenues to the provinces; furthermore, since local tax bureaus collected the taxes, their power to reduce and exempt firms from taxes led to loss of central revenue. Thus the proportion of the whole national fiscal revenue that accrued to the central government fell from 57 per cent 1981 to 39 per cent 1992. And in practice, the central government had to continue to redeem the losses of local governments. The central government was forced to borrow. A new scheme came into force on 1 January 1994. This reassigned the nature of the responsibilities for expenditure between the centre and the provinces. Taxation income from a province is shared between the province and centre according to their needs for expenditure. Rules were set to govern the transfer of revenue to provincial budgets. The system of value added taxation was transformed. As a consequence, the central government clearly now receives the main revenue streams but the system continues to provide incentives to the provinces to collect revenue (Liang 1994). The effect has been a substantial redistribution of economic and social power between the central government and the localities. The implications of this redistribution are clear in the re-emerging interregional income disparities and in the scale of rural industrialisation. That is, globalisation has woven its magic in China in large measure by the redistribution of power and incentives from the central to the local state: the reterritorialisation of power in China has been critical to the patterns and rates of economic growth achieved since 1978. Consider, first, the question of rural industrialisation (see Oi 1999). Under the revenue sharing arrangements, governments down to the level of the township are required to collect taxes; a portion of the revenue (often 30 per cent) is then sent up to the next higher level of government. The more a locality collects, the more it can keep. Localities (townships, counties or even provinces) that could not meet assumed normal expenditure needs received a subsidy. The taxes col-

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lected in this manner are profit taxes on enterprises and industrialcommercial/circulation taxes (on production, income or sales), again from enterprises. These forms of income comprise within-budget revenue. There is also extra-budget revenue – a variety of local taxes, contracted profits, management fees, enterprise retained profits and the like – that is retained in their entirety by the localities that collect it. Localities also have the right to determine the use of their retained revenues, including the payment of bonuses to cadres. The system leaves a clearly defined residual, over which the locality cadres have property rights. Oi (1999: 95–138) explains how a form of local state corporatism was adapted from the Maoist bureaucracy to develop the revenue streams that could meet local obligations. The old bureaucracy extended deep into counties, townships and villages. At county and township levels are the key economic commissions and agencies, dominated by party cadres. These levels are linked, rather like a corporation: a corporate headquarters in the county; regional locations in the townships; and local companies in the villages. The functional hierarchy includes: 1. County: oversees and guides the direction of growth, including arranging inputs and bureaucratic services. Led by rotating party cadres, the key industrial duties are to issue licences to operate, certify products, provide credit and loans, arrange materials, assess credit ratings, and guide information and technology. 2. Township: guides the direction of growth of the township, and liaises between village and county. Key industrial duties are to contract enterprises, issue credit and loans, supply materials, guarantee loans, and make production decisions. 3. Villages: with much more limited resources, their success is heavily dependent on the initiative, skill and contacts of the party secretary and village head. Key industrial duties are to contract enterprises, make production decisions, manage investments, procure materials and credit, and coordinate. This bureaucracy has in the 1980s and 1990s acted rather in the mode of the east Asian NIEs (see, too, Ho 1994). There are guidance plans, intended to direct growth, by offering advantages to those factories that meet production plans. There is preferential treatment in access to loans, often through ranking enterprises for access to loans, materials, tax breaks and the like. Credit allocation has been especially important. And the bureaucracy has been an important source of information and technology – through its contacts in the cadre networks and in other

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enterprises (these connections are especially important for TVEs that seek contracts with large urban firms). Some have set up equipment supply corporations, that in effect offer search, set up and training functions for enterprises that are seeking new machinery. As Oi (1999: 138–60) observes, as these functions have developed, the Chinese state faces the problem of principal and agent: the agents always know more about the actual level of implementation and performance at local levels than principals and they may use that information to further their own interests rather than the principals’. While there are checks on local uses of power – the hierarchical bureaucracy and the (less than complete) distinction between government and party officialdom – nevertheless the changes have tended to encourage local officials to comply minimally with other arenas of policy (especially tax collection) than local economic growth. Indeed, in many respects, the new policies have created a system in which the local officials have become the principals. The transformation thus created a system in which economic growth was promoted by a bureaucracy. Rural industrialisation strengthened the power of the local officials as the central state lost much of its capacity to regulate, especially in the more developed regions of the country. The evolution of this system depends, then, on the newly emerging distribution of powers, between the different levels of government, between the localities and within them. Regional disparities are drawing opposition from those who have been left behind. Furthermore, while the local state has played a key role in the rural industrialisation, the newly emerging local entrepreneurs and their cadre friends are gathering even more power. The extent of local redistributions within collective enterprises may not be sustained when more individualised enterprises emerge. As the central government’s share of total government revenue fell, so it also gave to the provinces a greater autonomy to make decisions about development. The changes opened the door to growing provincial autonomy and provided the provincial leaders with more resources and autonomy (Lin Z 1998). As a result, the administrative experiences of the provinces have increasingly diverged. Cheung (1998), for example, distinguishes between provinces that were pioneers (maximising the room for provincial initiative; trying policies not condoned by the centre; taking risks; and defending provincial interests); those that were bandwagoners (operating within the confines of central policy; implementing policies after they were promulgated; unenthusiastically defending provincial interests; taking fewer risks); and those

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that were laggards (not favouring change and sceptical of the market). Thus the implications of the new policies were quite different in the various provinces, largely because of differences in the quality of their strategy of development and of its implementation (see, too, Lin 1997). Province by province since the mid 1980s, the rate of growth of output has depended principally on the rate of growth of the local capital stock. But that stock in turn has depended largely upon local rates of savings and local rates of foreign direct investment. In turn savings and foreign investment are directly correlated with levels of per capita income (Wang and Hu 1999: 143–68). There are interregional movements of capital too, but these have become minor in the 1990s. In other words, local savings primarily depended on the level of economic development. Therefore advanced provinces had an edge in mobilising local savings. In the early 1980s, this advantage was discounted because substantial proportions of the savings of advanced provinces were exported to poorer provinces. Later, though, richer provinces were allowed to keep higher and higher proportions of their savings and their local investment rate thus accelerated. For foreign investment, too, advanced provinces with preferential policies had the edge. According to Wang and Hu (1999: 169–98), in the 1980s, trickle down theory and the desire to speed up growth contributed to an active policy of stimulating the advanced coastal provinces. By the early 1990s, though, the less advanced provinces were agitating more and more about this bias in development policy and a policy to narrow the interregional gaps was embodied in the Ninth Five Year Plan (1996–2000). However, as this policy stance was revised, so the government had lost redistributive capacity. Between 1978 and 1994, budgetary revenue declined as a proportion of GDP in virtually every province; but the provinces with highest ratios experienced the fastest declines. China’s government revenue as a share of GDP fell from 31 per cent in 1978 to less than 11 per cent in 1995. Its capacity to invest shrunk correspondingly. The share of fixed capital investment financed by the state fell from 30 per cent to 3 per cent. There was far less redistribution through the budget in 1992 as compared to end of the 1970s and early 1980s. Thus, the newly emerging regional disparities noted by Long (1999) and others.

3. Rural markets As well as changing the regulations that control its interactions with the provinces, the central government has since the late 1970s modi-

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fied the institutional framework under which farmers operate, altered the conditions of operation of state-owned enterprises, revised fiscal responsibilities between local, provincial and central levels of government, sanctioned new forms of enterprise, and relaxed its degree of control over price and production decisions by people, households and enterprises. Until the mid 1980s, change was concentrated in agriculture; later, the focus shifted to urban production and market forms of resource allocation. In this section, the changes in the rural production sectors are examined. Beginning in the late 1970s, the central government sanctioned the decollectivisation of agriculture, approved the household responsibility system and raised agricultural prices (Carter et al. 1996; Findlay et al. 1993). By the mid 1980s, the key elements of the new system of management were in place. Land remains owned by the villages but is contracted to households for farming. Peasants may not sell land, but can subcontract it to others and can hire labour to help farm it. The peasants pay a tax to the government for the use of land; produce an agreed amount of particular crops (grains, cotton, oil crops) to sell to the state at plan prices; and pay a levy to the village to maintain collective services. All other means of production can be owned and managed by the household. Apart from their contract obligations, households can plan production and dispose of labour as they like. The state continues to manage some key agricultural markets through planned purchases at state prices and subsidised distribution (Carter et al. 1996; Garnaut and Ma 1996). Beginning in the late 1980s, the government sought to liberalise commodity prices and financial markets. But this has proved difficult and has taken a long time, for policy has oscillated (Huang 1996). Thus the state still procures more than a quarter of the grain output (Carter et al. 1996) and, in particular, has not freed local labour markets. As a consequence, there remain large financial transfers out of agriculture, equivalent to perhaps 20 per cent of agricultural GDP (Carter et al. 1996). The rapid spread of the household responsibility system increased productivity and stimulated institutional changes in rural areas (Carter et al. 1996; Findlay et al. 1994). The commune system was finally dissolved in 1983. An increase in state procurement prices, the widening permission to sell above-quota production of most agricultural products in the free market and higher prices – all contributed to increased agricultural production (and productivity). Peasant households devoted more resources to producing vegetables, meat and other higher value farm products (Figure 4.1). Despite this, grain production has contin-

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China’s Transition to a Global Economy 250 Agriculture

Index number

200

Cereals,Total Livestock Non Food

150

100

50

0

1960

1965

1970

1975

1980

1985

1990

1995

2000

Year Figure 4.1 Indexes of agricultural production, China, 1961–2000 Note: index numbers are calculated so that 1989–1991 = 100. Source: FAO 2001 FAOSTAT Electronic Database, downloaded 14 August 2001. For additional data on agricultural output, see Heilig G K 1999 Can China Feed Itself? Laxenburg, Austria: IIASA CD-Rom.

ued to increase, though not as rapidly as the output of livestock and cash crops. Nolan (1990) provides a sensitive discussion of the social implications of these changes. According to many observers (see Oi 1999; Xu 1995), rural industrialisation has been at the core of the Chinese economic miracle. To a large degree this growth occurred with a high degree of state and collective ownership of resources. (In some regions, such as Wenzhou, private enterprise was more important than collective enterprise (Dong 1992); but Wenzhou was until the 1990s a special case (Oi 1999: 1–16).) Rural industrialisation had a variety of causes. The household responsibility system offered an incentive to households to use their underemployed members in more productive activities, either locally in private or communal enterprises or temporarily in more distant cities. At the same time, agricultural prosperity created a rural market for consumer goods and spawned savings that funded investment in rural enterprises. Perhaps more importantly, the new revenue-sharing arrangements between central, provincial and local governments induced lower level governments to encourage forms of production that could contribute

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to revenue (Watson et al. 1996). There emerged a whole variety of enterprises, including collectively-owned township and village enterprises as well as private, state-private and collective-private enterprises (see, too, Marsh and Yuasa 1998). Since 1978, output from rural enterprises has grown at more than 20 per cent annually; and by the mid-1990s, rural enterprises produced a third of total industrial output and a quarter of exports (Chen et al. 1994; Oi 1999; Xu 1995). Rural enterprises produce simple consumer goods (including processed foods) and services such as distribution, restaurants and shops – the kinds of commodities that had been largely ignored during the Maoist emphasis on heavy industrialisation. Chen (1990), Dong (1992), Johnson (1994), Lin (1997) and Xu (1995) all describe the forms of rural industrialisation in different parts of the country. Despite the common institutional structure, this new rural economy operates in quite different manners in different regions of the country. In villages of northern Jiangsu, village leaders have dual priorities: to meet their revenue targets by developing income streams (and in this industries are more productive than agriculture), while also meeting quota targets for grain and cotton (Liang 1994). These priorities are resolved through a Unified Management System, through which village leaders exercise controls over land allocation, crop mix, irrigation, pest control, and labour and other inputs into village factories; all within the constraints of fixed total land area, input markets, state ownership of land and restricted labour migration. In effect, what happens is that village leaders offer contracts for grain and cotton to individual household heads, using as incentives, access to subsidised fertilisers, marginal adjustments to land holdings, and prospects for off-farm work in village enterprises. The villages operated as mixed farming–industrial enterprises, maximising income subject to resource constraints and the targets set by higher level governments. By contrast in villages south of Huhehaote, Inner Mongolia, decision taking is far more decentralised. One principal cash activity is keeping dairy cattle. The village households are farm households, raising vegetables for own consumption and corn for their one or two cows. The milk from the cattle is sold to a nearby dairy for ice cream manufacture. The factory is privately owned, though the villages have constructed a communal milking shed. These activities fully occupy about one person per household. The remaining cash income is derived from working as a labourer in a construction contract team organised by one of the villages’ new rich. If young adults do not work in household duties, then they become members of this floating population, working

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in Huhehaote and nearby cities. Unlike the villages studied by Liang, however, these villages did not operate as corporate enterprises: farmers made individual decisions as did those who decided to work in the city as a contract labourer. The commonality of their decisions arose from the constraints on their choice, not the orchestration of their choice. In the Pearl River Delta, agricultural change within villages is driven by their close connections to nearby cities and export markets (Lin 1997). Many rice fields have been turned over to commercial crops, often on a very large scale. But rice cultivation has to continue (to meet contracted rice quotas): some households simply make a cash payment to the village instead of a rice payment; others hire people from poorer regions to do their farming. Another solution has been to amalgamate the rice fields of a township and contract a good farmer to produce the rice. Some of the new farms are very large indeed (one of 1300 mu is described), and a team of 20 or so labourers is hired by a management company to do the farming: the company has to meet a quota to the district and then can keep all production over that minimum. All of these innovations leave many landholders in a household to pursue other, more profitable activities. These forms of agricultural restructuring have led to greatly increased per capita income and so rapid growth of savings; they release a substantial number of surplus rural labourers, so that agricultural labour productivity rises; peasant demand for manufactured goods, farm inputs and consumer goods all increases; the market functions of small towns are revitalised. These processes are closely intertwined with rural industrialisation and, despite the movement of labour out of agriculture, there is now a shortage of rural labour. The degree to which markets have penetrated the countryside has evidently risen dramatically, though it is not always easy to measure this change. We shall attempt to assess the changes first for agricultural production and secondly for nonagricultural rural production, before discussing the implications of access to land. It is clear that household farm production is increasingly oriented towards the market. Peasants are increasingly independent commodity producers rather than subsistence producers. The most comprehensive – though now dated – assessment of this trend was reported by Khan et al. (1993), based on a survey of over 10,000 rural households, for the year 1988. According to this survey, of an average rural household income (including income in kind) of 760 yuan per year, 73 per cent was derived from the sale or subsistence consumption of farm products. Of farm production, 44.6 per cent was cash income; the remainder was consumed directly by the farm household. Other forms of income

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included cash income from labouring (8.6 per cent), the imputed rental value of housing (9.6 per cent) and a variety of other transfers (including dividends from village enterprises). Furthermore, the state still procured over a quarter of the grain output (Carter et al. 1996). By the end of the 1980s, then, rural agricultural production was almost equally balanced between commodity and subsistence production, though some of the measured commodity production was in fact mandated by the state through grain and other quotas. As the examples of the different regional economies make clear, there are wide regional variations in the ratio of commodity : subsistence production. The social relations involved in rural nonagricultural production are much less clear. Rural areas contain a variety of forms of private enterprise (the Wenzhou model, according to Yuan 1994). Often, even in advanced regions of China, these are small scale. Chen (1990), for example reports that the average size of household enterprises in Wenzhou was 50 employees, producing an average of 300,000 yuan per year. Small villages in Shanghai municipality contain clusters of households, each hiring one or two migrant workers, to supplement the household labour force in producing components for local factories (what Yuan 1994 calls the suburban model of rural industrialisation). As Chen reports, these are really petty commodity producers, though they have accumulated their own (or pooled their extended family’s) capital. Of course, villages are also home to larger scale enterprises, often comprising construction gangs of local young men working in nearby cities. However, much rural nonagricultural production occurs in communally-owned township and village enterprises. One of the most detailed studies of the social relations of work in such enterprises is Ho’s (1994) report on industrialisation in rural Jiangsu. • The managers of collective enterprises are contracted by local governments to manage for a fixed period. Typically, enterprises are contracted to employ all the workers who are allocated; to manage production and marketing; and to meet annual targets. Smaller enterprises tend to have contracts in which the contractor pays a fixed fee and then absorbs all the remaining profits/losses. Larger enterprises have a contract in which remuneration is tied to performance and above-quota profits are shared. • The capital requirements of communal enterprises are met principally by local savings (loans from peasants who seek employment in the TVE), the Agricultural Bank of China and the community surplus (resources controlled by the local government, mainly profits).

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• Local governments have used TVEs to absorb underemployment in agriculture, typically distributing jobs more or less equally among the households in the community. • Wages are determined: (i) as base pay, paid when workers achieve targets of production, quality, raw material consumption (these are usually not difficult to achieve); (ii) bonuses, monthly and at the end of the year, for achieving over target, and (at the end of the year) in relation to profits; and (iii) food and other subsidies. Bonuses transfer some of the profit risk to employees, but reduce their employment risk. Over time, incentive payments, such as bonuses, have become larger shares of total pay; and are relatively larger in more developed regions than in less. Wage levels vary between townships, generally in relation to average levels of well being there: cadres appear unwilling to let the agricultural–industrial wage differential get too large. The distribution of jobs equally to households has a similar effect. Wage differentials within enterprises are not large – of the order of 30–80 per cent. Since wages are not strongly linked to performance, the performance of TVEs seems to rely on the fact that workers are hired annually or seasonally and the contracts of unsatisfactory workers are simply not renewed. There is relatively little employment of people outside the local community. In other words, TVEs are more than just production units: they are operated to increase communal well being. The evidence from such accounts seems to be that communal enterprises certainly operate in product markets, but that their needs for labour and their internal operations are less than fully market oriented. (Meng 2000, however, claims that TVEs are becoming more market oriented in their decisions about hiring and firing labour and about pay rates; and Sargeson 1999 describes the evolution of TVEs into enterprises that operate more like private firms.) Private enterprises operate more like capitalist firms than do communal enterprises and are more common in some regions than others (Yuan 1994 discusses different models of rural industrialisation). Official data indicate that the proportion of rural income that is derived from non-farm work has risen rapidly. The share of net household income (including income in kind) that is derived as cash income from labouring has risen from 19.5 per cent in 1985, through 21.1 per cent and 23.9 per cent in 1990 and 1995 respectively, to 30.3 per cent in 1999 (SSB 2000). (However, cash income from labouring includes income from working on other people’s farms and remittances from temporary workers in cities. To this extent, these

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figures overstate the proportion of rural household income that is derived from rural industrial enterprises. On the other hand, income earned by migrant workers in villages is not included.) The proportion of rural household income that is earned from commodity production varies widely between the provinces of China. Two measures of this proportion are illustrated in Figures 4.2 and 4.3. As Figure 4.2 indicates, while the two measures have quite different absolute values, the correlation between them is high: r = +0.70. Evidently, too, both measures are highly correlated with average rural net income in each province (r > +0.82). Provinces in which average rural net income are high tend also to be provinces in which labourers’ remuneration forms a high proportion of total rural household income and in which a high proportion of rural household expenditures are in cash. Cash income from labouring represents less than 10 per cent of rural household income in such provinces as Hainan, Tibet and Xinjiang, but over 50 per cent in Beijing and Shanghai municipalities. In Figure 4.3, these two indices are combined to illustrate the provincial geography of rural commodity production. This new regional geography is rather less the coast–inland geography of development that is commonly represented than a core–periphery geography. The two regions with the highest levels of commodity production are centred on

1 0.9 0.8

Proportion

0.7 0.6 0.5 0.4

Labourers' remuneration

0.3 0.2

Cash expenditures

0.1 0 0

1000

2000

3000

4000

5000

6000

Net income (yuan / capita / year)

Figure 4.2 Labourers’ remuneration as a proportion of rural household income and cash expenditures as a proportion of rural total expenditure, in relation to average net household income, provinces of China, 1999 Source: SSB 2000 China Statistical Yearbook.

Qinghai (0.362)

0.6

Yunnan (0.372)

Sichuan (0.463)

Gansu (0.387)

Ningxia (0.472)

Inner Mongolia (0.395)

Beijing (0.778)

Heilongjiang (0.422)

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The relative level of commodity production

Tibet (0.387)

Xingjiang (0.378)

500km

78

0

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Beijing-Tianjin and on Shanghai and its neighbouring coastal provinces; away from these two cores, the degree to which rural production is commodified tends to diminish. Perhaps, then, about a third of rural household net income is earned as cash from a variety of labouring tasks. About a half of agricultural income is earned from cash sales rather than subsistence production. Both these measures vary widely over the country. The measures indicate the extent to which markets have penetrated rural China. The agricultural income is overwhelmingly from petty commodity production, except perhaps in some regions like the Pearl River delta. Furthermore, qualitative information indicates that much nonagricultural work in rural areas takes place under conditions that do not conform to capitalist markets. As Ho (1994) reveals, the goals and labour management practices of many communal enterprises reflect social norms of organisation rather than profit oriented norms. However, perhaps the most widely identified constraint on the development of purely capitalist forms of markets in rural China is the distribution of land. While Hinton (1990) claims that the dismantling of the communes led to increased class differentiation, especially capitalist relations of production, McKinley (1996) argues that so long as land is equally distributed and the principal means of production are collectively owned, there may be small increases in inequality, but there are safeguards against the emergence of capitalist relations of production. Indeed, McKinley’s evidence is that the distribution of assets, especially land, in rural China is much more equal than the distribution of incomes. The distribution of land within provinces is more equal than the national measure of equality. Less than 4 per cent of rural households are landless, and fewer than 17 per cent of them fall below Riskin’s (1996) measure of poverty. Evidently the degree to which peasants have become labourers without assets is still limited.

4. Urban markets The government has sought also to place state-owned enterprises on a more commercial footing. In the Maoist system, SOEs were required to hand their entire profits to the state. They were protected, by being given fixed plans to meet and fixed prices at which to meet them. SOEs also performed a variety of social functions: as well as providing a workplace for their labour force, they provided education and health facilities, housing and retirement benefits (Byrd 1991). Thus, to increase the degree of market orientation of China’s SOEs is fundamentally to alter

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the system of social welfare within urban areas (Dutton 1998). As a consequence, modification of the rules of operation of SOEs has proved contentious. Yet, as responsibility for economic planning in China has been increasingly consigned to the market, SOEs have been obliged to change. After the Third Plenary Session of the Twelfth Party Central Committee, in October 1984, SOEs were given increased independence, their managers were made responsible for performance, and their markets were opened to more and more competition (first with other SOEs; later with private enterprises). SOEs were provided stronger profit incentives (Byrd 1991); perhaps 30 million workers have been laid off, of which perhaps a quarter worked in SOEs (Qian and Wong 2000; see also Benson and Zhu 1999); and incentive pay systems have been introduced (Chai 1997). In general, government control of the operation of SOEs has become less direct (Shi Z 1998a). Despite attempts to eliminate the losses that SOEs make, these losses have continued (Field 1996) and it remains rare for enterprises that make persistent losses to be declared bankrupt (Chai 1997). (Since SOEs have so many social obligations that are not faced by their privately-owned competitors, it is hardly unexpected that SOEs are in general loss-making enterprises.) Accompanying these changes have been revisions to the legal framework within which enterprises operate. To some extent, the rule of law is replacing bureaucratic administration. In the 1990s there has been banking, financial market and commercial legislation, such as national laws on guarantees and loans. The Company Law was enacted in July 1994, providing legal consistency to both foreign and domestic firms, and introducing limited liability companies and share-issuing companies. China’s systems of accounting are becoming westernised, reflecting an orientation to identify the profitability of enterprises. The Anti-Unfair Competition Law, enacted in December 1993, has been little used, though there is much public support for the Consumer Protection Law, implemented in December 1993. The Enterprise Bankruptcy Law was implemented in November 1988, but the government still prefers that failing enterprises be merged or acquired, and until the late 1990s there were few bankruptcies. To a large degree, however, the restructuring of SOEs has been complemented by the relaxation of rules permitting other forms of enterprise to operate. Enterprises can be privately owned; foreign-invested; invested from Hong Kong, Macao or Taiwan; or joint ventures between these forms and Chinese state or communal enterprises (see also Chapter 5). An indication of the growth of these new forms of enter-

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Making Markets 81 Table 4.1 Sectoral and ownership structure of employment, 1978 and 1998 Sector

Ownership

Primary Secondary & Tertiary of which

Source:

State owned Township & village Urban collective Individual Private Foreign funded

Percentage of labour force 1978

1998

72 28 59 22 18 1

50 50 27 38 9 19 5 2

SSB various years Statistical Yearbook of China.

prise is given in Table 4.1. Until the mid-1990s, employment in stateowned and collective enterprises was still growing, though since then there has been a dramatic collapse in employment in such enterprises. As a consequence, their share of urban employment has fallen from over 90 per cent in 1990 to about two-thirds in 1998. Various forms of private employment and self employment have been growing rapidly. The degree of importance of state-owned and collective employment is quite different in different parts of the country: see Figure 4.4. Over three-quarters of all employment is in state-owned or collective enterprises in Xinjiang, Tibet, Qinghai, Shanxi and Beijing; but only a half or so in Guangdong, Fujian, Zhejiang and Tianjin. The most developed private economies are to be found in the south of the country and the least developed in the north and west. Outside the three westernmost provinces, the regional geography of the urban private market is quite different from the regional geography of rural commodity production, at least at a provincial scale. As a consequence of these changes, in many sectors of the Chinese economy, enterprises now operate in a market-oriented environment, which has rapidly displaced much of the command economy. Central to this change has been the liberalisation of prices. From 1979, price controls were progressively removed from a growing proportion of consumer goods and non-grain foods, and plan prices for other goods were raised towards market prices. In 1992, prices for coal, crude oil, steel, grain and cooking oil were partially deregulated. Over 90 per cent of retail prices and over 80 per cent of agricultural and raw materials prices were set by the market in 1995 (IMF 1996: 61–3; World Bank 1996: 24).

75%

Qinghai (77)

Jilin (67) Liaoning (66)

Tianjin (59) Hebei Shanxi (69) Shandong (76) (65)

Inner Mongolia (61) Ningxia (73)

Beijing (76)

Heilongjiang (69)

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Employment in collective and state-owned enterprises as percentage of all urban employment

Tibet (80)

Xingjiang (80)

500km

82

0

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Making Markets 83 Table 4.2 State-controlled prices in China, mid-1990s Sector

Remaining state controlled prices

Agriculture and resources

Cotton, tea, some timber, urea, salt, grains (including wheat, indica rice, japonica rice, maize and soybean). Ten per cent of all grain is subject to state price controls. Crude oil, natural gas, petrol, diesel & heavy oil, 58% of domestic electric power, irrigation water, domestic water Ammonium nitrate Railway steel, aircraft, engines Chemical, biochemical, medicinal, veterinarymedicinal products Telecommunications, public transport, urban housing

Energy and water

Chemicals Transport goods Pharmaceuticals Infrastructure services

Note: This list does not refer to those prices over which local governments have jurisdiction. Source: Department of Foreign Affairs and Trade, quoted in EAAU 1997: 77.

Most sectors of industry are now free of plan obligations and no longer receive subsidised inputs. However, the prices, procurement and distribution of some strategic commodities remain subject to intervention (see Table 4.2). The EAAU has assessed the degree of competitiveness within the Chinese economy by assessing the differences in rates of profits between different industries. SSB data indicate that profit rates (profit plus tax/total fixed capital, where total fixed capital is defined as depreciated fixed capital plus working capital) have become much more equal between industries since 1980 (EAAU 1997: 79) and somewhat more equal between provinces since 1986 (EAAU 1997: 81). If industries have approximately equal rates of profit, it is presumed that those industries are competing more or less equally for capital. All these changes mean that work in urban China has become substantially more market oriented. Private and foreign funded enterprises are generally presumed to be acting like capitalist enterprises, organising work and buying and selling to make a profit. Generally, stateowned and collective enterprises have been forced to operate within competitive product markets too. However, there is evidence that the market orientation of such enterprises is less than complete. Thus Benson and Zhu (1999) observe that, despite the institution of individ-

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ual employment contracts, state owned enterprises are still required to find or create suitable jobs for redundant workers, retrain them for new positions or allow them to take extended leave. Enterprise managers do seem to have become more profit oriented, at least according to surveys of attitudes (Chai 1997) and there has been some hardening of enterprise budget constraints but it is still rare for enterprises with persistent losses to be declared bankrupt. The institution of labour contracts to replace lifetime employment has gone some way to replacing the lifetime employment guarantees that formerly prevailed in state and collective enterprises (see Guthrie 1999). All firms since 1986 have hired new workers with contracts and by 1994, more than 25 per cent of China’s urban workforce was employed on contracts (the proportion was 41 per cent in manufacturing). Surveys indicate that many managers regard retired workers as a huge burden on a firm, especially when competing with private and joint venture firms that do not have this burden. Some firms, especially those with financial troubles, have responded by placing all workers on contracts. Still many firms have not placed all workers on contracts: managers refer to concepts like fairness (they worked for low wages in the past), loyalty (they worked for us for so long) and socialist ideals (firms are responsible for much of China’s social welfare system). Meng (2000), similarly, concludes that SOEs and collectives seem to work to a goal of maximising employees benefits rather than maximising profits. These are not purely economic decisions, but social, and they indicate the persistence of non-capitalist social relations within state and collective enterprises.

5. Migration: linking rural and urban markets According to Ma (1993), policy towards migration in China since the revolution can be divided into three periods. • First, between 1949 and 1957, migration was generally unrestricted, though it had to be documented. There was a rural–urban stream associated with indusrialisation and a stream from inland rural areas to border waste lands; • Second, 1958–84 was a period of restricted migration, since industrialisation was apparently unable to absorb all who had migrated to the cities. People could move to cities if they had an employment certificate from a urban workplace, were enrolled in a university, or had permission of the inmigrating city. There was substantial

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urban–rural migration associated with natural calamities and the cultural revolution; • Third, since 1984, migration has been partially restricted. Peasants could migrate to market towns, if they had funds for investment; could provide their own grain and accommodation; and had managerial skills (or if they had worked for a long time in town enterprises): such people became town residents, legally, and received subsidised grain, oil and the like. • More recently, however, several provinces have begun to remove controls over migration. Guangdong province has completely removed controls over migration (Ming Pao 4 September 2001); Zhejiang, Hebei, Beijing, Shanghai and Anhui have relaxed their restrictions on the movement of people. Peasants have in fact also increasingly migrated to cities, but (until very recently) without changing their household registration, and without receiving urban services, such as schooling, health care, police protection and subsidised basic commodities (Solinger 1999 describes in detail the circumstances and the politics of temporary migration in China). In addition, as suburban peasants have shifted into nonagricultural occupations, other peasants have migrated temporarily into suburban areas to farm their contracted land. There is very little control in practice over migration to rural areas from cities or to smaller cities from larger. Altogether, the main migration stream is rural-urban (Ma 1993). Now, in rural areas of the centre and the east of the country it is hard to find a household from which at least one male has not worked in a city at least temporarily. One consequence of the recent policy has been a break between locational and occupational shift. As peasants move to the cities, they shift residence, at least temporarily. But, by their household registration and their allocation of village land, they remain tied to the land and generally continue to do part-time farm work. Partly as a consequence, information about the rate of migration is scarce. As Solinger (1999: 15–23) notes, there is a huge range of estimates of the floating population, now centering on about 100 M, perhaps 60 per cent of them peasants, and representing about a quarter of the urban population. Perhaps a third of the floating population stays within its county of registration, another third stays within its home province and a third is interprovincial. A quarter of temporary migrants go to large cities, nearly a half to medium and small cities, and a quarter to the countryside. The recent (partial and localised) relaxation of the household regis-

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tration system and the current form of this migration stream carry two principal messages about markets for labour in China. The first message is the labour markets are not free (Carter et al. 1996: 40–52). Until the state has unified the system of social security, to make unemployment and health a social responsibility rather than one for localities and workplaces, and until housing and other urban goods are provided through markets, cities and towns have continued to seek to regulate the inflow of migrants, especially relatively unskilled migrants. As a consequence, there is a huge surplus of rural labour, perhaps 30 per cent of the total rural demand for labour (Carter et al. 1996: 53–68). Peasant households are forced to encourage some of their members to migrate because of the lack of arable land. Peasants are also attracted to urban areas by a widening urban–rural income disparity; the increasing pace of urban construction; rising demand for labour in the nonstate sector; and the rising demands for labour in the low wage service sector (Li 1997). The most obvious manifestation of this unfree labour market is, according to migration economists, the disparity in incomes between urban and rural areas (Figure 4.5). (However, it is not clear that interregional migration does actually lead to equalisation of wages: compare Allen 1994; Boyer and Hatton 1994.) The ratio of urban : rural per capita incomes, which had been over three at the end of the 1970s fell during the 1980s to a little over two, presumably reflecting the reorganisation of the rural economy. In the 1990s, however, the ratio has widened again, and is now over 2.6. (Khan et al. 1993 think that the SSB data underestimate the difference between urban and rural incomes.) However, the migration stream carries another, contrasting, message about labour markets, about the increasingly competitive labour market in urban areas. Solinger (1999: 198–206) observes that migrants were of three types, in terms of the resources that they brought with them: (i) (some) inlanders had ties to state, permitting placement in state owned units, with fair conditions and security; (ii) (some) migrants from the coast came primarily with social networks, and operated largely outside the state; (iii) many migrants came with neither of these resources: they are the true floaters. The networks, whether based in the state or in regional connections, created multiple markets for migrants, rather than a simple, dual labour market: formal and informal categories were each made up of diverse working conditions, and the floaters were highly diverse in their labour market positions. Within each sector, too, there existed a variety of markets (Solinger 1999: 206–38). For example, in construction as in manufacturing, some migrants found jobs in a state

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7000

Income (1999 yuan)

6000

Rural Urban

5000 4000 3000 2000 1000 0 1975

1980

1985

1990

1995

2000

Year Figure 4.5 Average rural and urban per capita incomes, China, 1978–99 Note: these incomes are those reported for official residents only. The data are per capita net annual income of rural households and per capita annual disposable income of urban households. The data are in prices of 1999. Source: SSB 2000.

company, subject to national regulations and subject to union supervision; others found jobs in private, collective or foreign invested companies, where conditions were far worse – often with no contracts, casual hiring and firing, low (and delayed) wages, embezzlements, extremely cramped housing, unpaid overtime, long hours, high accident rates, and physical abuse. Yet other migrants, with strong local connections, found themselves in migrant enclaves, such as Zhejiang ‘village’ in Beijing, working in sweat shops with only minimal community protection. In each trade, then, there is a variety of types of labour markets, with different norms of business, depending on connections and the form of the transition to markets – all though, set apart by hukou. As in capitalist western economies, migrants are subject to processes of labour market segmentation, for jobs are constructed around the characteristics of the available supply of labour. In effect, rural workers and rural–urban migrants in China face quite different conditions than in many developing countries (Ma 1993). In many developing countries, impoverished peasants, deprived

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of farm land and rendered surplus by mechanisation of agriculture, have changed occupations and location simultaneously. In China, when peasants move to the cities, they shift residence, at least temporarily, but their household registration ties them to the land and some of them continue to do part time farm work. Though migrants retain the security of land at home, and though their rate of migration may be lower than in other countries, their working life in the city is characterised by segmented, competitive labour markets.

6. Conclusion 1: developing markets Evidently the period since 1978 has seen a commodification of the Chinese economy, including of labour. The share of household production in total output has declined. Communal enterprises – in which people are hired and sometimes fired, in which some surplus is set aside for accumulation and to which prices are often set by a market – have become of increasing importance. State owned enterprises, the core of noncommodified industrial labour in China, have become of diminishing importance, being replaced by private and foreign-funded enterprises. There is some evidence that the conditions of valuation are becoming more equal in different enterprises and industries, but no evidence that conditions are becoming more equal in different regions within China. As the share of output that is traded increases, so conditions of production in China are set into competition with conditions of production in other countries, creating pressures for conditions of valuation to become equal in different countries. Yet we need be wary of interpreting these changes as a simple transition to a market economy. The changes have been slow and subject to periodic hesitations. There has not been widespread abolition of pre-existing social and economic forms but rather the tolerance (and sometimes encouragement) of new forms alongside the old or working through the existing institutions, while gradually transforming them or creating new ones. Many changes have not been introduced by the government but represent civil experimentation, later tolerated. The goal of a fully-fledged market economy, though declared, remains years off. Particularly, labour is bought and sold on an open market to only a limited extent. Although these new policy directions have induced rapid increases in average standards of living since the end of the 1970s, and have contributed to a much more obvious sense of commodity production for a market, nevertheless the Chinese government has yet to make the

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economy autonomous, independent of social life. In particular, at least until entry into the WTO, central government decisions about changes in policy have been guided by internal considerations, particularly the social acceptability of the new forms of markets. There are three senses in which commodification has been restrained, in the name of social cohesion. First, state-owned enterprises remain significant employers of labour. Many such enterprises remain non-entrepreneurial in their allocations of labour, their pursuit of markets and their product mix decisions. The bankruptcy law introduced in the late 1980s has still been rarely used. Though the government has allowed some enterprises to lay off workers and some firms have closed down completely, there has been widespread public unrest over such unemployment, especially in the more slowly growing regions away from the coast and the areas with a high degree of concentration of SOEs, such as NE China. To some degree the financial difficulties of the SOE sector arise from the fact that they are entities organised to provide a variety of social services to their employees/owners and yet they are now being expected to compete in a market against enterprises that do not carry such burdens. Secondly, much labour remains outside market forms of control (in many places, at least: see Figures 4.3 and 4.4). A high proportion of the official city labour force works in SOEs, which are still incompletely profit-oriented in their use of labour, or for the state; only a minority work for small businesses, private capitalist enterprises or foreign funded enterprises. The rural peasants either continue to work their land, under the household responsibility system, or work in TVEs (and most of them continue to hold onto their responsibility land, as an insurance). The third group, rural-urban migrants, take up jobs in the private sector, become self-employed or obtain temporary jobs in SOEs. Though their labour is indeed marketed, these individuals are only temporary members of this labour force, for many migrants intend to stay in cities only briefly, typically from two to three years. Third, it is different to assert that an increasing proportion of production is for the market than to assert that production is increasingly capitalist. Indubitably, there has been increasing production for the market, though within the limits we have noted. There is also increasing capitalist production, involving conditions of life and work that really involve commodity labour. But such forms of production are far more limited than market production – involving perhaps the new, private forms of urban economy and the labouring work performed by migrants.

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Yet it is reasonable to expect that the degree to which markets allocate commodities within the Chinese economy will increase. Not only have the terms of China’s entry into the WTO mandated some new policies, but the existing forms of competition between market and nonmarket forms of allocation seem to favour private production for markets. Private and foreign-invested enterprises are able to outcompete SOEs, for they are less burdened by social obligations and by historically-set expectations of managerial styles. Responding to what they regard as unfair competition, some managers of SOEs are seeking to divest themselves of these obligations. In the interests of local economic development (and, sometimes, corruption), cadres in many places are sanctioning the transfer of such social assets as communal enterprises into what is effectively private ownership (Sargeson 1999). And for many individuals the attractions of higher incomes in private forms of enterprise now outweigh the disbenefits of reduced job and social security within SOEs; for many rural households, even the low wages in private and foreign enterprises exceed agricultural incomes. Though SOEs and more private forms of enterprise can legally coexist, they have been set into an economic competition that continues to alter their relative weights within China.

7. Conclusion 2: regionalisation In effecting these changes to the operations of markets, the Chinese government has reorganised existing regional divisions of power. There have been two principal transformations. The government has rearranged systems of taxation and in effect ceded greater financial autonomy to the provinces and to sub-provincial localities. In addition, the government has gradually sanctioned changes to the boundaries between urban and rural life. These amendments to regionalisation have proved fundamental to the patterns and processes of globalisation in China. The new fiscal system has effectively given local officials at all levels a direct interest in creating wealth within their localities. The result has been a proliferation of models of economic development, depending on the capacity and innovativeness of local cadres and on the experiments that have been initiated within the regions. Provinces now differ widely in the degree to which their economies are marketised. Interregional variations in development models, in institutional resources, in natural wealth and in location have also contributed to newly widening levels of spatial inequality.

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The boundaries between rural and urban life have gradually been loosened, too. Rural and urban patterns of livelihood and social security are no longer so sharply distinguished as new systems of land management are introduced into rural areas and new models of social security take hold in cities. The standards of living of urban and rural workers are becoming increasingly interrelated. On the one side, rural migrants compete with urbanites for jobs, permitting wages and conditions in some sectors (such as construction, street cleaning) and forms of enterprise (such as small private and foreign invested enterprises) to fall below those deemed acceptable by most urban Chinese. On the other side, the incomes of the official residents of many suburban and industrialised counties depend on rents derived from the exploitation of rural migrant workers (Sargeson 1999). In a fundamental sense, then, markets in China are being created on the basis of place. At one level, the reallocation of powers between centre and locality and the redefinition of rural–urban boundaries have set the terms for China’s engagement with globalisation. At another level, the detailed form of that engagement are being worked out in ways that are particular to localities – that are different in different provinces, counties and townships. The processes of change on the ground rely on close interactions between local officials and the owners or managers of enterprises. And the daily lives of the people who live in those places are conditioned by spatial practices – by household registration, by preferences for local residents and by connections (guanxi). Many of these effects could not have been anticipated from the rather abstract changes in policy. The reterritorialisation that has followed from changes to markets is thus implicit in government policy, rather than being an explicit goal of the new regional divisions of powers.

This chapter and its two predecessors have identified several facets of globalisation in China – the increasing integration of trade, capital and production across China’s borders, the emergence of Chinese transnational corporations that are beginning to organise that integration, and the marketisation of the Chinese economy. The chapters thus represent a first pass at understanding how China has engaged with the global economy, presenting a picture of the forms of globalisation in China, observing change as a matter of both policy and evolution, and identifying new forms of regionalisation that are implicit in this globalisation. Several analytic directions are now important. First, in the

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following chapter, we shall examine in more detail the impact of one form of globalisation – the emergence of foreign, capitalist, market oriented forms of production – on the conditions of work in China. What does the emergence of marketed labour mean for conditions of work in factories? Second, the forms of regional analysis that were outlined in this chapter – those implicit in the new policies – need to be extended into understandings of the relationship between globalisation and the explicit manipulation of regions in China; this task occupies Chapters 6 to 8. How have the development of global forms of economy conditioned the regional development of the country and how has the state sought to manage the tensions between these several systems of valuation by reorganising regional boundaries? And thirdly, we need to understand how the emergence of new types of firms and the restructuring of SOEs have worked out in practice (Chapters 9 and 10). To what extent has the development of market forms of organisation in some arenas of the economy demanded compatible changes in other arenas?

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5 Foreign Direct Investment and Labour Relations Zhu Ying, Michael Webber and Mark Wang

1. Introduction Foreign direct investment (FDI) is one of the most important elements of globalisation. It has been increasing dramatically in China since 1979, when economic reform and the open door policy were implemented (Chapter 2), and it has been the single most important reason for rapid economic growth in the past two decades. By 1998, China had absorbed total foreign direct investment of US$234 billion, involving some 302,326 separate projects (SSB 1998). China is second only to the United States in terms of receiving FDI. Among the foreign-owned enterprises (FOEs) in China, the majority are in manufacturing industry, though the real estate sector is also significant. Other sectors share only a small proportion of total investment (SSB 1998). In China, FOEs come in three main types: the equity joint venture, the contractual joint venture, and the wholly-owned foreign enterprise. In the Chinese statistical system, this group has been categorised as Other Ownership Economic Units (distinguished from State-owned Economic Units, Urban Collective-owned Economic Units, Private Enterprises, and Individual Households), which include joint management units (joint ventures), stock ownership units (share holding companies), foreign funded units (wholly foreign owned firms), Hong Kong, Macao, and Taiwan Chinese-funded units. The contribution of FOEs to the national economy is significant. For instance, FDI accounted for an average of 2.5 per cent of total national investment in the 1980s, but this increased to 15 per cent in recent years (People’s Daily Overseas Edition 25 January 1997). The FOEs’ share of national industrial output increased from 7.5 per cent in 1992 to about 20 per cent in 1996 (People’s Daily 19 December 1996). They accounted 93

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for an even larger percentage of total national trade: 47 per cent in 1996 (People’s Daily 19 December 1996). Their contribution to taxes also doubled between 1992 and 1993 from RMB 10.7 million to RMB 20.6 million (Zhu 1995). In 1996, the taxes contributed by FOEs constituted 10 per cent of total national tax revenue (People’s Daily Overseas Edition 25 January 1997). In addition, FOEs are important in the creation of jobs. Whilst it is not possible to obtain figures on FOE employment in rural areas, by 1996 they were responsible for the employment of 9.6 million workers in the urban industrial sector (China Labour Statistical Yearbook 1997). FDI as one of the important forces of globalisation has a profound impact on employment relations and labour conditions. Three issues are investigated in this chapter: (i) the labour conditions within factories; (ii) effects on government policy to control FDI; and (iii) changes in the general conditions of labour that arise as a consequence of FDI, government policy, and the copying of FDI conditions in local enterprises. In China, some serious problems exist in the employment relations and labour conditions of many FOEs. The problems – though not unique to these enterprises – reflect the lack of workers’ benefits and working conditions. Problems include a lack of basic hygiene facilities, frequent industrial accidents, overcrowded working environments and exposure to pollution, high temperature and noise without protection, physical abuse, long working hours and low wages. The initial response from the government towards such problems was rather blurred and hesitant. Several reasons can be offered. First, in their enthusiasm for seeking foreign investment, some government officials (especially local ones) were less than energetic in supervising and regulating FOEs. Second, endemic corruption among officials and public servants creates an environment in which foreign investors are able to avoid prosecution for violations of labour rights. Third, the means open to workers’ organisations to protect workers are inadequate. At present, the rate of organised unions in FOEs is still low. Finally, labour law and labour regulation have been in a state of transformation and uncertainty during this period. However, as the problems have become more serious, the government has become more concerned about political stability, and it believes that the industrial disputes occurring in FOEs could lead to turmoil. During the 1997 international financial crisis, the fragility of the economy and the high incidence of unemployment in the Asian region spurred the government to implement certain protection measures. Therefore, recent efforts of the government are tending to

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regulation (for example, the new Labour Law of 1995), through encouragement of trade unionism and more intensified inspection. This chapter thus tackles the relationship between globalisation, foreign investment behaviour and changing labour relations in the dynamic developing economy of China. The chapter says much about the implications of globalisation for the economic geography of daily life in China, revealing a set of outcomes that are perhaps not very different from those that appear in structurally adjusting countries. Section 2 reviews the relationships between globalisation and labour relations; section 3 illustrates the impacts of FDI on employment, forms of employment status, wages and non-wage benefits, human resource management and trade unions, and the different labour relations system between FOEs and SOEs; sections 4 and 5 examine the problems within FOEs and their impact on government policy and legislation. In conclusion, the major issues concerning the relationship between globalisation and changes in labour relations are identified. Generally speaking, FOEs have generated a special need for legislation due to their special status. Their foreign identity is different from that of conventional local enterprises and social expectations about their values and behaviour are different. FDI, as one of the important elements of globalisation, needs adequate legislative control to maintain social cohesion.

2. Globalisation and labour relations Three of the key processes of globalisation – the integration of financial and currency markets across the world; the integration of production, trade and capital formation in global corporations; and the emergence of functions of global governance – all find expression in the conditions under which people work and in struggles over those conditions. International capital is an important influence over the state’s economic decisions. Since states depend on investment and capital, states need to create a favourable environment for investment. Tight control of labour, restrictions on trade unions, the maintenance of low wages and long working hours, loosening of regulations protecting workers’ rights, and hesitancy in enforcing labour regulations over labour disputes can be seen as part of this effect – and are important in China. Furthermore, as governments and corporations alike have become increasingly dependent on borrowing in foreign currencies, and financial manipulation has become easier, so finance has gained an independent power over the real economy, as the 1997 Asian financial crisis indicated. In other words, foreign indirect investment can damage

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the jobs and productive capital created by foreign direct investment, though China is little subject to this effect yet. As corporations have restructured globally and reacted to intensified competition for global markets, so there has emerged a model of production that separates core and other functions. This model is based on a core-periphery structure of production in which core functions are carried out by a small number of employees who handle research and development, technological organisation and innovation. The periphery of the firm is responsible for the production process itself, and, because it is loosely linked to the overall production process, its components can be called into action according to the corporation’s needs. The new model of production has two consequences: one is the weakening of local trade union power and corresponding strengthening of the power of managers; the other is a reduction in the degree of control over production that can be exercised by individual state authorities. In the 1970s, offshore production was considered a novelty adopted by a small number of innovative companies. By the 1990s, it had become a necessary survival strategy for organisations. In the past two decades, integrated international production systems have become common practice. The use of computers and new communication technologies in business has enabled companies to develop sophisticated logistic management systems that make the coordination of international production activities viable. Furthermore, advances in transport technologies have enabled companies to manufacture different parts of a product at locations that offer the lowest cost. As a result, capital moves across national boundaries in search of the lowest production costs. Certainly, China is among the most attractive places for FDI because of its abundant cheap labour and huge potential market. In addition, there are recent indications that the integrated production system is giving way to international subcontracting of production capacity. Jaikumar and Upton (1994) and Hoogvelt (1997) describe how companies like Nike use the internet to make loosely-linked providers of flexible production capacities bid competitively for subcontracting orders meanwhile avoiding responsibility for the conditions under which labour is carried out. Nowadays, new technology, transport and communications systems enable TNCs to use parts sourced from all over the world and to become marketing agents with limited assembly capacity of their own. There is wide debate over the social and political implications of these developments. All these factors according to Falk (1992) have resulted in a significant loss of control by states over national economic policy.

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This is defined as ‘globalisation from above’ (Falk 1992). In contrast, transnational social forces that have managed to establish links between local action and global campaigns such as international human rights movements and labour movements are promoters of ‘globalisation from below’ (Falk 1992). These transnational social movements push for the establishment of a global civil society (Hyden 1997). In these respects, the new global environment poses a serious challenge to the state and labour movements. However, the influence of the emergence of functions of global governance on labour relations in China is partial and incomplete. The ILO has some influence on Chinese policy towards regulations on employment contracts, collective bargaining, social insurance and so on. However, the role of the ILO is to facilitate the Chinese government to form its own rules and at the same time to persuade the Chinese to follow ILO conventions. The Chinese government still holds the power to interpret the rules and avoid politically sensitive issues such as an independent trade union movement. In addition, international trade unions have had little influence in China for historical reasons. The links between western trade unions and the Chinese trade unions were broken after the establishment of the PRC in 1949 and the All China Federation of Trade Unions (ACFTU) withdrew from membership of the International Communist Union Movement. The ACFTU functions as a transmission belt between Party-State and the masses, under the leadership of CCP. Thus, so-called ‘external influence’ has been limited; for example, pressure from the international union movement on China to form independent unions has been ignored by both Party-State and the ACFTU. Thus, transnational production systems, as exemplified by FOEs, form the principal link between globalisation and labour relations. Can the state perform a meaningful role vis-à-vis international capital? What institutional transformation is required to maintain a balance between attracting foreign investment and protecting labour rights in a developing economy?

3. FDI and its impact on labour relations The workforce of FOEs includes foreign employees and local employees. The large number of FOEs in China has created significant employment opportunities for both the Chinese workforce and foreign professionals. In recent years, more than 100,000 expatriates have been employed in FOEs. Most of these are managers and technicians (Zhang 1994). The

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wages of these expatriates are ten times their local counterparts’ earnings. Special accommodation, shopping centres, entertaining centres and education facilities exist for foreign employees and their families. The local employees are mainly blue-collar workers, though some managerial staff and technicians are also recruited locally. In the 1970s, when FDI began into China, SOEs operated under a system of central labour allocation and the overwhelming majority of workers in urban SOEs were permanent employees. This lifelong employment system represented a guarantee of security – the so-called ‘iron rice bowl’. Under this system the recruitment, allocation, employment permit, transfer and dismissal of workers were all subject to the official approval of state labour personnel departments at the appropriate level (see Zhu and Campbell 1996: 32; Simon 1996). Wages were based on a nationally standardised wage system, comprising eight grades for manual workers, 15 grades for technical workers and 25 for cadres (Zhu and Campbell 1996). On top of the basic wage were a range of supplements and allowances, incentive payments and bonus payments. Most important, the enterprise (in other words the work unit) could also be the site of delivery of a wide range of non-wage benefits, including subsidised housing, subsidised meal halls, free kindergarten and day care, medical care, retirement payments, funeral expenses, and a variety of other subsidised activities. The value of these welfare benefits amounted to 14 per cent of the total money wage bill (Hu and Li 1993: 167–8). However, FOEs operated according to labour regulations that were different from those which applied in local firms such as SOEs. Whereas SOEs could not recruit labour but were allocated workers by labour bureaus, new regulations were set in place to permit FOEs the autonomy to recruit employees directly. FOEs recruit by several means: public advertisement; introductions from employment agents, local labour bureaus, and individuals who are already working in FOEs; and participation in the local labour market to recruit blue collar workers or in ‘intellectual exchange centres’ to search for managers and technicians. (Intellectual exchange centres are employment agencies for professional workers.) Nationally, employment in FOEs as a proportion of total employment is still relatively small (Table 5.1), and insignificant compared with employment in SOEs and collective-owned enterprises (COEs). Nevertheless, FOEs have a higher rate of growth of employment, especially since both SOEs and COEs have reduced their workforces through the rationalisation and laying off superfluous workers in recent years.

93.33 96.54 99.84 101.10 103.50 106.60 108.90 109.20 108.90 112.61 112.43 110.44 90.58

Staff & workers (millions)

3.4 3.4 1.3 2.4 3.0 2.2 0.3 -0.3 3.4 -0.16 -1.8 -17.9

–

Increase (% pa)

State-owned

34.2 34.9 35.3 35.0 35.5 36.3 36.2 33.9 32.1 31.2 30.2 28.8 19.6


2.0 1.2 -0.9 1.4 2.3 -0.3 -6.4 -5.3 -2.8 -3.2 -4.6 -31.9

–

Increase (% pa)

Collective-owned

0.55 0.72 0.97 1.32 1.64 2.16 2.82 5.36 7.47 8.82 9.62 11.09 16.75

Staff & workers (millions) – 30.9 34.7 36.1 24.2 31.7 30.6 90.1 39.4 18.1 9.1 15.3 51.0

Increase (% pa)

Foreign-owned

128.1 132.1 136.1 137.4 140.6 145.1 147.9 148.5 148.5 152.6 152.3 150.3 126.9


Total

3.1 3.0 1.0 2.3 3.2 1.9 0.4 0.0 2.8 -0.2 -1.3 -15.6

–

Increase (% pa)

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Notes: Domestic private enterprises (DPEs) and the informal sector also employ some of the national labour force. It is estimated that employment in the household sector reached 45.44 million and in the domestic private sector 10.14 million by mid-1996. However, data on employment in these sectors are inconsistent. Source: China Labour Statistical Yearbook 1995, 1997 and 1999.

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Year

Table 5.1 Urban employment, by enterprise ownership, 1986–98

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Workers in FOEs tend to be relatively young, and have received more education and training than employees in other types of firms (Verma and Yan 1995). In addition, FOEs generally pay higher wages than other firms and spend more on training due to their technical and quality standards. Furthermore, in some regions, FOEs have employed a large number of local industrial and migrant rural workers, especially in the Pearl River delta region of Guangdong (Zhou 1992; Li and Li 1992). Foreign investment creates many forms of non-agricultural employment, especially in manufacturing and services. Table 5.2 demonstrates that the manufacturing sector accounts for the largest proportion (80 per cent) of employment in FOEs. The second largest is the services sector, which constitutes 17 per cent of total FOE employment. In the early 1980s, SOEs and COEs were still operating according to the lifelong employment system. However, FOEs began to use contract employment practices in Special Economic Zones (SEZs) in Guangdong and Fujian provinces. In 1986, the government issued a temporary regulation introducing a contract-based employment system (Zhu 1995). Under this system, there are two types of employee: ‘contract’ employees with an employment duration of more than one year and ‘temporary’ employees with an employment duration of less than one year. Both types of employees sign contracts with their companies individually. These contracts prescribe duties, rights and benefits for individual employees (see Zhu and Campbell 1996: 37–8). However, in terms of welfare, the two categories of employee enjoy different benefits. Employees with contracts of more than one year have more favourable conditions, such as medical and social insurance. In recent years, the proportion of contract employees has increased. In 1994, for example, contract employees constituted 46 per cent of

Table 5.2 Employment by sector and gender, FOEs, 1996 Sector

% of FOEs’ employment

% of female employees

Agriculture Mining Manufacturing Construction Services Others

0.2 0.3 80.0 2.0 17.0 0.5

37 25 49 16 49 34

Source: calculated from China Labour Statistical Yearbook 1997.

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total employees in FOEs compared with 34 per cent in 1989 (CLP 1993; China Labour Statistical Yearbook 1995). Since FOEs employ only contract and temporary employees, the rate of turnover of labour is higher in FOEs than in other types of firms. In 1992, for example, the average turnover for all joint ventures in China was 14 per cent and for Guangdong province 18 per cent (Verma and Yan 1995). The majority of those employees leaving their jobs did so for higher salaries or better jobs in other firms, most of which were other FOEs (Verma and Yan 1995). In contrast, the rate of turnover in SOEs/COEs was still relatively low. Some surveys show that the rate of turnover among SOEs and COEs is between 1 and 10 per cent, with the majority in the range of 1 to 3 per cent (see Warner et al. 1999: 231). Thus, since the 1980s there have been two parallel employment systems operating in China: first the centrally controlled labour allocation system operating in the state sector, and secondly the contractbased employment system fundamentally located in the FOEs. This had a significant impact on the reform of the employment system in China and provided the impetus for the extension of the contract-based system to SOEs and COEs nationally in the late 1980s (see Zhu and Campbell 1996: 29–49). In 1986, the government stipulated that the minimum wage of employees in FOEs should be at least 120 per cent of the average national wage (Zhang 1994). This stipulation sought to guarantee an equivalent (wage plus non-wage) income for FOEs’ employees compared with employees in SOEs where non-wage benefits were a significant part of the income. In fact, FOEs were the first group of enterprises in China in which minimum wage regulations were implemented. Table 5.3 indicates that FOEs pay higher average wages than SOEs and COEs. In 1995, for example, wages in FOEs were 132 per cent of wages in SOEs, and 189 per cent of wages in COEs (China Labour Statistical Yearbook 1996). Rapid economic growth has produced not only an increase in nominal wages but also a significant growth in real wages. Official figures suggest that between 1984 and 1994 real wages in FOEs have risen rapidly (1984 = 100; 1994 = 196.0) (China Labour Statistical Yearbook 1996), though rather less quickly than in SOEs (Table 5.3); wages in COEs continue to lag. Although the money wage is higher in FOEs than in other types of firms, 25 per cent of wages in FOEs is made up of insurance, covering items such as retirement and old-age pensions, unemployment benefits, medical costs and others. At present, only FOEs have a relatively com-

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102 China’s Transition to a Global Economy Table 5.3 Average yearly wages of urban labour force since 1985 (RMB) Year

SOEs

COEs

FOEs

Ratio: SOEs/FOEs

Ratio: COEs/FOEs

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

1213 1414 1546 1853 2055 2284 2477 2878 3532 4797 5625 6280 6747 7668

967 1092 1207 1426 1557 1681 1866 2109 2592 3284 3931 4302 4512 5331

2252 2025 2300 2475 3077 3334 3940 4001 4734 5964 7463 8261 8789 8972

0.539 0.698 0.672 0.749 0.668 0.685 0.629 0.719 0.746 0.804 0.754 0.760 0.768 0.855

0.429 0.539 0.525 0.576 0.506 0.504 0.474 0.527 0.548 0.551 0.527 0.521 0.513 0.594

Source: CLP 1993; China Labour Statistical Yearbook 1995, 1997, and 1999.

prehensive social insurance policy. SOEs and COEs are in transition from a welfare system to an insurance system. In fact, the government is using FOEs as a platform to implement a social insurance policy. On the one hand, the government can gain some experience from this initial experimental practice in FOEs and then later extend the policy to SOEs and COEs. On the other hand, the experiment within FOEs helps to change people’s attitude towards the transition from a welfare system to an insurance system. Economic reform has aimed to increase the autonomy of enterprise management. FOEs are expected to bring advanced management systems into China. The results of this process are varied, but it does seem that managers have enjoyed an increase in power. The major difference between FOEs and other types of firms is that FOEs have greater autonomy in recruitment, selection and dismissal, whereas in SOEs and COEs nepotistic practices are widespread and institutionalised (Zhu and Campbell 1996). In principle, both FOEs and other types of firms seem to enjoy managerial flexibility in assigning work (Verma and Yan 1995). Supervisors have absolute power to assess individual workers’ performance without much objection from workers or unions. A new development in corporate management is the introduction of the concepts and practices of human resource management (HRM) in

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FOEs. As Poole (1997) indicates, HRM is a relative new term even in Western society: it originated in the USA and arrived in the mid-1980s in the UK and much of Europe. In China, many Western management schools (mainly from the US and UK) set up joint-teaching arrangements with Chinese universities to introduce Western management subjects. HRM was one of the new concepts brought in as part of these new subjects. Meanwhile, many FOEs started to practice HRM in a modified way in order to achieve international competitiveness and flexibility (OECD 1986; Webber 1992; Child 1994; Warner 1995; and Gospel 1992). According to recent surveys (Warner 1998; Benson and Zhu 1999), a number of large MNCs from the US, Europe and Japan are implementing this so-called flexible HRM in their joint ventures and wholly-owned enterprises. In this approach, new technology is integrated into the production system as a whole and decentralised control and selfmanagement systems are encouraged. By using fewer middle managers, and promoting a multi-skilled workforce with more decision making power and autonomy, companies try to achieve a more cost effective and less hierarchical management system. There is also a strong emphasis on continuous training that can be seen as a reflection of managerial will to develop a competent workforce. In addition, several techniques are used to induce organisational commitment. One approach is to create a company culture by emphasising company values and shared missions. Another common technique is participation schemes. A variety of schemes such as formal grievance procedures and schemes involving profit sharing or stock options are adopted. FOEs have been seen as a role model for many domestic firms, including SOEs and COEs, as they struggle to survive in the increasingly uncertain and turbulent markets of China’s transition economy. Chinese firms mimic the management system of foreign investors that they view as being the most market-savvy (Guthrie 1999). Many SOEs and COEs try to obtain external funds, advanced management systems, market experience, and new technology through joint-venture or subcontracting arrangements with foreign investors (Hussain and Zhuang 1998; Pan and Parker 1998). Although union membership and the number of union organisations in FOEs has increased in recent years (in 1998, 53,634 FOEs had union organisations, with 5.45 million members) (Guangming Daily 18 October 1998), only about 20 per cent of FOEs have unions, and even where such unions exist their influence remains relatively weak (Ng and Warner 1998). One reason for the weakness of unions is the fact that

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the government did not encourage unionisation in FOEs in the 1980s and early 1990s. The major concern of the government was the fear of losing foreign investment if unionisation became compulsory. But unions in FOEs are also weak because many are not independent of managers. For example, some union leaders in these firms are chosen directly by managers. In other firms the leaders may be relatives or friends of the owners or managers. This personal kinship prevents the union from representing workers and protecting workers interests effectively. However, there are some formal union organisations in relatively large FOEs, with a formation similar to the unions in SOEs and COEs, in which one or two full-time union officials take charge of union activities. Unlike SOEs and COEs, there is no Workers’ Congress at the enterprise level in FOEs.

4. Problems in FOEs As we have seen there are growing problems connected with labour relations and labour abuse in FOEs. Labour abuse in FOEs has been reported by both official internal agencies and public media (Zhang 1994; Chan 2000). Nevertheless it is necessary to recognise that there are important variations in the history of labour relations in FOEs, depending on a variety of factors, including their size, industrial sector and country of origin. Of FDI in China, over 50 per cent derives from Hong Kong and Taiwan (China Labour Statistical Yearbook 1997). In the labour intensive manufacturing sector, such as clothing and footwear industries, Asian investors from the so-called newly industrialised economies (NIEs) of Hong Kong, Korea and Taiwan share an even higher percentage of FDI (Chan 2000). To fulfil the demand for low skilled workers in these factories, very large numbers of peasant migrants from China’s poorer regions have rushed into the coastal regions. For instance, in the industrially booming regions such as the Pearl River delta region in Guangdong, about 90 per cent of production line workers are migrants (Chan 2000: 262). Migrant workers do not enjoy the same status as the local residents (Mallee 1995: 1–29) and they usually have to buy their temporary work permit and pay a deposit (yajin) for obtaining and maintaining their work contract. Workers forfeit the deposit if they are fired or if they quit without management permission before the contract expires (Chan 2000: 263). Some empirical surveys show that different types of labour abuse exist in many FOEs. Chan’s (2000) research based on a detailed questionnaire

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survey of 1531 workers and staff in 54 footwear factories in five cities spread across China in 1996 shows that there is a bonded relationship between company and employees in the so-called ‘free’ labour market. FOEs in the footwear industry were predominantly owned by Asian investors. Among the production line workers, 58.6 per cent of the migrants were obliged to pay deposits. Factories paid workers irregularly, or systematically withheld a portion of each pay period as another means to bond labour. In some cases, the factory management collected the workers’ residential permits and identity papers for ‘safekeeping’, a practice that is illegal (Chan 2000: 264). Without the permit, workers can hardly go out or change job. Many Asian-invested enterprises pay workers below the local monthly minimum legal wage, or pay them just up to the minimum monthly wage by including overtime work (Zhuhai Laodong Bao 19 August 1995). Besides these abuses, the wage system is usually constructed around a structure of rigid penalties, deductions and fines (Sargeson 1999). Fines are meted out for being late, or for not turning up because of illness, or for negligence at work, or for behaviour not related to production such as talking and laughing at work, littering, forgetting to turn off lights, untidy dormitories, and so on (Zhuhai Laodong Bao 19 August 1995). A further mechanism for controlling workers is the use of private security guards in factory and dormitory compounds. These create an atmosphere of intimidation, and some factories can get away with meting out physical punishment. In Chan’s (2000) survey, 24 per cent of the production-line footwear workers report that physical punishment exists in their factories. In addition, some FOEs impose strict rules to control workers’ bodily functions by drastically restricting the frequency and length of time allowed for going to the toilet. However, neglect of the standards of occupational health and safety is one of the worst abuses of labour rights in FOEs. According to a report made by a leading critic from the government’s Foreign Investment Bureau, Zhang Quan, based on a systematic survey of labour abuse in FOEs, an unsafe working environment was the major problem in FOEs. For instance, in the period between 1991 and 1993, there were five fires in FOEs in Guangdong and Fujian provinces, which killed 244 workers and injured 76 others (Zhang 1994). Human rights abuses also occurred in FOEs. For example, there may be no break during working time. Some factories do not allow workers to go to the toilet. Other workers cannot take leave if they are sick. If workers make mistakes, they can be punished by fines or physical pun-

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ishment. Some factories use male supervisors to search female workers (Zhang 1994). In a Korean-owned factory, a supervisor carried a stick to supervise production and to abuse workers (Zhang 1994). In a Taiwanese-owned footwear factory, the manager suspected a female worker had stolen a pair of shoes. She was punished firstly by parading her through the streets carrying a pair of shoes, and secondly by putting her into a dog cage (Zhang 1994). Local police also harass migrant workers (CLB 2001c). Long working hours and continuous overtime work are also characteristic of employment in FOEs. For instance, in Dong’guan City in Guangdong province, 17 FOEs established a daily working schedule of between ten and 12 hours. Some FOEs organise uninterrupted workshifts of up to 36 hours in length. Others threaten to reduce wages or fire workers if workers refuse to work overtime (Zhu 1995). Exploitation is also found in production levels and pay rates. For example, in Zhuhai SEZ, a Japanese-owned factory set the production quota at the level of 4000 pieces per worker per working day, but the maximum level in Japan is only 2500 pieces per worker per working day (62.5 per cent of the Chinese rate). Some FOEs set wage levels lower than the minimum wage level. An FOE in Shenzhen SEZ only pays RMB 5–7 per day, much lower than the local average wage level of RMB 11.5 per day. Some factories lay off workers before the new year in order to avoid paying the year-end bonus (Zhang 1994). Such exploitation has a variety of causes. Most fundamentally, foreign-invested enterprises, like domestic private enterprises, are taking advantage of the weaknesses of labour – especially the existence of a huge surplus rural labour force. This labour force was set free when the introduction of the household responsibility system provided households with the incentive to economise on the use of labour in agriculture and to send other household members off to work in nonfarm occupations. But workers also lack independent trade union representation to work in defence of their rights at work (see for example Han 1998 and the continuing reports of the CLB); even when transnational corporations do implement codes of conduct, Chinese workers do not have a voice in formulating, implementing or monitoring them (Frost and Wong 2000). As we noted in Chapter 4, migrant workers also belong to secondary positions in local labour markets, being discriminated against in terms of pay, working conditions, security of contracts and opportunities for advancement (Sargeson 1999). However, the central and provincial governments also have responsibility to set employment standards and to monitor and protect them.

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5. Government response and new legal framework Labour abuse and industrial disputes in FOEs create profound social and political instability in China (Zhu and Fahey 2000). In recent years, labour conflicts in the FOEs have escalated, and more and more strikes have occurred. For instance, over 2000 strikes occurred around the country in 1999 according to an internal official report (author’s survey, 2000). The government is aware that such tensions could lead to social instability and block further economic reform, and eventually weaken the control of the Party-State. Therefore, the central government has gradually become more clearly focused and decisive in imposing legal requirements upon FOEs as a means to control the situation. This revised approach reflects several important factors that have changed the country’s outlook on employment in this sector. First, the maturity of economic reform has created a huge consumer market in China, making China now an attractive location for foreign investment. As a consequence, the Chinese state has a greater degree of bargaining power as compared to foreign investors than ever before. Second, labour disputes in FOEs are still an ideologically sensitive matter in China, where the socialist state is expected to protect workers against exploitation, especially by foreign capital. Third, the awareness of workers’ rights among employees has led both individual workers and trade unions to put pressure on the government to act. By implementing regulations to control the behaviour of FOEs and establishing institutional mechanisms to facilitate tripartite working relations among government, trade unions and enterprise associations, the government seeks to create a more coherent industrial relations system that can prevent further crisis. In order to achieve these goals, both central and local governments have been working to implement some initiatives. The central government has introduced legislation and sought to improve the means of implementing and enforcing the laws. In 1995, the first Labour Law was implemented, providing a legal framework for protecting workers’ rights. Since this is the first Labour Law introduced since 1949, uncertainties of application and enforcement of the law have arisen. However, some important issues have been addressed. The new Labour Law specifies individual rights. Contracts between employers and employees are compulsory. There is a maximum of 44 working hours per week and overtime work of one hour per day. A minimum wage has been set. Overtime payments of 150 per cent of

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wages on normal days, over 200 per cent on holidays and over 300 per cent on public holidays have all been stipulated. Other issues include working conditions, safety and hygiene, protection for female workers and young workers (16–18 years old), training, social insurance and welfare. In addition, the new Labour Law has opened the way for an element of collective bargaining. Article 7 decrees that workers ‘shall have the right to join and organise labour unions according to law’ and that ‘labour unions shall represent and protect the lawful right and interests of the workers, and shall develop their activities autonomously and independently according to law’. Most importantly, subsequent articles allow for collective agreements between employees and managers (on matters such as labour remuneration, working hours, rest, holidays, labour safety and hygiene, insurance, welfare, etc.), negotiated either by the labour union or – in enterprises without a union – representatives elected by the employees. Collective agreements are binding and standards in individual contracts may not be lower than those provided for in the collective agreement. Under the new Labour Law, trade unions have been required to play a crucial role in the emergence and establishment of the so-called ‘collective negotiation and collective agreement’ (CNCA) process. This process is seen as occupying the same function as collective bargaining in Western systems. The CNCA concept was preferred to the adversarial collective bargaining of Western systems, because it was intended to promote a less confrontationist system of industrial relations. This preference reflects the government’s view that industrial relations in China are fundamentally based on cooperation (Worker January 1995: 4–10). The most important matters contained in CNCA agreements include wages, working hours, holiday arrangements, insurance and welfare, health and safety, job description, discipline code, duration of contract, the condition and procedure of changing, dismissing or ending contract, handling contract disputes, and the responsibility for contract violations and so on. At present, the CNCA process has been established in a majority of SOEs and COEs. However, only a small number of FOEs have adopted the process. Several problems have emerged since the CNCA process was established. For example, the CNCA process is new, so workers’ representatives lack experience. As a result, their legal knowledge and negotiation skills are inadequate to meet the requirements of the system. Furthermore, an aversion to conflict is a feature in the state’s design of the collective contract institution – to underscore its non-adversarial and

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non-confrontational character, making it distinctive in the Chinese context and acceptable to FOEs (Warner and Ng 1999). As a result most enterprises have tended to adopt similar agreements based on the sample provided by the government labour administration. The system of CNCA thus demonstrates a high degree of state intervention and control. Another problem is that a CNCA can only be developed in FOEs where there is a union and as we observed earlier, unions exist in only a minority of FOEs. In the absence of unions, individual workers are reluctant to represent other workers voluntarily because of the fear of losing their jobs. Conversely, management does not trust individual workers due to their lack of education and unfamiliarity with labour law and regulations. Hence, because of the low level of unionism in FOEs, the majority of contracts are individual agreements between employer and employee, and in these circumstances there are serious problems in the enforcement of workers’ rights. A recent survey made by Zhu and Campbell (2002) shows that most FOEs only have individual contracts without any collective agreement. Management has an absolute power to determine the pay and working conditions within the contract. Chan’s (2000) survey also shows that FOEs can devise their own set of arbitrary rules and regulations, and these rules and regulations may be against the interests of workers and sometimes in open breach of national Labour Law and regulations (Chan 2000: 265). Since the new Labour Law was implemented, the central government has been working on new legislation, including the Work Contract Law, the Employment Promotion Law and the Social Insurance Law, with the aim of improving the system of labour law. These initiatives of the central government indicate a shift from the traditional governance by administrative means towards the rule of law and the settlement of disputes through a judicial system. However, the gap between the establishment of law and its enforcement is still quite obvious. In China, the central government is in charge of national policy formation and the establishment of law and regulation. However, the phenomenon of ‘policy from above and counter-policy from below’ is widespread in China. Therefore, the implementation and enforcement of policy, regulations and law usually depends upon the effort and cooperation of local governments. For labour law and labour regulations of central government to be implemented, local governments must cooperate. So far, local governments have taken some initiatives towards facilitating the implementation of the labour law and regulations. For instance, some local governments have established supervisory teams to examine the problems of labour abuse within firms. The first super-

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visory team was set up in Shenzhen SEZ by its local labour administration. The major task of the team is to monitor the implementation of the relevant labour laws and regulations. Three types of monitoring have been carried out: first, a general inspection carried out in every enterprise each year; second, selective monitoring for certain enterprises; and third, special monitoring for particular enterprises which have been the subject of complaints by workers. However, many local governments find themselves competing with other jurisdictions for factory jobs, and their desire to attract investment by appeasing foreign managers often outweighs their sense of obligation to protect workers rights and conditions (particularly since many of those workers are outsiders). A further initiative has been the development of labour dispute mediation commissions and arbitration commissions at both enterprise and local labour administrative levels. A labour dispute mediation commission at enterprise level is composed of a union leader and representatives of management and workers. The chair is held by the union leader. If the mediation fails at enterprise level, one of the parties may apply to the labour dispute mediation and arbitration commission at the regional labour administrative department, namely the Labour Bureau. The regional commission is composed of representatives of the Labour Bureau, the trade union at the corresponding level, and the employing unit. The mediation shall take two months initially. If it fails, one of the parties may apply for arbitration. After arbitration, both parties have the right to appeal to the People’s Court at local and later intermediate levels. Although at an early stage of transformation, the initiatives of both the central and local governments are designed to institutionalise a tripartite industrial relations system which not only provides a relatively secure investment environment for business but also creates an opportunity for unions to participate in a wider range of activities that represent and protect the interests of working men and women.

6. Conclusion FDI as a major element of globalisation has been an important force for high economic growth and job creation in China. The inflow of foreign investment has been accelerating in recent years and its positive impact can be identified as generating revenue, introducing new technology and higher quality standards, and creating employment opportunities. In fact, FOEs have been used experimentally by the government as a

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trial for the contract-based employment system, the social insurance system and HRM as detailed above. At the same time, difficulties also exist within many FOEs, among them low levels of unionism, lack of institutional protection for workers, inadequate working environment and exploitation of labour. However, FOEs are relatively new organisations in China and they have generated a special need for law due to their particular status. They are not part of the conventional government–corporate system in China, characterised by hierarchical links between the government and companies which are mainly SOEs and COEs. FOEs do not share the social basis of expectation which guides the behaviour of SOEs and COEs. This has led, and continues to lead, to misunderstandings and abuses of labour rights. Implementing legislation and using institutional mechanisms to solve the problems and manage the socio-economic transition have therefore become the highest priority for the authorities. However, the problem of the gap between the establishment of law and the enforcement of law still exists, even after many initiatives made by both central and local governments. Institutionalisation of the industrial relations system, and effective supervision and enforcement of labour regulation and legislation, are the key issues which will determine the outcome of further political and economic reforms. The successful outcome could eventually create an environment of accountability and rule of law in which FOEs cannot continue to take advantage of an unregulated environment. Certainly, pressure is building on the Chinese government – internally from Chinese workers and intellectuals and externally from the ILO and the international trade union movement – to establish adequate institutions of industrial relations. Thus, in China as in other countries, globalisation affects the conditions under which people work in part through the operations of foreign direct investment. The conditions of work within foreign owned enterprises and the policies of governments that seek to control foreign investment are both direct effects of global flows of capital. However, foreign investment also influences the general conditions of work in China, for it influences the demand for labour, government policy towards the conditions of work, and had led local firms to copy the practices of foreign owned enterprises. The case of China provides interesting lessons. The recent regional financial crisis has taught us that, without protection, development cannot be sustained and political and economic chaos can erupt to severely damage people’s lives. ‘Globalisation from above’ has not yet

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been matched by the development of a global society. Current international law and international institutions are not strong enough to prevent crisis and human rights abuse. It is crucial to develop a grass-roots-oriented global civil society to empower ordinary citizens in this global village with collective strength. In the process of ‘globalisation from below’, the trade union movement is one of the important forces to speak on behalf of workers and to put pressure on national and international governing bodies to act appropriately and on MNCs to behave according to national and international laws. Building a global civil society relies on the development of civil society in individual countries, especially in the developing countries, and in linking civil organisations internationally. China as the largest developing country plays a crucial role in this development. The transformation from the tradition of governing by administration to the rule of law will have a profound impact on Chinese society. The introduction of an institutionalised industrial relations system (such as the formation of tripartite system and collective bargaining) indicates that the corporatist framework is starting to transform from state corporatism to societal corporatism (Unger and Chan 1995: 41). Traditional Chinese methods of social control may be giving way to controls that are commensurate with a civil society, the rule of law and a pluralist framework for negotiations among the state, foreign capital and workers. If indeed these changes are underway in China, then perhaps the implications of globalisation for workers’ lives will diverge from those apparent in structurally adjusting nations.

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6 China’s Puzzle Game: Four Spatial Shifts of Development Mark Wang, Michael Webber and Zhu Ying

The entire country as a chessboard (a slogan from the 12th CCP Congress) The Chinese policy makers should be perhaps the best chess players for they have been entitled to set up regional development priorities for different regions at different times. Mao Zedong and the founders of the PRC could directly move any chessman without much hesitation under the centrally planned economy of 1949–76. Deng Xiaoping made every move of his chessmen using two hands. His visible hand, like Mao’s, was the central control mechanism; the other was his invisible hand – the market mechanism. Deng gradually introduced a market economic system into China but his visible hand guaranteed that every move of the chessmen was accomplished, because of his seniority and reputation in the CCP and powerful personality. This may be the beauty of a socialist market economy with Chinese characteristics. Deng’s successor, Jiang Zemin, has a weak visible hand and a strong invisible hand. After over 20 years of economic reform and political change, local governments have tasted the benefits of freedom and autonomy and frequently bargain with the central government. The current political system does not allow Jiang directly to intervene in too many economic development issues. He has to use market forces to fulfil his regional development goals. However, for these three generations of Chinese leaders, it matters less whether the hand is visible or invisible, than that it translates their ideas about strategic regional development into action. Since the founding of the PRC in 1949, Chinese leaders have attached great importance to regional development. In most of the Mao period, China’s regional development priority was the interior. From 1978–99, China shifted its development priority to the coast. Most recently, the 113

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so-called large-scale development of the western region (xibu da kaifa) has become a popular phrase in the Chinese mass media. (Xibu literally means the western region, da means large scale, and kaifa means development.) This strategy was adopted by the Chinese government at a national economic working conference in Beijing in 2000. Coincidentally, the strategy was adopted on the same day that the United States and China signed an agreement over China’s entry to the WTO. The large-scale development of the western region represents China’s new effort to narrow regional income disparities and to step up economic development in the central and western regions. It is expected to be followed by a new wave of foreign direct investment (FDI) to the inland provinces akin to the wave on the coast when China opened its door in the early 1980s. Development of the western region is Jiang Zemin’s icon move, comparable to Deng’s pet coastal open cities and regions in the past 20 years. To shift to the western region is strategic decisionmaking, as Premier Zhu Rongji stressed. It is worth noting that Zhu used the word ‘strategic’ much as Zhao Ziyang did when he advocated the Coastal Region Development Strategy in 1987 at the Thirteenth Party Congress. This suggests that the Chinese government is formally shifting its political emphasis from the coastal regions to inland regions, from east to west. Development of the western region is a long term project. It is beyond the time scale of the Tenth Five-Year Plan (2001–5). As Jiang stated, development of the western region will last as long as 50 years, the period of Deng’s third step – when China’s per capital income is supposed to reach the level of moderate developed countries (Tang 1997: 273). This is nothing new. The Chinese top leaders have periodically swung their development focus between the coast and inland since 1949. The major shifts include Mao’s inland development, the southwest focus (centred on Sichuan), Deng’s coastal strategy and most recently Jiang’s western region move. Each shift can be characterised by a particular region and regional economic structure (Table 6.1). Overwhelmingly, the existing literature concludes that both Mao and Deng were single dimension leaders – emphasising either the inland or the coast. So, Mao favoured inland development and attempted to narrow the coast– inland gap whereas Deng preferred the coast-led strategy (Han 1976; Wang and Hu 1999; Hu 1999; Mackerras 1998; Wei 1998). This chapter argues that the three generations of Chinese top leaders – Mao, Deng, and Jiang – purposefully shifted China’s regional development priorities at different times. Different parts of China have been viewed as chessmen and they were frequently redefined, used as tools to fulfil China’s strategic objectives. The spatial shifts identified in Table

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Four Spatial Shifts 115 Table 6.1 China’s major shifts of regional development priorities Period

Priority regions

Nature of the shift

Shift one 1949–56

Shanghai + northeast + inland (but not much in south China).

Regional equity. City-based heavy industrialisation.

Great Leap Forward: 1958–60

Everywhere

Small-scale, mass industrialisation campaign.

Shift two: 1960–71

Southwest region (centred on Sichuan province)

Military industry related projects.

Shift three: (1972*–99)

South China: Guangdong & Fujian. Gradually extended to northern coast and Shanghai, then to border.

Regional comparative advantage, coast-led.

Development of the coast region in the last 20 years has accumulated capital, know-how, and experience of how to keep capitalism red in socialist China.

Before 2000, there were some attempts to spread growth inland, including: 1) opening up of borders 2) giving inland capital cities open status; 3) redefining seven regions; 4) horizontal links between rich coastal provinces and poor inland provinces. All these arose from political pressures from inland provinces and became viewed as failures.

Shift four; post-2000

Western region.

Equity and efficiency

Note: * it is can be argued that China started to shift its development to coast not in 1978, when Deng came to power, but in 1972 when Sino-US relations improved (for details, see section 2).

6.1 derived from both internal and external considerations. The internal pressures included 1) the coastal regions’ comparative advantages; and 2) resistance from inland local governments after the decentralisation of power since 1980. The external influences included 1) military threats during the cold war (from USA-backed Taiwan in 1949–72 and from the former USSR between 1960 and the 1970s); 2) the regional origins of overseas Chinese, whose hometowns were mostly located in south China; and 3) coastal cities’ previous colonial connections. The relative strengths of these considerations depended not only on exter-

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nal political changes (such as relations between China, the USA and the former USSR), but also on China’s engagement with globalisation. Thus an increased reliance on markets to allocate commodities has stimulated the effects of comparative advantage; and opening up has made colonial connections and links to overseas Chinese important in development. In addition, the decentralisation of political power and of fiscal resources has influenced the central government’s ability to implement its objectives for regional development. That is, the shifts in regional development policies reflect not merely different views about the means to attain development for China. They reflect also changes in the relative significance of influences on appropriate paths for regional development. Therefore, it is too simple to categorise Mao as inland-oriented, Deng as coast-led, and Jiang as trying to balance coast and inland while reducing regional tensions. To understand China’s puzzle game better, we have to recognise a fundamental element. Mao, Deng and Jiang all follow a common principle – the final destination is to modernise the whole of China, not just coastal China or inland China; to let all, not just a few, get rich. Their differences in terms of regional priorities lie only in approach – after the shift from isolation and self-reliance towards an open strategy, Deng’s coastal development strategy had eventually to yield to an inland focus. These arguments comprise the central issue of this chapter. As the arguments are explored, other questions are posed: 1. If SEZs were a laboratory for the rest of the coast when China first opened, or linked China to the rest of the world, what is the role of coastal China when the inland is opening? 2. When the coast was opened, it relied on certain preconditions, including: overseas Chinese connections, relatively good infrastructure and a relatively skilled labour force. What are the preconditions for developing inland China? 3. What has the Chinese government done to promote inland development? This chapter thus examines changes in policy towards the macrogeography of China. (The following two chapters dissect policy towards the microgeography of China, particularly the propensity to create zones.) The next section briefly reviews the first two shifts under Mao and their regional consequences. The second section discusses Deng’s shift to the coast and its impacts on relations between the coast and

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Four Spatial Shifts 117

inland. The third section describes the most recent shift – its politics, targets, and some issues of policy. The final section concludes by pointing out that it is not so much the personal beliefs of Mao, Deng or Jiang that made China shift its regional priorities as changing domestic and international environments.

1. The first two shifts – equity: Maoist geo-strategic legacy China’s socioeconomic characteristics vary tremendously from place to place. For geographical and historical reasons, the contrasts are so sharp that at least three worlds can be identified within China. Therefore, before trying to identify the shifts of China’s regional development priorities, it is necessary to understand that the economy that the Chinese Communist party inherited in 1949 was insignificant in quantity and already riddled with spatial inequality. As Table 6.2 shows, China’s output of important industrial products was only a fraction of that in the USA (and even India). Pre-liberation China was economically poor and culturally bleak. Virtually all major industries in 1949 were located in two groups of area. One concentration included the ex-treaty port cities along the northern cost, such as Shanghai, Tianjin and Qingdao. The other was northeast China (Manchuria – some Chinese view this as a colonial term), where Russian and later Japanese colonisation led to the significant development of raw material resources, much of them serving the

Table 6.2 Output of major industrial products, China, India and the USA, 1949 Industrial Products

Yarn Textile Coal Crude oil Electricity Steel Pig iron Cement

Units

1000 tons Billion meters Million tons Million tons Billion kwh Million tons Million tons Million tons

Source: Sun 1992: 16.

China (1)

327 1.89 32 0.12 4.3 0.16 0.25 0.66

India

USA

(2)

(2) as % of (1)

(3)

(3) as % of (1)

620 3.46 32 0.25 4.9 1.37 1.64 2.14

190 183 100 208 114 867 656 324

1,710 7.68 436 248.92 345.1 70.74 49.82 35.94

523 405 1,363 207,433 8,026 44,772 19,928 5,445

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needs of the Japanese economy (Teng 1992). The rest of the country had virtually no connection with modern industry (Figure 6.1). For example, according to 1952 statistics, the industrial output of the coastal provinces accounted for over 70 per cent of China’s total (Falkenheim 1985). Another source reveals that only 9 per cent of China’s industrial output was produced in western China (Northwest, Inner Mongolia, Southwest), which covers 70 per cent of China’s total land area (Liu et al. 1995: 2). First shift: towards equity Such an unequal distribution of economic activity was viewed as irrational. The economic development policies in the first decade of the PRC were intended both to eliminate these divisions within Chinese society and to prevent their recurrence in the future (Smith 1991). The very first shift of spatial development focus by the communist Chinese government was to respond to perceived inequalities between the coast and inland China in the early 1950s. In geographical terms the CCP established two basic principles of economic development: 1. it should incorporate the entire country and avoid creating any further inequality at the regional or local level; and 2. it should be based on the principle of self-reliance, or self-sufficiency, building up economic capacity at both the local and the national level to prevent further dependence on foreign nations (Smith 1991: 157). According to Riskin (1987), Mao’s concept of self-reliance included three characteristics: (i) fully using domestic resources, including finance, skills and labour; (ii) rejecting indiscriminate imitation of foreign methods in favour of developing indigenous technology; and (iii) establishing a comprehensive industrial system. The first principle represents Mao’s commitment to egalitarianism: the redistribution of wealth from rich regions to the poor. Although Smith (1991) argues that Mao’s goal of spatial equality was not always the highest priority during 1949–76, the first five-year period did witness a wide spread of development inland. The formulation of the principle of self-reliance needs to be understood in the light of the external conditions faced by China. Almost immediately after the birth of PRC, the Korean war started (on 25 June 1950). On 27 June, the USA adopted economic sanctions against China and stated that it would use military force to block communist China’s

Source: based on Liu et al. 1995: 4–5.

Figure 6.1 Major industrial centres in China, 1949

Macao

Guangzhou (Canton)

Wuhan

Hong Kong

Nanjing

Tianjin

Shanghai

Qingdao

Dalian

0

500km

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Major industrial centre (Circle size indicates city’s industrial output)

Chongqing

Taiyuan

Beijing

Shenyang Fushun Anshan Benxi

Changchun

Harbin

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attempt to take over Taiwan (Liu et al. 1995: 5). The American stance was the overwhelming problem for China’s top leaders, at least until the early 1970s when the USA and China established formal diplomatic relations. An effective embargo by the western powers in the post-1949 cold war effectively forced China into a policy of relying on itself (and aid from the USSR). The Soviet-style industrialisation in the first Five-Year Plan (1953–57) was reflected in city-centred heavy industrialisation. In the plan, 156 key projects were carried out with close assistance from the USSR. Total investment for the 156 key projects was RMB20 billion (Liu et al. 1995: 6). (Among the planned 156 key projects, four projects were not carried out during the first five-year plan period and two others were double counted. Actually the number of key projects was 150.) This investment was made possible by China’s extremely high accumulation rate during the first five-year plan. For example, in 1950–52, the accumulation rate was 15.8 per cent and reached 24.2 per cent in 1953–57 (Chen 1983). Strategic concerns determined not only the high rate of capital accumulation, but also the location of investment. The key projects were located according to several distinct patterns: 1. At the macro level, new projects were scattered all over the country, except for the southeast coast. No key projects were located in the southeast coast region, near Taiwan, so as to reduce risks from possible bombing and invasion. As Figure 6.2 shows, most of the key projects were located in Northeast China and inland. For example, of the 156 projects, 118 were located in the inland region (Liu et al. 1995). If Liaoning province is not counted, the coast region as a whole comprised only 18.9 per cent of total investment during the first five year plan (Liu et al. 1995: 9). 2. At a sub-regional level, projects were concentrated in the major cities (except some mining investments). In Northeast China, cities like Shenyang (Liaoning province), Fushun (Liaoning), Anshan (Liaoning), Chanchun (Jilin), Jilin city (Jilin), Harbin (Heilongjiang), Qiqihar (Heilongjiang), were selected to host many of the 156 key projects. In the central region, cities like Beijing, Shijiazhuang (Hebei), Baoding (Hebei), Taiyuan (Shanxi), Zhengzhou (Henan) and Luoyang (Henan) were selected. The inland cities of Xi’an (Shaanxi), Baotou (Inner Mongolia), Langzhou (Gansu), Chongqing (until recently part of Sichuan) and Chendu (Sichuan) were also offered an opportunity to expand. This was a city-based heavy industrialisation. Apart from some of the large cities in Northeast China, most of the

Kunming

Sources: Based on Liu et al. (1995: 5–10) and Hu et al. (2000: 66).

Figure 6.2 Location of China’s 156 key projects, 1953–57

Major old industrial center

Mining industry

Electric power industry

Hong Kong

Guangzhou

Nanjing

Shijiazhuang

Macao

Guiyang

Wuhan

Taiyuan

Taiwan

Shanghai

Qingdao

0

Liaoning province Dalian Tianjin

500km

Jilin province

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Manufacturing

Xi’an Chongqing

Lanzhou Chengdu

Xining

Baotou

Beijing

Heilongjiang Province Harbin

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1600 1400 1200

Inland

Index

1000 800 600 Coast

400 200 0 1950

1951

1952

1953

1954

1955

Year Figure 6.3 Indexes of regional gross domestic product (1950 = 100) Source: Sun 1992: 178.

cities selected were new sites for industrial development; they acted as new industrial growth centres for the inland region. China’s first Five-Year Plan had a variety of effects. Perhaps the most important impact was that economic growth rates were higher inland than along the coast (Figure 6.3). Therefore the gap in incomes between the coast and inland was reduced. The inland’s share of China’s total industrial output increased from 27 per cent in 1952 to 31.9 per cent in 1955 (Table 6.3). Other impacts – including the new patterns of urbanisation – will be discussed later in this section. The major criticism of the first Five-Year Plan was its over-emphasis on Northeast China and inland China and its corresponding neglect of existing industrial centres, such as Shanghai, Tianjin and other port cities (Liu et al. 1995). In 1956, Mao’s famous On the Ten Major Relationships provided a balanced view of the relations between coastal and inland development. However, increasing international hostility towards communist China led Mao to speed China’s pace of industrialisation even further. The annual average 15 per cent industrial growth rates of 1953–57 were viewed as still too slow. The popular slogan was to build socialism with greater, faster, better, and more economic results. Thus, during the second Five-Year Plan (1958–62), Mao promoted an

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Four Spatial Shifts 123 Table 6.3 Coast and inland regions’ share of total industrial output, China 1950–55 (%)

Coast Inland

1950

1952

1953

1954

1955

na na

73.0 27.0

71.7 28.3

69.7 30.3

68.1 31.9

Source: Liu et al. 1995: 7.

industrialisation strategy called the great leap forward (GLF), a massive campaign of industrialisation. The intention was to develop small-scale and dispersed industry, with all areas attempting to achieve local selfsufficiency in major industrial products (Cannon and Jenkins 1990). The literature generally views the great leap as a total failure, explainable only in terms of Mao’s radical mentality and attempt to run the economy as a military campaign (Salisbury 1992; Smith 1991). Cannon and Jenkins (1990), however, give a better understanding of Mao’s reasoning. To understand the GLF once again requires an appreciation of the international situation, and the growing threat after 1958 in south China. Taiwan was increasingly belligerent towards the People’s Republic at the same time as the USA was planning to base nuclear missiles on that island. As if this were not enough, antagonism with the USSR led in 1960 to the (former) Soviet Union withdrawing its aid, and the beginning of the thirty-year rift (Cannon and Jenkins 1990: 36). It was well-known that the great leap forward was an economic disaster, contributing to the largest famine in recorded human history (1960–62). The failure of the great leap forward and the famine forced China to slow the pace of industrialisation. The period 1963–65 was called a recovery period, during which agricultural development was emphasised (Cannon and Jenkins 1990; Smith 1991). But immediately after the recovery, the focus of development shifted again. Second shift: the concealed Third Front project The existing literature has overwhelmingly emphasised China’s political campaign, especially the cultural revolution, as the dominant theme of social life during 1966–76. It is true that the politically-motivated cultural revolution slowed down China’s economic growth and that China

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at some stage was chaotic (Dreyer 1996) – the ten wasted years. But behind the curtain of the political campaign was a highly confidential form of industrial development. As partially revealed since the 1980s (Naughton 1988), during the late 1960s a purposive, large-scale, and centrally-directed military industrial program was implemented, called the Third Front (sanxian). This programme was tremendously costly and highly confidential. Its impact on China’s industrial development and the spatial pattern of industry was more far-reaching than the disruption of the Cultural Revolution itself (Naughton 1988; Li and Li 1986). Figure 6.4 shows the location of the Third Front region. It was regarded as a safe haven – safe from invasion and bombing both from southeast coast and north. The first front comprised the highly vulnerable coastal cities and region. Surrounding the coastal zone is the second front, a rather vaguely-defined zone. The core of the Third Front was Sichuan, in China’s southwest. It became a secret large-scale industrial base in which many cities such as Chongqing (part of Sichuan until the late 1990s) developed into important industrial centres for the supply of military equipment. The basic purpose of the Third Front was to provide an alternative industrial base that would allow China to continue to produce – and thus to fight – in the event of an attack on its main urban centres. Mao Zedong said of this large and centrally-directed programme: We must pay close attention to Third front construction: it is a way of buying time against the imperialists, against the revisionists, . . . In third front construction, we have begun to build steel, armaments, machinery, chemical, petroleum and railroad bases, so that if war breaks out, we have nothing to fear (Mao Zedong 1965, quoted in Naughton 1988). As Figure 6.5 and Table 6.4 show, a large proportion of China’s investment went to the inland region, especially the Third Front during the Table 6.4 Ratio of investment in capital construction between coast and inland China (coast = 1)

Inland

1953– 57

1958– 62

1963– 65

1966– 70

1971– 75

1976– 80

1981– 85

1986– 90

1.27

1.45

1.67

2.41

1.53

1.19

0.97

0.71


Haikou

Hainan

0

Taiwan

Zhejiang

Hangzhou

Shanghai

Jiangsu Nanjing

Shandong

Nanchang Jiangxi Fuzhou Fujian

Guangxi* Guangdong Guangzhou Nanning Hong Kong

Hunan

Chansha

Hefei

Anhui

Jinan

500km

Notes: *: Autonomous regions; #: Municipality directly under the jurisdiction of the central government. The location of the nuclear industrial sites is not directly known. Sources: Based on Liu et al. (1995: 5–10), Hu et al. (2000: 66) and Cannon and Jenkins (1990).

Yunnan*

Kunming

Guizhou Guiyang

Hubei Wuhan

Zhengzhou Henan

Shanxi

Liaoning

Jilin

Changzhun Shenyang

Tianjin

Hebei Shijianzhuang

Beijing

Inner Mongolia *

Taiyuan

Hohhot

Xi’an Shaanxi

Chongqing

Lanzhou

Yinchuan Ningxia*

Chengdu

Sichuan

Xining

Gansu

Figure 6.4 Location of the Third Front projects

Provincial Boundary

Municipality or SAR#

Provincial Capital City

Secondary Third Front Areas

Qinghai

Nuclear industry?

Heilongjiang Harbin

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Third Front Core Areas

Lhasa

Tibet*

Xinjiang*

Urumqi

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Inland

40

40

55

53.5 41.1

39.4 30.9

38.2

53

47.8

42.3

39.4

40

30.6

50

41.8

60

52.7

58

70

36.9

(%)

3rd Front

66.8

Coast

30 20 10 0 1953–57

1958–62

1963–65

1966–70

1971–75

1952–75

Figure 6.5 Proportion of China’s capital construction investment: coast, inland, and Third Front regions Note: Data are percentages of investment in each region. Since some projects did not belong to either the coast or inland region, the sum of the share of coast and inland investment is not 100. Source: Liu et al. 1995: 19.

late 1960s and early 1970s. The focus of investment on the Third Front was at its peak during 1969–72. (The following incidents may explain why the largest investment took place during 1969–72 period. In 1969, a border battle between China and the former USSR occurred in northeast China. In 1972, President Nixon visited China.) The core provinces of the third front project were Sichuan, Hubei and Shaanxi, which received a higher proportion of total investment than did the coastal provinces of Liaoning, Shanghai and Guangdong (Table 6.5). The Third Front project and its related industrialisation were products of the cold war. A cost-benefit analysis cannot explain such a massive industrialisation programme. It is unclear whether the Third Front project was also intended to narrow the gap in development between the coast and inland. But its impact was far-reaching: it reshaped the distribution of industry in China. Thus, according to Liu et al. (1995), the Third Front project had four principal effects. 1. The project altered the coastal domination of China’s spatial economy. Inland development provided to coastal industries a source of natural resources and a market for their products (Liu et al.

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Four Spatial Shifts 127 Table 6.5 Percentage of China’s total investment of capital construction in selected provinces of coast and Third Front regions, 1969–72 Selected inland provinces

Selected coast provinces

Sichuan Hubei Shaanxi Henan Guizhou

Liaoning Guangdong Jiangsu Shanghai Tianjin

12.1% 7.4% 6.1% 4.9% 4.2%

5.1% 3.4% 2.4% 2.4% 1.6%

Source: Lu 1990: 23 and 31.

1995: 15). China’s natural resources are mainly located in the inland region (especially ferrous and nonferrous mineral resources and coal). 2. Industrial development was brought directly to the inland regions. For a century before the Third Front, the inland had been excluded from the industrialisation process. Except for some industrial facilities in Shanxi, Hubei and Sichuan, inland provinces had previously no modern industrial facilities. The region was geographically isolated and access to the region had been limited: of the 18 inland provinces, six had no railroad (Liu et al. 1995: 16). The Third Front project joined them all to China’s national transport networks, both railroad and highway. 3. There was also urban development inland. Before 1978, inland China was urbanising faster than the coast. New industrial cities were built and existing cities expanded. More labour was assigned to inland cities. Some technicians and sometimes entire factories in the coast cities were relocated inland (Naughton 1988; Li and Li 1986). Both the number of large cities and the urban population increased inland between 1949 and 1978 (Table 6.6); some Third Front projects were even located in remote mountainous regions. 4. The inland regions also became the site for construction of some reasonably efficient manufacturing enterprises, and the development of nuclear industry and space programme. Since its first nuclear test in 1964 and first hydrogen bomb in 1967, inland China has become the base for development of China’s nuclear weapons, space program, satellite industry (Xinhua News – Domestic Material Group 1982). However, in general, the Third Front has been criticised for greatly increasing the costs of industrialisation in China. Not only were the

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128 China’s Transition to a Global Economy Table 6.6 Number of large cities and urban population, 1953–78

Number of cities China total Coast Inland Inland as % of total Urban population (million) China total Coast Inland Inland as % of total

1949

1952

1957

1965

1978

132 69 63

153 67 86

176 73 103

168 67 101

193 69 124

47.7%

56.2%

58.5%

60.1%

64.2%

27.40 18.90 8.50

34.91 22.40 12.51

54.12 31.85 22.27

66.91 37.38 29.53

79.87 39.54 40.33

31.0%

35.8%

41.2%

44.1%

50.5%

Notes: Cities with population of over one million. Urban population here refers to nonagricultural population. Source: SSB 1990.

Table 6.7 Comparison of capital return ratios, China, coast and Third Front regions, 1978

Industrial output value/per 100 Yuan fixed investment (yuan) Circulating capital/per 100 Yuan industrial output value required (yuan) Production cost/per 100 Yuan industrial output value (yuan) Capital accumulation rate (%) Profit rate (%)

China total

Coast region

Third Front

102.60

141.40

70.40

32.00

24.60

40.70

67.40

64.80

77.40

24.2

35.4

14.1

15.5

23.4

9.2


provinces in the Third Front distant from existing industrial centres, but even within those provinces, individual Third Front factories were sited in especially remote places, which further added to costs (Lu 1990). The central criticism has been the cost-benefit ratio. The capital investment return ratio was much higher on the coast than inland (Table 6.7).

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For example, every RMB100 fixed capital investment produced RMB141 of industrial output in the coast, but only RMB70 in the Third Front region. The low rates of return were mainly caused by the economically irrational distribution of manufacturing facilities. The famous Shan, San, Dong principle was blamed for such irrationality, implying that manufacturing should be located in mountains (Shan), in sparsely populated areas (San) and in caves (Dong). It is obvious that investment in military industry in the interior areas suffered from one glaring weakness: inefficiency. Or in economic terms, Third Front industrialisation was extremely costly. Yet it is inappropriate to assess Third Front projects and their rationality purely on economic location theories. During the cold war, especially in the Third Front period, China faced (or thought it faced) military threats from two superpowers. If military survival trumps economic rationality, a project like the Third Front was at least less costly than local self-sufficiency.

2. The third shift: Deng’s legacy It is commonly accepted that it was Deng who shifted China’s development focus to the coast. This is largely true but it is not the whole story. Actually after the normalisation of diplomatic relations with the USA (beginning with Nixon’s visit in 1972), the military threat to the southeast coast appeared to reduce to some degree. In this changing international environment, the shift of development focus to the coast seems to have started during Mao’s last few years. As the international environment was changing so, too, Mao started to emphasise economic construction over ideological struggle, proposing the so-called four modernisations (of agriculture, industry, defence, and science and technology). The four-modernisation programme became the ideological base for Deng’s later strike to open the door and reform. In any event, it is not fair to portray Mao’s era as dominated by a single strategy (any more than it is fair to describe Deng’s era as purely one of the open door). The spatial structure of development in China has been arranged according to changing international circumstances. Thus, from 1971 until Mao’s death in 1976, investment in the coastal region increased. The share of the coast in China’s total investment increased from 30.9 per cent during 1966–70 to almost 40 per cent during 1971–75 (Table 6.4 and Figure 6.5). During this period, major new investment projects in the coast established new industrial capac-

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ity. As western economic sanctions were reduced and economic relations with the major western powers were normalised in the early 1970s, China could once again import manufacturing equipment from west. In the early 1970s, 47 large complete sets of industrial equipment were imported, of which 24 were located on the coast (Liu et al. 1995: 14). The Baoshan Steel complex (the key equipment for which was imported from Japan) in Shanghai is an example of this process. But it cannot be denied that Deng initiated radical departures from the Maoist approach to development. Deng opened China’s door widely and led China gradually into the world economic system. Deng also oversaw the introduction of a new market-oriented economic system in which efficiency came to be more important than equity. It was also Deng who initiated the large-scale shift of the focus of development from inland to coastal China. Officially, China’s Sixth Five-Year Plan (FYP, 1981–85) adopted a coastal development strategy. The coastal development strategy involved the official redefinition of China’s economic regions. Three macro economic regions were formally introduced in 1985 (Figure 6.6). The strategy sought to encourage each region to develop its own economy on the basis of its comparative advantages. The coastal region was expected to develop high-technology industries and to participate actively in international markets, while the central and western regions were earmarked for energy, agriculture and mineral development (Table 6.8). This planned spatial division of labour has in large measure been achieved. China has participated in international markets and attracted FDI and TNCs to the SEZs and Open Areas along the coast (see especially Chapter 7). Most of forms of specialisation listed in Table 6.6 have been realised but some of them have not. For example, the coast did not develop high-technology industries, nor has the interior witnessed vigorous development of its energy, agriculture and mineral sectors. Furthermore, Deng did not shift the economic growth centre to the whole coastal region. Actually it is more accurate to state that the focus of economic development at the beginning of the reform shifted not to the coast in general, but to some parts of south China. In particular, Guangdong and Fujian were selected as a laboratory for the new market economy, even though they had not been significant in China’s spatial economy before 1978. Thus, Deng gradually introduced a system in which parts of south China were opened up to the world and encouraged to get rich first, effectively implying the end of the era of a poor but equal society.

Provincial Name

Municipality or SAR*

Yunnan

Sichuan

Hainan

Zhejiang

Fujian

Jiangxi

Jiangsu Anhui

Guangdong

Hubei

Tianjin

Shandong

Hebei

Beijing

Henan

Hunan

Guangxi

Guizhou

Shaanxi Chongqing

Shanxi

Inner Mongolia Ningxia

0

Taiwan

Shanghai

Liaoning

500km

Notes: *: Municipality directly under the jurisdiction of the central government; SAR: Special Administrative Regions of Hong Kong and Macao. Source: Cannon and Jenkins 1990.

Figure 6.6 Location of three macro regions in China

Shanxi

Western Region

Provincial Capital City

Central Region

Qinghai

Gansu

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Coastal Region

Tibet

Xinjiang

Jilin

Heilongjiang

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Table 6.8 Chinese government plans for macro regions in seventh Five-Year Plan (1986–90) Coastal: • Preferential treatment for export industries, and promotion of increased tourism. • Special Economic Zones, open coastal cities and other areas to grow rapidly and become bases of expanded foreign trade, and act as training grounds for transmitting knowledge and technology to other parts of the country. Such areas to continue preferential policies. • Technological updating industries and creation of new industries, especially in high value and consumer goods, using central government investment and foreign partners. • Energy resources and transport to be developed to ease shortages. Heavy users of energy and transport to be closed or relocated in Central Region. • Agriculture and rural production to be expanded and linked more to urban and industrial demands • Service sector to be expanded, including financial services and the setting-up of markets and trading centres to encourage circulation of manufacturers and farm produce, and rural inputs, imports and exports. Central: • Speed-up of coal and electricity generating, non-ferrous metals and phosphate mining, and building-material industries, using increased government investment. • Cities and areas which are more developed will have greater development of hi-tech industry, both existing and new. • Vigorous development of agriculture to raise output of grain and cash crops. • Accelerated development in coal, electricity and oil, and increased capacity for steel, using government and foreign investment. Also more transport links to coast. • More rapid introduction of new technology in existing industry. • Setting-up of ‘commodity production bases’ for grain, soy bean, oil-bearing seed crops and sugar-yielding crops. • Vigorous development of forestry, animal husbandry and animal products. • Development of the middle reaches of the Yangtze river to help stimulate growth in the Western region. Western: • Preferential treatment for the west in development of education, transport, mining and energy. • Development of farming, forestry, animal husbandry and transport. • Increased exploitation of minerals and energy supplies on a selective basis. • Where economic and technical level is relatively high, technological up-dating to be undertaken, especially using cooperation with Coastal and Central regions. • Land for grain production to be protected, to raise yields and reduce imports from other regions. • Faster development of grasslands and pastoralism, but with environmental protection. • Improved rail links with the Central and Coastal regions. • Transfer of defence industries to civilian production. • Open up mineral and energy sources in the higher reaches of Yellow river and Yangtze river. • Development of the Sichuan-Yunnan-Guizhou border area in energy and semifinished products. • Develop the Urumqi-Karamai area as an industrial centre in Xinjiang. • Faster construction of frontier market towns, and expanded foreign trade across borders in west. Source: Adapted from The seventh Five-Year Plan of the PRC for economic and social development (1986–90) Beijing Review 29(17) 1986: 1–33; Cannon and Jenkins 1990.

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The spatial dimension of China’s opening followed the same principle as its approach to the general reform programme: gradualism. Figure 6.7 shows the spatial sequence of China’s opening to the world economy during the 1980s and 1990s. The opening up of China started from parts of the provinces of Guangdong and Fujian. Four Special Economic Zones – Shenzhen, Zhuhai, Shantou and Xiamen in Guangdong and Fujian provinces – were created in 1980. Then open areas were expanded to the northern coast, including 14 coastal open cities and open areas, in the mid-1980s. In the early 1990s, Pudong became the focus. Meanwhile, all provincial capital cities and five cities along the Yangtze river were granted open city status. Many inland border cities and towns were opened as well. The spatial sequence clearly demonstrates how the open area was gradually expanded, from a few small sites in the distant south, to larger areas throughout China. It is important to understand that Deng opened China from the south rather than from the economic centres of Shanghai, Beijing and Tianjin in north China. South China’s geographical situation and cultural environment are both important elements. Culturally, Guangdong and Fujian are the home of millions of overseas Chinese. Cantonese is commonly spoken in Hong Kong and Macao as well as Guangdong province where the SEZs of Shenzhen, Zhuhai and Shantou are located. Xiamen and Taiwan share the same local dialect. Such a bamboo network was (and remains) an important asset through which these SEZs could be integrated with Hong Kong, Macao and Taiwan – and so further on into the global economic system (Weidenbaum 1996). But it is also significant that these SEZs were all isolated geographically, remote from China’s heartland – the Yangtze delta (Shanghai, Jiangsu and Zhejiang) and the Bohai ring (including Beijing, Tianjin, Liaoning, Hebei and Shandong) (Wang 1994). SEZs were regarded as incubators of economic reform, permitting the country to learn how to deal with market economies in a controlled environment. If the SEZ experiment had failed, they could have been closed and red China remained socialist. That is, it was viewed as risky to test ideas about capitalist management in socialist China. When Deng proposed to establish SEZs in the late 1970s, he himself had little confidence in the experiment. This is reflected in the fact that Shanghai was not listed as one of the key open areas until the early 1990s – after special economic zones had been proved successful – even though Shanghai is China’s largest industrial city, with a well-trained work force, a large pool of scientists and technicians and extensive overseas connections. In 1992, Deng candidly expressed his regret:

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Heihe Tacheng

Manzhouli Heilongjiang

Yining

Shuifenhe Jilin

Erlianhaote Xinjiang

Hunchun

Beijing

Inner Mongolia

Gansu

Liaoning

Ningxia 3

Hebei Shanxi

Qinghai

Liaodong peninsula 1 economic open area

2 4

Shandong peninsula economic open area

Shandong 5 6

Shaanxi Sichuan

Chongqing

Hubei Y3

Y1 Guizhou

Rili Shanxi Provincial Name

Provincial Capital City Municipality or SAR*

SEZ

Jiangsu

Henan

Yunnan

Y2 Hunan

8 9

Y5 Y4

Zhejiang 10

Jiangxi Fujian

South Fujian (minnan)

11 economic open area

I

Guangxi

12

Wanding Hekou 14 Pingxiang Dongxing V

Yangtze delta economic open area

7

Anhui

Tibet

IV 13

Taiwan

II

III

Guangdong

Pearl river delta economic open area

Hainan

Coastal Open City Border Open City/Town

0

500km

Figure 6.7 Spatial sequence of China’s opening since 1978 Notes: I – Xiamen SEZ, II – Shantou SEZ, III – Shenzhen SEZ, IV – Zhuhai SEZ, V – Hainan SEZ. Fourteen coast open cities: 1 – Dalian, 2 – Qinhuangdao, 3 – Tianjin, 4 – Yantai, 5 – Qingdao, 6 – Lianyunguang, 7 – Nantong, 8 – Shanghai, 9 – Ningbo, 10 – Wenzhou, 11 – Fuzhou, 12 – Guangzhou, 13 – Zhanjiang, 14 – Beihai. Five Yangtze River open cities: Y1 – Chongqing, Y2 – Yueyang, Y3 – Wuhan, Y4 – Jiujiang, Y5 – Wuhu 1980: Four SEZs were established (Shenzhen, Xiamen, Shantou, and Zhuhai). 1984: Fourteen coast open cities were open. 1985: Five coast economic open areas 1988: Hainan SEZ was estabilshed 1990: Shanghai Pudong new area was established 1991: Thirteen border open cities/towns and five open cities along Yangtze river (cities of Chongqing, Yueyang, Wuhan, Jiujiang, Wuhu); All provincial capital cities were listed as open cities 2000: Large scale inland development began * Municipality directly under the jurisdiction of the central government. SAR – Special Administrative Regions of Hong Kong and Macao. Sources: Hu, Zhaoliang, Wang E. Y. and Han M. L. 2000, China Socioeconomic Development and its geographic background, Beijing: Renmin Jiaoyu (people’s education) Press, p 135. Liu, Peiqiong (ed.) 1994, Mega trends of China economic development, Guangzhou: Guangdong Jiaoyu (Guangdong education) Press, pp 52–109.

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In retrospect one of my biggest mistakes was leaving out Shanghai when we launched the four SEZs in the early 1980s. If Shanghai had been included the situation with regard to reform and opening in the Yangtze Delta, the entire Yangtze River valley and, indeed, the whole country would be quite different (Tang 1997: 356). Deng’s regret, however, reflects the Chinese leadership’s uncertainty about SEZs in the 1980s. Remoteness from China’s heartland was viewed as a matter of internal political and social security. The policy of letting selected regions grow first has led to another problem – uneven spatial economy in China. The existing literature about disparity between regions in China has mainly focused on the increasing coast–inland gap. Most research emphasises increasing regional disparity, particularly during the 1990s (Wang and Hu 1999: see Chapter 4). Ke (1996), for example, indicates that there exist wide regional differences in the income and consumption levels of rural residents between the provinces. Ke compared data of 1980, 1985 and 1991 and concluded that the disparities were widening, both absolutely and relatively. The major difference between the regions lies in the income from off farm sources, which is far higher in coastal China than in central and especially than in western China. Higher incomes from off-farm than from farm work raise average income per household as well as tending to raise agricultural productivity per person. In turn, Ke relates the rapid rural industrialisation of coastal China to its access to large urban markets. However, the focus on regional inequality is somewhat misleading. According to SSB statistics, in 1998 Guizhou had the lowest per capita income in China – RMB2342 (US$283), while Shanghai had the highest – RMB28,253 (US$3416), about 12.1 times larger. However, back in 1980, Guizhou’s per capita income was RMB219 (US$26.5), while Shanghai’s was RMB2738 (US$331), or 12.5 times higher. Thus, contrary to popular belief, the disparity did not increase dramatically over these 18 years, although it has slightly increased in the last few years (Figure 6.9). The real gap in China is not at a provincial level but an individual level. According to the SSB, the top 20 per cent of households by income held 42.4 per cent of the total wealth of the country; the 5 per cent of China’s wealthiest hold nearly half of the country’s savings deposits, worth more than RMB 6 trillion (http://ce.cei.gov.cn/frame_3.htm). (See, too, the data on rural inequality in Khan et al. 1993.) And the major spatial differences in standards of living are the urban:

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rural ones rather than the interprovincial ones (Khan et al. 1993; Chapter 4). Recently, though, the most unequalising component of incomes has become wages from enterprises in urban areas. State-owned enterprises have laid off nearly 30 million workers, one quarter of the total (Qian and Wong 2000). This had led to the emergence of a new urban poverty in China: the government has begun to limit the welfare payments formerly available to SOE workers under the work-unit welfare system; on the other hand, the recently-introduced pension system has come too late to help many laid-off workers. As in other developing countries, rural urban migration has contributed to urban poverty (Chapter 4), but so too has the more recent disintegration of SOEs. The Chinese government apparently believes that this new form of urban poverty is an inevitable social cost of transition to the market system (Yabuki and Harner 1999).

3. The fourth shift: equity and efficiency In the 1980s, when Deng Xiaoping suggested opening up and developing the coastal regions first, he promised that the inland region would be accorded similar preferential policies when the time was right. Actually, the fourth shift was planned when Deng first opened the coastal region in the 1980s. It is a part of the long-term plan. As early as the 1980s, Deng Xiaoping put forward the strategic concept of two general situations, which provincial government leaders should consider. In one case, he noted that the coastal region should make full use of its advantages to open up to the outside world speedily and get rich quickly. In this process, the central and western regions should sacrifice their development temporarily. When a moderately high, national standard of living is attained at the end of the century, the state should devote more effort to helping the central and western regions accelerate development, and the coastal regions should assist inland development (Beijing Review 43(22) 2000: 22–4). There is no other evidence to suggest that Deng really wanted to develop inland. But the bulk of the literature about the politics of central-local government relations in China has expressed an inland voice for fair policies (Hendrischeke and Feng 1999; Li L 1998; Jia and Lin 1994; Breslin 1996). These studies show that over the last 20 years, the inland local governments have increasingly resisted the coast-led policy and argued that the inland’s turn has come. Inland governments have fought hard since 1978 to gain an equal share of investment and

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equal special policies from the central government. By 2000, Jiang believed that the time was ripe to implement western regional development. This reorientation would also accord with the new international and domestic states of economic and social development. According to Zeng Peiyan, Minister in Charge of the State Development Planning Commission and Head of the Office for Western Region Development, there are several reasons for this new spatial pattern of development (Beijing Review 43(22) 2000: 22–4): 1. Domestic demand has become sluggish, restricting the sustained development of the national economy. Particularly, the eastern coastal areas that are still developing are being affected by the increasingly intense competition on the international market and the lack of sufficient demand on the domestic market. East China’s capital, technology and labour force are seeking new spaces for development. 2. A drastic readjustment of world economic and industrial structures has unfolded. China needs to seize the opportunity to adjust its domestic economic and industrial structures to adapt to these new economic developments. Developing western China will open a broad development space within which the central and eastern regions can readjust structurally and upgrade their economic structure. China seems to be consciously planning to implement a flying geese model, with the coast as a leading goose and the west as a follower goose. 3. The environment in the upstream areas of the Yellow and Yangtze rivers has been deteriorating over the past years. Worsening soil erosion and the improper exploitation of water resources have caused a reduction of flow (the Yellow River now has dry sections for most of the year). The country must invest in the source region for many of these problems – the west. 4. Since the early 1990s the perceived income gaps between the different regions have been widening controversially. Currently, per capita GDP in western China is only about 60 per cent of the national average. Most of the 30 million poor population, who still have subsistence problems, live in the west. If left unchanged, the underdevelopment of the west would constitute a hurdle to the modernisation of the nation as a whole. As a moderately high standard of living has been achieved nationwide, measures should be taken to help the central and western regions speed up development. 5. Finally, during the past 20-odd years of reform and opening, the national economy has developed rapidly, and comparatively solid

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material and technological capacities have been formed. The state now has the conditions and ability to support the rapid development of the west. Perhaps political objectives are more crucial to the shift than these. Zeng does not refer to inland local governments’ concerns and their call for fair policies. It is also unrealistic to expect to reduce the gap between coastal and inland levels of living at least in the near future. Certainly, the difference between living standards on the coast and in those western areas where development advances most rapidly may decrease. But the overall gap between the coast and inland regions is unlikely to narrow much because the eastern region will continue to develop on the foundations already laid. The priority is, according to Yabuki (2000), to control the level of disparity that already exists, keeping it from widening, so that it will not threaten political stability. Furthermore, the go west policy is an important step for assimilation. The western region is home to most of China’s ethnic minorities. To go west will help consolidate ties between Han Chinese and other ethnic groups in the country. Another less mentioned objective is to treat the west as a resource basket. As discussed in Chapter 3, there has been a conflict between the coast and inland regions over the supply of and demand for raw materials. The continuing economic growth of coastal China relies on the inland region to be the main source of raw materials. Western China’s verified mineral resources account for a half of the national total. Compared with the eastern region, the west enjoys the advantages of rich natural resources, plentiful labour power, low investment costs and market potential. It is estimated that in the twenty-first century, some 60 per cent of the raw materials and 50 per cent of the energy needed by the east will come from the west (Zhong 2000). Ultimately, the reserve strength for China’s economic progress depends on the development of the resources in the western region. Some of these objectives will be realised in the near future, some will not. China’s overall plan for the development of its western region is divided into three stages: 1. Foundation (2000–10). This stage will focus on constructing infrastructure; preventing the environment from deteriorating; preventing the gap between coast and inland from widening; solving the problems of technology and education (know how and labour skill);

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and attracting capital from coastal China and foreign countries (http://ce.cei.gov.cn/frame_3.htm). 2. Take-off (2010–30); and 3. Overall modernisation (2030–50). There is no detailed plan for the second and third stages yet but it is expected that the western region will take off after 2010, as did coastal China in the last 20 years. The initial focus on infrastructure is learnt from the experience of developing the coast. Infrastructure construction has been regarded as one of the preconditions for economic take-off. The popular saying in rich regions of the coast – lutong caitong (economic prosperity comes from the construction of roads) – is just one of many slogans emphasising the important role of transport in the development of coastal China (Lin 1997: 152). In 2000, the Office of Western Development and the State Development Planning Commission launched ten projects in western China. Many projects were to construct highways; others include construction of railways, airports, natural gas pipelines, power grids and communications, as well as water conservancy works. The ten projects were 1. Xi’an-Hefei section of the Xi’an-Nanjing railway: to link China’s northwest and southwest to the east and central south, shortening the rail distance and optimising the railway network. 2. Chongqing–Huaihua railway: to form a convenient external passageway for southwest China. 3. Highway construction in the West (including national trunk highways and roads in State-level poverty-stricken counties). 4. Construction of 20 airports (both extensions and new airports). 5. Elevated light railway in Chongqing. 6. The Sebei Qaidam Basin–Xining–Lanzhou natural gas pipeline: to transport natural gas from Qinghai Province to Lanzhou and Xining cities, to reduce air pollution due to burning coal. 7. Water-control projects at Zipingpu in Sichuan Province and Shapotou on the Yellow River in the Ningxia Hui Autonomous Region. The former project is intended for irrigation and water supply; the latter will improve irrigation conditions along the Yellow River in Ningxia. 8. Returning farmland to Forests and Pastures, Ecological Construction and Breeding Saplings in the central and western regions to prevent soil erosion.

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9. Qinghai Potassic Fertilizer Project: to exploit the potash in the salt water lake in Qinghai. 10. Facilities Construction in Colleges and Universities (for details see Beijing Review 43 (25 2000: 17–19). Environmental protection is long term task. Starting in 2000, the Chinese government launched its RMB1.9 billion grain-for-green project in China’s western region. This is targeted at the serious soil erosion problem in western China. Farmers in all provinces of the upper reaches of the Yangtze river (above Three Gorges dam) and the middle and upper reaches of the Yellow River (above Xiaolangdi dam) receive subsidies in the form of grain after they turn cultivated land into forest and pasture (http://ce.cei.gov.cn/enew/eb2h0c51.htm). In aggregate, the state in 2000 issued RMB100 billion long-term government loans, of which 70 per cent are directed into infrastructure construction in the west. The central budget for 2000 planned for a RMB440.2 billion expenditure as subsidies to localities. Of this amount, 70 per cent was allocated to the western region. Also, 70 per cent of assistance from foreign governments and capital from international financial institutions was directed to the west (Beijing Review 43(16) 2000: 24). The methods used to attract foreign investment into the western region are so far similar to those used in coastal China. The central government has granted favourable policies to projects in the west if foreign investment takes up more than 25 per cent of the total investment. Foreigners who invest in industries encouraged and supported by the Chinese government receive another three years of tax cuts, following five years of tax exemptions or reductions. The provinces and autonomous regions in the west are encouraged to draft their own favourable policies to attract foreign investment, as long as they meet the general guidelines of the central government (Beijing Review 43(22) 2000: 22–4). China’s 50 years’ history shows that every region has to become a development attention seeker so as to be granted special policies and privileges. The earlier development of the coast and the recent largescale development of the western region ignores the region in between – provinces in the central region, neither coast, nor western region. They call themselves bu dong bu xi – belonging to neither the east nor the west. They complain that they will be left out again. When will be their turn? The central planners assume that the central region will act as a bridge to connect the developed coast and the developing western

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region. Perhaps development of the central region will become the icon project of Jiang’s successor.

4. Beyond the puzzle The four shifts of focus for regional development in China demonstrate a series of strategic reorientations. They reflect the close association between China’s domestic development and external conditions. To shift China’s development focus inland was not a matter simply of Mao’s ideology – and likewise Deng’s open door policy since 1980; both were seeking to modernise China but in a changing international environment. Mao’s emphasis on inland development, especially the Third Front region, was a product of the cold war. It was a choice without choice. Thus, when the international environment became less hostile, Mao attempted to use the coast as China’s engine of growth in his last few years in power. As Deng’s open door policy is a response to increasing globalisation, Guangdong and Fujian were selected as localities from which to engage China with the world system. Here overseas Chinese were targeted as pioneers who could hook China into the global market. The changing spatial foci led to marginal alterations in standards of living between the regions. The gap between coast and inland narrowed in the Maoist era, but the shift in development focus to south China in the early 1980s not only enlarged the coast–inland gap but also created a new spatial contrast, between north and south. North China (including the Yangtze region, Beijing-Tianjin and northeast China) used to be the heart of China’s economy, but it was left behind in the 1980s. However, this gap has been gradually narrowed in the 1990s when the development focus was shifted to northern China. By the same token, it is expected that the current inland development program will reduce the coast–inland gap in the future. These shifts in regional policy, like the attempts to open the economy and to make it more market oriented, are not policies for themselves. They are intended to serve an objective: fulfil China’s modernisation goal, or to get the whole of China rich. But different leaders had development emphases and priorities. Under Mao, the spatial shifts of development and industrialisation focus – inland and then Third Front – sought (arguably) to forsake growth for equity and military safety. Under Deng and early in Jiang’s era (1990–2000), equity was forsaken in the name of growth. Jiang’s recent attention to the development of the inland region looks towards a convergence of coastal and interior regions. But the capital for the development depends on maintaining

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high rates of growth: can China in the next 20 years attain both equity and growth? Each phase of China’s policies towards the global economy has its own characteristic geography of regional development, modifying the preexisting pattern. The period of hostility has seen a focus on the inland and Third Front; the more open period since 1972 has been associated with a focus on the coast, especially the southern coast. But the increasing reliance on markets and the increasing relative power of local governments have both undermined the central government’s ability to direct regional development. Coastal development is no longer merely a government strategy; it also reflects the political economic structure of markets and openness. The recent politics of western development has emerged from this geography of the globalised economy, but is shaded by the government’s ceding of power to markets and the provinces. In these senses, the new regional geography is a product of the processes of globalisation in China. Of course, it is also true that the processes of globalisation have themselves a regional structure: the inefficiencies of the western strategy contributed to the perception that more market-friendly policies were needed, and the opening up was inherently oriented to the coast. But an explicit regionalisation was integral to the new forms of development that Deng championed. In particular, the marketisation and opening up have been not only experimental and hesitant in time; they have also been geographically localised. Only after the policies were judged a success were they generalised to other parts of the country. However, the formation of zones with specific purposes has been used much more explicitly in China to conduct such experiments; two such experiments are described in the following two chapters.

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7 Reconfiguring the Microgeography of China: Special Economic Zones Zhu Ying, Michael Webber and Mark Wang

1. Introduction The geography of China is being reconfigured at a variety of scales and by a variety of processes. In Chapter 6, we described how policies of the central government had at some times emphasised inland development and at others development along the coast. The result has been large scale, albeit slow, changes in regional economic geography. Secondly, since the reform process started in the late 1970s, the government has opened up the Chinese economy, and in the process the provinces have gained power relative to the central government (Hendrischke 1999). The provinces have thus been provided the space within which to construct and then exploit provincial competitive advantages. The result is a variety of strategies through which the provinces are becoming economically and culturally distinct. On the provincial scale, China’s geography is being reconfigured. But, thirdly, Chinese governments have also sought to remake the geography of the space economy at a much smaller scale, by demarcating the spaces within which particular kinds of policies are followed. These are reconfigurations at the urban or intra-urban scales. Buy a road map of any large city in China. If the map identifies administrative districts in the city, there will be demarcated a whole variety of special zones of one kind or another. There may be export processing zones; agricultural high technology zones; textiles industry zones; foreign investment zones; special economic zones; customs zones; high and new technology zones; and many more. (The variety is repeated at the larger scale: see Figure 7.1.) Some of the zones will be administered by the central government; others by the province (or municipality), the county or the city. There may be tens of these zones in a really big 143

Provincial HTDZ

State HTDZ

Kunming

Chengdu

Xi’an

Haikou

Weihai Qingdao

Dalian

Xiamen Shantou Shenzhen

Ningbo

0

Fuzhou

Hangzhou

500km

Notes: ETDZ – Economic and Technology Development Zone; HNETDZ – High and New Economic Technology Development Zone; HTZ – High Technology Zone; State ETDZ – the central government run ETDZ; Provincial HTDZ – Provincial level government run HTDZ Source: Gu and Zhao 1998: 5

Nanning

Guiyang

Nanchang

Guangzhou

Wuhan Changsha

Zhengzhou

Taiyuan

Tianjin

Nanjing Nantong Hefei Shanghai

Beijing

Shijiazhuang

Chongqing

Lanzhou

Figure 7.1 Location of China’s various development zones

Provincial Boundary

Bonded Area

State HNETDZ

Qinghai

Yinchuan

Huhhot

Changchun Jilin Shenyang

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State ETDZ

Tibet

Uromqi

Harbin

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Special Economic Zones 145

city, like Shanghai. Evidently, Chinese governments have sought to reconfigure the geography of the space economy at the local scale as well as at the macro scale. In this chapter we analyse the policies towards and the implications for Chinese economic development of special economic zones (SEZs). We seek to understand why governments have sought to manipulate geography in this way, demarcating some places and setting them apart from others. (In the following chapter we examine another facet of China’s governments’ attempts to remake microgeography: the development of high and new technology development zones or HNTIDZs.) Achieving economic development and the so-called four modernisations is the first priority for the party-state in the post-Mao era. However, the lack of a blueprint for such development forced the regime to borrow many existing models from foreign countries and then modify them with Chinese characteristics. Certainly, the development of SEZs (and, as we shall observe, HNTIDZs) can be seen as evidence for such a pattern of borrowing and modifying. The idea and model of SEZs come mainly from other East Asian export processing zones (EPZs) and free trade zones (FTZs), and the HNTIDZs are a modified model of Silicon Valley. However, the characteristics and functions of the two kinds of zone – the manner in which they are used as tools to achieve modernisations – are different.

2. The history and functions of special economic zones The transformation of China’s system of socialised production spread from rural areas through the fiscal and banking systems, the means of determining prices and production levels for industrial commodities, the labour market and relationships to the rest of the world. International trade and foreign investment in China were to be stimulated, particularly by establishing Special Economic Zones, and later, opening all of the east coast to trade and foreign investment (Zhu 1992). In this sense, SEZs are an outcome of open door policies in China. But SEZs are not simply economic tools. There were political considerations, too. Hong Kong and Macao were to be returned to China in 1997 and 1999 respectively under the design ‘one country with two systems’. By practising a form of capitalism in the SEZs which are close to Hong Kong and Macao, China can ‘kill two birds with one stone’: on the one hand, the government can become familiar with the operation of capitalist production and the market economy while learning how to manage a market economy; on the other hand, Hong Kong and

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Macao can gain confidence from the fact that socialist China is trying to tolerate capitalist development on the mainland (SSEZY 1985). Therefore, in early 1979, Guangdong and Fujian Provinces were nominated to be pioneers in encouraging foreign trade and investment. One of the tools they were to use was to experiment with the establishment of small Special Export Zones similar to Export Processing Zones in other countries (Zhu 1992). In September 1979, the State Council declared that four SEZs were to be established: Shenzhen, adjacent to Hong Kong; Zhuhai, near Macao; Xiamen, across the water from Taiwan; and Shantou, a traditional overseas Chinese home town (SSEZY 1985) (see Figure 6.7). In December 1979, the Guangdong and Fujian Provincial People’s Congresses passed draft regulations about Special Economic Zones. The goals of the zones were: to attract foreign investment, earn foreign exchange by exporting, import foreign technology and management skill and acquire efficient production. Later, the government summarised the effect of SEZs as ‘one window, two coverings of fan’, which means that through this window, China can know the outside world, and foreigners can understand China. The two coverings of the fan have radiating capacities: one is radiating to the outside world by joining the international producing, trading and financial system; another is radiating to the domestic economy by introducing foreign capital, technology and management skill (SSEZY 1985–89). After several years’ development of the four SEZs, the central government decided to open up the economy further. For instance, 14 cities located along the coast became open cities in November 1984. Later, the largest SEZ (Hainan island) was established in April 1988 (Figure 6.7). In the same period, the Liaodong and Shandong peninsulas, Yangtze and Pearl River deltas, and south Fujian all became coastal open areas – a total of 150,000 square km (Zhu 1992; see also Chapter 6, especially Figure 6.7). The initial conception of the development model was that Shenzhen and Zhuhai SEZs would develop into comprehensive zones, combining industrial production, foreign trade and other business, while Shantou and Xiamen would become zones focusing on processing export goods (Gao and Chi 1997). In many respects, therefore, China’s SEZs are similar to export processing zones (EPZs) and free trade zones (FTZs) in other countries: 1. within the zones, economic policies and regulations are different from those practised in other parts of the country;

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2. preferential measures, such as tax reductions or exemptions, are applied to foreign investors; 3. infrastructure is constructed in order to attract foreign investors; and 4. enterprises in the zones are encouraged to expand their exports, enter global markets and participate in global competition. However, the central government later decided that SEZs should be economically comprehensive if they were to develop quickly. Therefore, China’s SEZs are different in some respects from EPZs and FTZs in other countries: 1. SEZs have relatively large areas and populations and diversified industrial structures that include primary, secondary and tertiary industries, giving foreign investors more possibilities than simply export-oriented processing; 2. SEZs are not only bases from which China opens to the outside world and showcases of development in China, but they also serve as pilot (or experimental) locations for economic reform, from which the government can learn about the methods and implications of economic reform; and 3. unlike FTZs and EPZs, SEZs have well established links to the rest of the country, which provide easy access to suppliers of raw materials and components and to the domestic market for SEZs’ products. The establishment and development of SEZs have broadened people’s experience of capitalist development. After a long period as a closed society, the SEZs served as China’s windows to the outside world. In addition, the SEZs serve as places to which people from other parts of the country come to learn about the latest developments in economics, technology and management. Presently, governmental departments and nearly one thousand enterprises from other parts of the country have set up offices in the SEZs, which have thus become the country’s largest exchange centre for personnel, economic information and technology. Furthermore, the SEZs provide the world with a window into China: the world can observe and understand China’s policies of reform and opening through the SEZs. As an experimental field, the SEZs have been used as a platform on which to implement a series of new policies and systems. Many reforms – including reforms to planning, circulation, foreign trade and foreign exchange management, land management, labour distribution, person-

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nel management, enterprise management and government administration, pricing and banking – were first implemented in the SEZs before being introduced elsewhere in the country. The SEZs were the locations of China’s first joint venture, first foreign exchange regulating market, first property rights auction, first foreign invested bank, first stock exchange, and first market for means of production. The SEZs have become a link between China and international markets. After more than two decades of development, an export-oriented economy has taken shape in the SEZs. For example, the total foreign trade in the five SEZs reached US$27.8 billion, or 15 per cent of the national total in 1993 (Gao and Chi 1997). Exports manufactured in the SEZs accounted for US$14.3 billion of this trade. In addition, foreignowned enterprises (FOEs) have become the major force for the development of the SEZs. Nearly 60 per cent of the total industrial output (by value) in the five SEZs in 1993 was generated by FOEs (Gao and Chi 1997). The SEZs have also become important catalysts for regional development, acting as regional central cities that provide services both locally and nationally. When the SEZs were first established, Shenzhen and Zhuhai were both small towns, each with a population of about 100,000, while Xiamen and Shantou were economically backward cities. Now the SEZs have become central cities with multi-urban functions. For instance, by the end of 1993, the bank deposit balance in Shenzhen reached RMB65.7 billion, and the loan balance, RMB50.2 billion (Gao and Chi 1997); the totals for Xiamen reached RMB13.9 billion and RMB15.3 billion respectively (Gao and Chi 1997). In the same year, the number of tourists numbered 6.2 million, generating foreign exchange of RMB2.3 billion in Shenzhen. The Shenzhen and Xiamen airports are among the five busiest airports in China, handling 2.5 million and 1.6 million passengers respectively. The Shenzhen port can handle more than 25 million tons annually; the capacities of Xiamen, Zhuhai and Shantou all exceed ten million tons annually (Gao and Chi 1997). Table 7.1 shows the main social and economic indicators of these four SEZs in 1999. Over seven million people live in these SEZs, the majority of them urban citizens. Secondary industry is the largest employment sector, followed by tertiary industry and primary industry; the contribution of industrial sectors to GDP had the same pattern. Total fixed assets were valued at RMB92.6 billion and foreign investment reached US$4.54 billion in 1999. The majority of real estate projects were related to residential buildings. Other social and economic indicators show that people living in SEZs had a better infrastructure

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Special Economic Zones 149 Table 7.1 Main social and economic indicators of four SEZs, 1999 Items

Counties included

Counties excluded

Population Non-agricultural population No. of employees Of which Primary Industry Secondary Industry Tertiary Industry Total area (sq.km) GDP (RMB billion) Of which Primary Industry Secondary Industry Tertiary Industry Telephones per 1000 households Electricity consumption/year (RMB billion) Total investment in fixed assets (RMB billion) Total investment in real estate (RMB billion) Residential buildings Utilised Foreign Investment (US$ billion) No. of hospitals No. of beds No. of doctors Total wages of staff & workers (RMB million) Outstanding savings deposits (RMB billion)

7,692,000 3,564,000 3,801,000 760,000 1,688,000 1,354,000 7,000 263.60 9.65 134.90 119.01 2,850 24.90 92.61 34.36 22.01 4.54 242 23,000 18,000 332.6 172.11

4,072,000 2,841,000 2,238,000 87,000 1,186,000 965,000 5,000 235.90 4.67 120.29 110.94 2,450 23.20 89.72 34.00 21.75 4.30 169 20,000 15,000 317.7 159.00

Notes: The four SEZs are Shantou, Shenzhen, Xiamen and Zhuhai. The four SEZs are located in cities. Some of the counties of the cities are within the SEZ (Counties Included); other counties of the cities are outside the SEZ (Counties Excluded). Source: SSB 2000: 348–9.

(including hospitals, education and telecommunications) than the national average. In addition, the general income was higher than in the rest of the country. Finally, SEZs have provided bridges between the global economy and the domestic economy. The SEZs and the domestic economy are interdependent. Economic cooperation is an essential factor for the development of SEZs, while the domestic economy benefits from this connection in terms of linkages to the global economy. For example: 1. SEZs are an important channel for imports from overseas to China and exports from China to overseas markets. Nearly a third (32.7 per cent or US$710 million) of the materials exported through Shenzhen in 1989 were produced in the domestic economy. In addition, SEZs

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2.

3.

4.

5.

are an important market for products and raw materials from the domestic economy: Shenzhen procured 70 per cent of the construction materials used during the 1980s and 60 per cent of consumer goods of 1989 from the domestic economy (Park 1997). SEZs also provide a platform for cooperation between domestic companies, SEZs’ companies and overseas companies. Thus, domestic companies can operate in SEZs in three ways: (i) setting up a joint venture with SEZs’ companies or with foreign companies; (ii) independently investing in production in SEZs; or (iii) making triangular investments with SEZs’ companies and a foreign company (Park 1997). SEZs also created an investment environment for domestic and overseas capital. In the 1980s, SEZs depended on domestic and overseas investment. For example, the total amount of loans given out by Shenzhen’s various financial agencies was RMB17.37 billion. Of this, 89 per cent came from the domestic economy (Park 1997). SEZs offered domestic capital a high rate of return, due to rapid economic growth, links with international markets and the development of financial markets including the stock market. The profits earned by domestic investors in Shenzhen have been estimated to exceed RMB2 billion between the mid-1980s and the mid-1990s (Park 1997). At the same time, SEZs have become one of the capital sources for domestic investment. In recent years, more and more SEZs’ companies have invested in the domestic economy and the capital flow from SEZs to the west of China is one of the major sources of capital for inland regional economic development. SEZs help to transfer advanced technology from overseas markets to the domestic economy. For example, from 1986 to 1989, over 100 out of 500 cases of advanced technology that had been introduced to Shenzhen were transferred to the domestic economy (Park 1997).

In general, the SEZs have achieved rapid economic development by taking advantage of the special policies granted by the central government. They have built a lot of urban infrastructure, as well as a new industrial structure. The establishment of SEZs has accelerated China’s opening to the outside world.

3. The characteristics of SEZs The SEZs differ in several important respects from the domestic economy, even after economic reform. As special economic areas, SEZs’

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investment environments – the so-called hardware (yingjian) of infrastructure, administrative system and policy – are different from the domestic economy. In addition, SEZs have become a platform for changing the so-called software (ruanjian) of development, particularly with the emergence of the ideology of a socialist market economy with Chinese characteristics (you zhonggu tese de shehuizhuyi shichang jingji). The hardware has been developed in three stages (Gao and Chi 1997). The first stage was from 1980 to 1985, when the industrial foundation of SEZs was laid. During this stage, all SEZs concentrated on the construction of infrastructure to create a favourable investment environment. At the end of 1985, for example, the accumulated investment of the (then) four SEZs in capital construction stood at RMB7.63 billion. They developed nearly 60 square km of land for construction, and built groups of factory buildings, commercial buildings, tourist facilities and residential buildings. Meanwhile, nearly 900 new factories went into operation (Gao and Chi 1997). The second stage started in 1986 and ended in 1992, when the industries in SEZs diversified. During this stage, the economic scale of the SEZs was expanded, the level of foreign-invested projects raised markedly, export trade volume increased and their export-oriented economy was gradually reinforced. In 1992, the total value of SEZs’ industrial output reached 86 billion yuan, of which first-ranking Shenzhen SEZ contributed RMB37 billion. Investment in industry was mainly foreign capital. In 1992, the number of approved foreign invested projects in the five SEZs totalled 5385, involving agreed capital of US$8.71 billion. In Shenzhen, Zhuhai and Xiamen, the industrial output of FOEs made up over 50 per cent of the cities’ total. The volume of exports also expanded rapidly. According to Customs’ statistics, total exports of the five SEZs in 1992 stood at US$12.38 billion, an increase of 24.2 per cent over 1991, accounting for 14.5 per cent of the national exports (Gao and Chi 1997). Under the challenge of economic expansion, there were drastic changes in SEZs’ economic structure and related policies. In particular, firms in SEZs gradually began to: 1. produce commodities to their own designs and production techniques instead of processing supplied materials; 2. abandon the transhipment trade in favour of an export-oriented mode in which materials were imported, processed, given increased added-value and exported; 3. run industrial enterprises that integrated agriculture, manufacturing,

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technology and trade to produce products for export rather than mainly exporting products produced by the interior; 4. replace indirect ocean-going trade by direct ocean-going trade. The third stage is from 1993 to the present. During this stage, SEZs needed to adopt a new development strategy in order to cope with changed internal and external environments (see details below in Section 4). SEZs have had to create new forms of international and domestic competitiveness to underpin their development – to combine geographical and industrial advantages in order to re-adjust their regional industrial and production structures so as to participate successfully in the international division of labour. On the other hand, the software of development has been the site of major struggles over the path of economic development in China since the Mao era. After Mao’s death and the fall of the Gang of Four (siren bang) in 1976, the political and ideological conflict between left-wingers led by Hua Guo-feng on the one hand and reformists led by Deng Xiao-ping, on the other (Zhu and Warner 2000) was resolved only when Deng’s ideology gained the support of the Party and people. Deng’s initiatives of economic reform (jingji gaige) and open door policy (duiwai kaifang) were formally adopted as the central policy of the CCP. The formation of SEZs was one of the central elements of the policy. This policy sought to combine both socialist principles and capitalist elements in economic practice; SEZs were to be the locales for these experiments. In particular, new forms of economic management and property ownership have been introduced in SEZs. 3.1 Ownership in the SEZs Ownership has been seen as one of the crucial elements that distinguishes socialism and capitalism. In SEZs, the question of ownership refers not only to industrial organisations – such as state-owned enterprises (SOEs), collective-owned enterprises (COEs), domestic private enterprises (DPEs), China-foreign joint-ventures (JVs) and wholly foreign-owned enterprises (FOEs) – but also to property and land. For instance, land in China belongs to the state and cannot be sold, no matter whether in the domestic economy or in SEZs. However, the sale of the right to use land is permitted, though the government levies a tax on its use. In addition, the ownership of real property is permitted. In Shenzhen SEZ, for example, the local government formulated the Regulation on Land Management in November 1981. According to this regulation, any individual may freely sell or buy a factory, warehouse,

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building or house (Da 1989). As a result, most buildings have been bought and sold by individuals: 74 per cent of buildings built by the Financial Development Corporation in 1987 were sold to individuals, and only 26 per cent to groups (Da 1989). Under the SEZs’ policy, foreign investors can obtain many privileges, such as tax holidays and tax reductions. Therefore, the ownership of corporations has become even more diversified, transforming the majority of SOEs and COEs from the public sector to a combination of public and private ownership, as JVs and FOEs, in order to enjoy the benefits of that preferential treatment. In Shenzhen, for example, by the end of 1988, industrial production was worth a total of RMB7.7 billion (at 1980 prices). Of that total, SOEs contributed RMB2.1 billion and COEs RMB0.5 billion; JVs and FOEs contributed the largest share, RMB5.1 billion. In fact, the public sector only contributed about 30 per cent of total production (Fang 1991). However, even within the public sectors, much of the production was under the so-called Sanlaiyibu (processing on consignment): 1. lailiao jiagong (processing on commission from foreign customers); 2. laiyang jiagong (manufacture on the basis of samples from foreign customers); 3. laijian zhuangpei (accessories are supplied by foreign customers, assembled by Chinese companies, then reexported to the foreign customers); and 4. buchang maoyi (compensation trade: raw materials and machinery supplied by overseas companies are paid for with products). Hence, the private sectors – including foreign companies – play an even more significant role in the development of SEZs since the 1980s than official data indicate. Within SEZs, even the traditional public sectors, SOEs and COEs, are linked closely to the international economy. The diverse forms of ownership now apparent in China appeared first in SEZs and then spread into the remainder of the country. One of the functions that SEZs have played in debates over ownership concerns the restructuring of the public sector. SOEs and COEs have been identified as less competitive than other types of firms, facing financial difficulties and employing surplus labour. Successful changes in the public sector would be significant, in terms of legitimising the changes and encouraging further restructuring and development. Restructuring of SOEs started in SEZs in the late 1980s, much earlier than in the rest of the country, where change has really only started since 1995. Different

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practices have also been introduced in SEZs, such as setting up JVs with foreign investors, becoming a Joint-Stock Company (JVC) through the share market, and sometimes allowing foreign or domestic investors to take over the SOEs. More recently, such trends have been adopted in the inland areas and the data on employment by ownership shows such changes (see Chapter 5 and Figures 4.3 and 4.4). Other experiments, such as labour remuneration and social insurance, were also practiced in SEZs in the 1980s (see below). Individual labour contracts were introduced in FOEs first and then spread into other ownership enterprises, gradually abolishing the life-time employment system, the so-called ‘iron rice bowl’. The most common practice is to adopt a fixed-term contract lasting two, three or five years. Managers have more power in terms of recruiting, selecting, dismissing and rewarding employees (Zhu 2000). A structural wage system which combines basic wage, seniority, position/skills and bonus was also introduced to replace the rigid eight grade wage system for workers that had been in practice since Mao’s time. Company, group and individual performance thus become more important in determining wage. Piece-rate systems are common among production line operators. Equally, a social insurance system was first established in SEZs. A city-based social insurance fund was established to which each employing unit should contribute about 25 per cent of employee’s wages for insurance of old age pension, illness and injury, unemployment, medical treatment, and so on (Zhu and Campbell 1996; Zhu and Warner 2000). All of these experiments were initially practiced under local temporary regulations. In the late 1980s and 1990s, these regulations were adopted by the national government after consultation and modification. In fact, the 1994 Labour Law reflects many of the practices in SEZs in the 1980s (Zhu 2000). 3.2 Managing the economy of SEZs Since the formation of SEZs, local governments have been working to create a market for consumer goods that could form the basis for raising people’s living standards. Some of the initiatives that were implemented in SEZs since the early 1980s were later diffused through the rest of the country. The major changes involve the price system, financial market, labour market and the market for research and development (R&D). Remaking the prices system Three types of prices existed in the 1980s: 1. fixed prices, which are determined by provincial and state governments;

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2. liquid prices, which corporations can increase or decrease within a range determined by the local government’s Bureau of Prices; and 3. market prices, which are determined by exchange activities in the market. Outside SEZs, state-determined fixed prices still dominated the domestic economy for most of the 1980s (see Chapter 4). However, the situation inside the SEZs was completely different. In Shenzhen SEZ, for instance, the price system has evolved through three stages (He 1988). The first stage was between 1982 and 1984, when the state-determined fixed prices were gradually reduced and the so-called free market prices were expanded. As a result of these changes, prices of only a few commodities remained under the control of the Shenzhen government. The second stage was between 1984 and 1987, when the Bureau of Prices loosened price controls over production materials and daily necessities, allowing liquid prices and market prices to dominate the prices system. Thirdly, since 1988, the prices for most consumer goods have been determined by the market (Fang 1991). The development of financial markets Until the 1980s, SOEs’ profits and taxes were paid to central and local governments, which also provided the investment for the enterprises. Government financial agencies had more power than banks. People joke that the banks were one of the pockets of the department of finance (Zhu 1992). For a relatively long period, banks in the inland areas had to follow administrative direction (for example, from the State Council and provincial and city governments). Interventions by the government departments over who should get loans and the size of loan made banks operate quite differently than commercial banks. One of the effects of such intervention and the consequential inadequate commercial or credit assessment is the triangle debt phenomenon, in which borrowers can no long to pay back loans and banks suffer a huge bad debt. In fact, the problems are rooted in the pre-reform financial system with its virtual monopolistic banking system. The People’s Bank of China (PBC) acted both as the controller of overall liquidity in the economy and as the holder of deposits and distributor of financial resources. The resource demands of the government and enterprise sectors were determined by the annual plans and budgets, which mandated and directly allocated the financing of fixed and minimum or quota working capital. Government and enterprise transactions, except for cash payments for wages and some services, were reflected in the clearing of deposits on the PBC books.

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In a series of steps beginning in 1979, the ordinary banking activities of the PBC were separated out and assigned to newly created specialised banking institutions, including the Agricultural Bank of China, recreated (for the fourth time) in 1979, and the Industrial and Commercial Bank of China established in 1984. In addition, the Peoples’ Construction Bank of China, founded in 1954, continued as the government’s fiscal agent in the distribution of budgetary funds for capital construction and as the exclusive bank of construction enterprises. The Bank of China, traditionally the sole institution involved in international business, has remained the principal vehicle for foreign exchange transactions. However, in 1979, the China International Trust and Investment Company was established under the State Council to promote joint ventures between Chinese and foreign enterprises and to provide another window for attracting foreign funds to China (World Bank 1988). A number of similar institutions have since been created at the provincial level. Still another intermediary for foreign lending, the China Investment Bank, was founded in 1981, initially as a channel for World Bank loans to the industrial sector. In addition to changes in the banking system, considerable dynamism has been shown in the appearance and growth of such non-bank financial institutions as the investment and trust companies, leasing activities, and insurance. Foreign banking was permitted initially in the SEZs in the early 1980s. Since 1986, a number of foreign banks were allowed to open branches in SEZs and Open Cities. Their business scope was initially limited, largely to foreign trade-related operations and lending and deposit services for foreign owned enterprises (World Bank 1988). In 1988, four foreign deposit-taking banks and 29 foreign joint-venture banks operated in China (World Bank 1988: 2–3). Ten years after the initial limited permissions for foreign financial institutions to operate in China, the number of these institutions was increased dramatically and the scope of their financial services expanded as well. For instance, in 1996, there was a total of 527 foreign financial institutions, foreign financial representatives, and offices in China. Of these, 156 were financial operation institutions, including 131 branches of foreign banks, six joint-venture banks, five foreign wholly owned banks, five joint-venture credit companies, eight jointventure insurance companies, and one joint-venture financial company (Almanac of China’s Economy 1997). In fact, the formation of SEZs provided a new environment in which commercial banks could function as the major player in the financial market. For instance, the total investment in infrastructure projects in

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Shenzhen was RMB13.8 billion between 1979 and 1988 (Fang 1991). Of this total, the combined expenditures of the central and Shenzhen government comprised no more than 16 per cent (Fang 1991). The remainder of the investment came from domestic banks and foreign direct and indirect investment (including foreign commercial loans). Thus the banking system in SEZs comprises: 1. state-owned banks, such as People’s Bank (central bank), Bank of China (mainly dealing in foreign exchange), Industrial and Commercial Bank, Construction Bank and Agricultural Bank; 2. private banks, such as the Shenzhen Development Bank and the Shekou Commerce Bank in Shenzhen; and 3. foreign commercial banks, largely from Hong Kong, Japan, the US and Europe. In addition, there are many other financial agencies in SEZs such as trust investment companies, finance companies, lease companies, stock companies, and insurance companies. On the other hand, the money market was also developed within SEZs in the early 1980s. On the money market are transacted debt and credit between banks, financial agencies and corporations, and short-term funds between banks. The scope of changes in the rate of interest is determined by the Chinese People’s Bank, after which it is influenced by the market. Furthermore, stock markets were also first established in Shenzhen and later in Shanghai Pudong Development Zone. In 1983, a stock market was set up in Shenzhen; stocks were issued by the Shanwa Limited Corporation, Yinghu Travel Agency, and the Lianhe Investment Corporation (He 1984). After the Shenzhen government issued Temporary Regulations on Issuing Company Shares in Shenzhen SEZ in 1984, stock and company bond markets developed gradually under government control (He 1988). In the early 1990s, company bonds amounted to RMB4.4 million, state bonds reached RMB2.68 million, and securities had a value of RMB10 million on the Shenzhen stock market (Park 1997). In the rest of China, people can buy and sell shares through the branch offices of Shenzhen and Pudong Stock Exchange Centres. There are three type of shares, namely A shares for domestic investors, B shares for foreign investors and H shares for industrial institutions. In 1999, the total share value reached RMB2647 billion with 291 billion shares (Almanac of China’s Economy 2000). Besides the development of stock markets, foreign currency markets

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were also established gradually. Corporations in Shenzhen, for example, enjoy special treatment in foreign currency management. All foreign currency earned through exports is reserved from taxes. However, during the early Deng years, foreign currency management was under the central control of the state through the Bank of China, and there was no easy way of exchanging foreign currency and RMB. Thus, a lot of foreign currency and RMB was exchanged on the black market (heishi). In order to alleviate the problem, the government established the Foreign Currency Exchange Centre (waibi jiaohuan zhongxin) in Shenzhen in November 1985 (Zhu 1992), though dealing remained limited. Under pressure from the black market and customers, the government lifted restrictions in 1987. Prices were to be dictated by the market, and individuals or corporations allowed to trade freely. After the free price system was implemented, companies could exchange their foreign currency with RMB at a higher than official rate, which helped to eliminate black market activities in SEZs and the rest of the country (Zhu 1992). Since then, RMB can be exchanged with foreign currency within China. During the 1997–78 Asian financial crisis, the Chinese government insisted on maintaining the value of RMB at US$1 = RMB8.28, a policy that helped maintain financial stability in China and in the rest of the Asian region. The development of labour markets SEZs have been used not only for implementing financial initiatives, but also for developing the labour market. A relatively free labour market was developed in SEZs in the early 1980s when the rest of the country was still under the central employment allocation system. Changes to the labour market started when the central government granted labour planning autonomy to Shenzhen, which manages labour supply according to its social and economic development objectives (Zhu and Campbell 1996). The labour market in SEZs has several important characteristics. The household registration (hukou) is managed jointly by the SEZ’s Labour Bureau and Public Security Bureau. The Labour Bureau determines and mandates the size of the population with hukou in the SEZ. People with hukou are mostly permanent employees with government jobs. However, since the Regulations on Business Management in Guangdong Province SEZs were announced in 1982, most companies in Shenzhen have adopted the contract system for hiring employees, and most of those employees are migrants from other parts of China, without permanent hukou in Shenzhen (Zhu 1992). Some of the

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migrants hold long-term temporary hukou (over one year); others may only hold short-term temporary hukou (less than one year). Both may renew their temporary residence, depending on the contract of the job. Under the contract employment system, individual companies have the right to hire and fire their employees without government interference. Most contract employees are young, middle and high school graduates who may change workplaces more often than their parents because of dissatisfaction with their working environment and pay. Furthermore, companies in Shenzhen that have relationships with firms in the domestic economy use a system of rotating labour. Technicians, managers and skilled labourers assigned to the SEZ company are replaced with new personnel from related domestic firms when they complete their one- or two-year assignment in the SEZ. Temporary employees usually work on factory assembly lines, civil engineering and construction sites, quarries, transport and various repair jobs. Other temporary labourers work in hospital wards, warehouses, and as parttime housemaids. Hence, labour turnover is much higher in SEZs than in the rest of China. For instance, the labour turnover in Guangdong SEZs was 18 per cent compared with less than 5 per cent in the rest of China in 1992 (Zhu 2000). Following the economic development of SEZs and coastal regions, the central government gradually loosened the control of hukou. Since the mid-1980s, millions of migrant workers (the so-called floating population (mingong)) have moved temporarily from the countryside to SEZs and coastal urban regions looking for all kinds of work (Zhu 1995). Therefore, it is difficult to determine precisely how many people work in SEZs, due to the lack of complete official statistics. However, according to partial statistics, about 80 per cent of the total labour force in corporations and offices in SEZs are known to be contract or temporary workers (China Labour Statistical Yearbook 1998). However, the shift towards a more decentralised and flexible labour market (Naughton 1996) requires new regulations and institutions to maintain stability (Benson and Zhu 1999). Four key reforms were instituted in 1986 covering labour contracts, recruitment, dismissals and social insurance (Zhu and Campbell 1996). Those policies were initially implemented in SEZs and spread into the rest part of China. Eventually, those temporary regulations, established experimentally in SEZs have been transformed to such permanent legislation as the Trade Union Law (1992) and the Labour Law (1994), covering the whole country (Benson and Zhu 1999). The SEZs have played a leading role in transforming labour market regulations and promoting employment flexibility.

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The market for R&D SEZ governments have actively promoted scientific projects and introduced advanced technology from abroad (Chapter 8). SEZs have encouraged companies to create R&D centres and scientists and technicians to establish private corporations. Consequently, the applied sciences became strengthened and a technology market was created. With the formation of a technology and information market, China not only began to import advanced technology, but also to export its own technology (Park 1997). Globalisation in China, of which SEZs are a central element, reflects a hybrid economic system that comprises some socialist principles and capitalist free market elements. The path of change is rather gradual due to the lack of a blueprint. Hence the description of restructuring as ‘socialist market economy’ and ‘with Chinese characteristics’ (Zhu and Fahey 1999).

4. The role of SEZs in transition After nearly two decades of development, the domestic and international situations facing SEZs are quite different from those in the early 1980s. In their new historical circumstances, the SEZs, like other places in the country, face severe tests. The SEZs are being challenged domestically and internationally. 4.1 Internal and external competition As China’s economy is internationalised, China has joined a variety of international, regional, multilateral and bilateral economic and trading conventions and organisations. These memberships have progressively limited the scope for applying preferential policies of local economic development, especially foreign trade. Furthermore, the opening up of the 14 coastal cities in 1984 offered similar preferential policies to a much larger number of regions than formerly. More and more regions can serve as windows and comprehensive trial areas of reform. In other words, Special Economic Zones are no longer so special. Equally, since the hand over of Hong Kong and Macao to the PRC, the economies of Hong Kong, Macao, Taiwan and the mainland have become even more integrated. A platform for establishing a common market is in process. The easy access to information, technology and managerial skills among the four areas no doubt limits the SEZs’ role as an experimental area. Internationally, competition between developing countries has intensified. More and more developing countries are adopting the exportoriented strategies advocated and encouraged by the World Bank. In order

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to attract foreign investment, developing countries compete with each other to offer preferential conditions, leaving little space in the market for international labour-intensive products. In recent years, many new EPZs, FTZs and SEZs have been constructed in many newly industrialising countries in Asia, Eastern Europe and the former Soviet Union. For instance, Poland decided in 1989 to set up seven SEZs (Gao and Chi 1997). There are other obstacles to the development of SEZs in China. For instance, the cost of some factors of production in the SEZs, such as labour and real estate, has risen, reducing SEZs’ ability to compete for labour-intensive, cost-minimising forms of production (Clark and Kim 1995). Twenty years on, the industrial structure in some SEZs requires readjustment if the regions are to survive such domestic and international competition. 4.2 New strategies The design of the new strategies reflects the existing advantages of SEZs and seeks to create an even wider range of functions for SEZs in the future. One important advantage of SEZs is their geographical location. Four of the SEZs are located close to the most developed areas in East Asia. The fifth – Hainan SEZ – also has a unique character: a tropical island, populated with people of many ethnic origins and rich in natural resources. These five SEZs are all on the coast in south China, and the centre of the Asian-Pacific economic community. It is convenient for them to become integrated into regional and global networks of production. The SEZs are seeking to combine this locational advantage with their own character to regain competitiveness; Hainan SEZ, for example, is developing advanced agri-based, mining and material processing industries as well as the tourist industry. In addition, the SEZs have been playing a leading role in developing a socialist market economy. Markets have been developed in the SEZs to a far greater degree than in other parts of China. The construction of various key product markets, the market for intermediate organisations and the laws governing the operation of markets are relatively complete. These market forms can be exploited in international trade, finance and foreign investment. Furthermore, the SEZs have much better infrastructure and better planned urban development than the rest of China. Harbours, airports, railways, highways, water and electricity supply, communications, factory buildings, dwellings, shops, schools, hospitals – all are of higher quality than elsewhere in China. These advantages are important in long-term competition, both internally and externally. The living

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environment of SEZs attracts a highly qualified labour force which can underpin their future development. Besides exploiting such existing advantages, SEZs are trying to maintain their competitiveness by creating multi-function capacities. One important transformation is in the area of production. So far, labourintensive simple processing industries have dominated industrial production in SEZs. However, increasing competition (both internally and externally) and rising production costs in the SEZs make it necessary for SEZs to develop new and high technology industries. One important step is to attract investment from MNEs with new and high technology. Another is to develop innovative centres and science parks inside the SEZs. Shenzhen has its own science and industry park (Chapter 8), though it still far from being an effective innovative high-technology base. Instead of encouraging all forms of investment, SEZs are beginning to focus on promoting new and high technological industries, while relocating labour-intensive industries inland. Another important transformation concerns the location of SEZs with respect to China’s customs border. SEZs are relatively large, so each can be divided into an area outside customs and an area inside the customs border, allowing the SEZs to take advantage of two different systems. The area outside customs can be divided into a variety of special economic subzones, such as free duty, free trade, export processing and transit subzones and free ports. Other regions, outside these subzones, can be located within China’s customs border, much as SEZs are now. In other words, many small specialised zones would exist in each large SEZ. These transformations would make the SEZs even more special. The pursuit of specialisation within the SEZs is linked to each individual zone’s location, existing business sectors and technological specialisation. Shenzhen plans to strengthen its economic cooperation and exchange with Hong Kong in the areas of production, finance, science and technology, trying to share Hong Kong’s functions as a transport and financial centre for east Asia. Meanwhile, it also relies on the development of the Pearl River Delta region. The regional integration of Shenzhen, Hong Kong and the Delta rests on mechanisms whereby they can cooperate. It has been suggested that a common market be developed between Hong Kong, Shenzhen and the Pearl River Delta, and their governments are assessing this possibility. Shenzhen is expected to become one of China’s major multifunctional cosmopolitan cities, serving as a window on international trade, finance, information, hi- and new-technology and market

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mechanisms, thus taking full advantage of its role as a hub in both domestic and international markets. The detailed plan includes: 1) a regional transport hub linking Hong Kong and the Pearl River Delta region; 2) a regional finance centre with over 1000 financial institutions and services agents; 3) a regional commercial and trade centre to attract foreign funds and develop foreign trade; 4) a regional information centre offering information on both domestic and international markets; and 5) hi-tech industrial production. So far, Zhuhai has experienced remarkable economic growth. The city’s economy has been growing at an average annual rate of 35 per cent (Gao and Chi 1997). In order to maintain this economic development, the government of Zhuhai is re-orienting its economic plan: 1) taking advantage of its geographical location to make itself a hub of talent, materials, funds and information between the national and international markets; 2) giving full play to innovation and research and development; 3) upgrading industries to become more competitive; 4) establishing a fully developed market system and developing more intermediary and special markets; 5) strengthening the training of workers and creating a better environment to attract and retain skilled employees. Shantou, an area of only 1.6 square km, one of the smaller zones and a part of Shantou city, faced more challenges and difficulties than the others. Compared with other SEZs, the infrastructure in Shantou, including telecommunications, transportation and energy supply, is relatively backward. These facilities rely on the infrastructure of the old city and it has proved difficult to raise funds for modernisation. The particular advantage of Shantou as an SEZ was not its closeness to Hong Kong, Macao and Taiwan, but its links to overseas Chinese communities. In the history of China, Shantou was a traditional source of emigrants, and it is therefore one of the cities inhabited by many relatives of overseas Chinese (and nowadays returned overseas Chinese). In 1991, the State Council decided to expand Shantou SEZ to the whole city, an area of 234 square km. The local government exploited this decision by planning to develop Shantou SEZ as a modern international harbour city. The new development attracted more FDI and by 1994 about 75.4 per cent of total FDI in Shantou occurred in the previous three years. Since the expansion of Shantou SEZ, infrastructure has been upgraded and eight major projects have been developed: the Shantou deep water harbour, Bay Bridge, Shenzhen–Shantou Expressway, Guangzhou–Meixian–Shantou Railway, a new water plant, coal power plant, internal combustion power plant, and Nan’ao Bridge over the sea. Other large projects are being planned.

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Despite the recent rapid development of Shantou SEZ, Shantou still lags behind the other SEZs. Restructuring the existing industrial structure is the first priority for the Shantou SEZ government. The government claims that Shantou’s economic development should depend on progress in science and technology and the improvement of the quality of workers. High and new technology industry should become the strategic and guiding industry in Shantou, leading to the technical upgrading of other industries (Gao and Chi 1997). Three major tasks have been established in recent years: 1) setting up a scientific and technological zone within Shantou SEZ in order to develop microelectronics data technology, bioengineering, new materials, fine chemistry, energy resource technology, and mechanical and electrical integration; 2) establishing several large enterprise groups and building up pillar industries in order to achieve economies of scale and agglomeration of production; 3) building a more developed market system, including a commodity market, labour market, technological market, real estate market and information market. Xiamen has been famous for many years as the harbour facing Taiwan Island. After the SEZ was established in Xiamen, its economy has developed rapidly. Its GDP increased over 20 times between 1980 and 2000 and it ranks as the fourth busiest international port in China. Many FOEs operate in Xiamen, producing some 70 per cent of the total industrial output value. There are also eleven foreign banks and 799 representative offices of foreign financial institutions in Xiamen. In recent years, Xiamen has been among the top ten cities in China for comprehensive economic strength and investment environment (Gao and Chi 1997). To achieve the next goal of development in Xiamen SEZ, its government believes that a model of Taiwanese development and its geographical closeness to Taiwan should be exploited. In fact, the so-called small three direct connections (xiao santong) – postal communication, air and water transport, and trade – between Jinmen and Mazu islands of Taiwan region and Xiamen started in early 2001. The SEZ government hopes that the large three direct connections (da santong) will be established between the two sides of the Taiwan Straits in the near future, to expand the scale of cooperation and exchange of economic activities between Xiamen and Taiwan. By 1996, Taiwanese-invested firms already produced 40 per cent of the city’s total industrial output value (Gao and Chi 1997). Plans to engage even further with the international economy include fully implementing the free port system by developing the Xiangyu Bonded Zone where bonded machinery and raw materials, bonded factories and bonded warehouses can operate without paying duty. This

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requires reform of the customs supervision system, and a system of flexible international financial transactions. In addition, Xiamen SEZ’s goal of becoming a scientific and technological city rests on the development of high- and new-technology industries. Several initiatives have been implemented, including the Torch Hi- and New-Tech Industrial Zone, expanded investment in schools, colleges and universities, and encouragement of skilled immigration from inland areas to Xiamen by offering a good working and living environment (Gao and Chi 1997). Since 1987, Hainan has become a new industrialising province with the status of a SEZ covering an area of 34,000 sq km. The national and provincial governments’ policy towards the development of Hainan is based on: 1) an advanced agricultural production base with relatively high technology and productivity; 2) an attractive tourist location, with tropical climate and natural beauty; 3) new, high technology manufacturing oriented to exports; 4) well-established infrastructure facilities with an advanced telecommunication system, financial services, real estate development, freeway system and rail connections to the mainland; 5) new mining activities, such as gas exploration (HDPB 2000). Hainan’s economy maintained strong growth in the late 1980s and early 1990s but more moderate growth recently. At the same time, the number employed also increased substantially. Since opening up the economy, the structure of industry has changed and the ownership system has become more diverse. Light industry – food processing, textiles, printing, plastics, machinery and chemical industries – has become more important than heavy industry, such as mining and iron and steel processing. The traditionally dominant SOEs have become less important in terms of their contribution to industrial output; in 1998, SOEs produced only 24.7 per cent of the total value of Hainan’s industrial output and non-state sectors 75.3 per cent (HDPB 2000). In the nonstate sector, FOEs developed rapidly and they have become one of the most important economic players in Hainan. For instance, there were 8134 FOEs in Hainan in 1998, with an accumulated foreign investment of US$7.4 billion (HDPB 2000). The recent Asian financial crisis and competition from other SEZs and Open Cities have pressed Hainan SEZ to identify new strategies for further development. Several initiatives have been taken, including setting up a comprehensive free trade zone in Hainan and a free harbour in Yangpu district; developing the western side of Hainan Island, reflecting its rich mineral resources such as oil, gas, iron ore and salt and its access to sea transport; encouraging foreign banks and financial institutions to operate in Hainan; developing a tropical coastal tourist area with Sanya as its centre by attracting capital for the development of

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tourist projects and the construction of tourist facilities; and strengthening value-added forms of agricultural production and food industry based on its rich agricultural resources. The Chinese SEZs are at a crucial stage of development and survival in both global and domestic market competitions. China has persuaded other countries to accept its membership in the World Trade Organisation (WTO). However, other pressures on China to open up its domestic market are building, due to China’s rapid economic growth and its huge trade surplus with such major trading partners as the US and the EU. The central government has sought to convince the outside world that China is willing to open up more. The SEZs have been used once again as a window to show this intent. SEZs have the hardware and software with which to adapt to free trade conditions. By developing SEZs into free trade areas, China is demonstrating its willingness to open up the economy. At the same time, China seeks to control the pace of this opening, gradually opening the entire economy without losing too much (such as domestic industrial capacity and jobs).

5. Conclusion: towards globalisation China’s path towards globalisation is realistic and pragmatic. On the one hand, marketisation and opening up benefit China’s economic development and have raised the living standards of most people. Foreign trade and investment create jobs, new industries, foreign exchanges and market prosperity. However, the central government feels that the transformation toward a market-oriented economy and integration with the global economy can not be driven purely by ideology nor rushed. One important characteristic of Chinese reform is gradualism. Crossing the river by feeling the stones demonstrates this philosophy (Zhu and Warner 2000). The burden of history, the pressure of the population in terms of size, education and ethnicity, the size of the national economy, and the political and social structure – all require careful and pragmatic policies. Globalisation is a double-edge sword: it can benefit a national economy, but it also can hurt. The recent regional economic crisis taught this lesson. SEZs in China are an outcome of policies which aimed to change the economy and committed the nation to open up. SEZs can be understood as a bridge to link the national and international economies, and as an experimental area for implementing new reform policies and legislation. The SEZs have been used systematically by the government as the one window and two coverings of fan. Through this window, China

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can know the outside world, and foreigners can understand China. The recent transformations of SEZs into fully free trade areas reflect the government’s attempt to convince the international community that China is willing to open up the economy. The transformation of SEZs, to use their existing advantages and create multi-function capacities, aims to improve their competitiveness and lead the national economy into a new wave of global competition. Location, infrastructure, experience and economic strength encourage the government to use SEZs as pioneers in further economic change and global competition. This form of regionalisation – the creation of special areas with laws different from those elsewhere in the country – reflects an explicit attempt to manage process of globalisation. These regions are not the effects of globalisation; they are a means. In particular, SEZs have allowed the central government to experiment with new policies before introducing them more widely in the remainder of the country or to limit the social dislocation caused by the operation of relatively free markets. Thus, SOEs in SEZs could be restructured with few implications for urban unemployment; the effects of relaxing the regulations about hukou can be identified; the operations of FOEs could be studied. In debates over the extent to which markets should allocate resources or to which trade and investment should be internationalised, the existence of such regions as SEZs allowed Deng and his supporters to argue for change as an experiment; once opposition to the new policies was overcome, the changes could be spatially generalised. Thus, SEZs have played an important political role in facilitating globalisation in China. But SEZs are also economic geographic entities. That is, they are also regional agglomerations of investment, hubs for infrastructural development, locations to which talented and ambitious people are attracted. As such, they operate in China as loci to which foreign enterprises can be attracted – not simply by fiscal benefits but also by the knowledge that business conditions are not too different from those in developed countries, except that costs are relatively low. In other words, SEZs could perform their political role only if they also conformed to rules about the manner in which space economies operate. That is, they had to be spatial agglomerations (rather than, for example, nominated sectors) and appropriately located (rather than, for example, inland). Deng did not have total freedom to determine the nature of the experiments with which he sought to convince others. This interaction of regions as policy and regions as expressions of geographical precesses is also apparent in the history of high and new technology development zones.

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8 High and New Technology Industrial Development Zones Wang Jici and Mark Wang

Across the world during the past quarter century, various types of technopoles have been built, seeking to hitch growth to technical innovation. The images and ideology of high-technology are popular elements of regional policy in many countries. Hundreds of regions in the world have dreamed of becoming the next Silicon Valley. While some technopoles undeniably sustained growth, as Castells and Hall (1994) noted, the world is now littered with the ruins of all too many such dreams that have failed, or have cost far too much. There has been a rich Chinese literature on the development of a high-technology sector in China. However, there is no appropriate theoretical framework within which to understand China’s hightechnology policy. This chapter analyses technological development in China during an era of rapid technical change, globalisation and changes to China’s institutions; in particular, it seeks to identify the logic of Chinese high and new technology industrial development zones (HINTDZs). In China, the fields of high- and new-technology are defined to include: microelectronics and electronic information; space science and aerospace; photoelectronics and laser-mechanic-electronics; life science and biotechnology; material science and new materials; energy science, new-energy and energy-efficient technology; ecology and environmental protection; earth science and marine-engineering technology; science of fundamental matter and radiation; medical science and biomedical engineering; other new technologies applied in the processes of traditional industries. The eleventh item includes all technologies that are underdeveloped in China, meaning that it is difficult to identify real high- and new-technology enterprises. After examining the background to the formation of technology zones, the chapter turns in the second section to trace their creation 168

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and development. The third section examines evidence of development in HINTDZs. The chapter then proposes an interpretation of technology zones in China and finally, identifies some of the dilemmas of innovation policy. The chapter traces the special policies that were formulated as HNTIDZs adapted overseas fashions in technical change and regional development theory to China’s own institutions and conditions. Those fashions are perhaps summarised in the themes and titles of Amin and Goddard (1986) and Markusen et al. (1986).

1. Background When China opened its door to the outside world at the end of the 1970s, globalisation was not the sole shock; there was also the matter of rapid technical change. The 1983 forum on the challenge of the world new-technical revolution and China’s countermeasures, held by the State Council, quickly embraced the concept of a revolution in technology. At the forum it was realised that earlier attempts to apply defence research to production were inadequate; a new challenge for China was to invigorate the existing economic infrastructure with advanced technology, and to gain capacity in high-technology production. Although state funds were (and are) limited, the stunning development of Silicon Valley, the explosion of fashionable theorisations of the Valley’s ‘success’ and the worldwide emulation of the model have greatly stimulated Chinese interest in planning centres to promote high-technology industry. China’s planners have created technopoles in the belief that a technically-advanced economy depends on spatial concentration. Like the coastal development strategy itself, such agglomeration runs counter to earlier Chinese industrial planning practice when, as we have seen (Chapter 6) China discouraged concentration of facilities for reasons of national security and regional balance. In the past, high-technology defence industries of China were built in remote areas deep in the interior. The government sent outstanding scientists there and established sophisticated research facilities. However, little technology transfer occurred and limited benefits were obtained from the policy of dispersal. The philosophy for establishing Chinese technopoles was initially domestic: The five-thousand-year history of science, culture and knowledge indicates that the Chinese nation is world class in term of its abstract thinking capability. . . . As long as we create a good milieu for

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[Chinese young people], their success in competing in the worldwide high-technology market will be visible in the near future (Song 1997). This idea was expressed also by the noted Chinese atomic physicist Dr Qian Sanqiang on behalf of ambitious Chinese intellectuals: what foreigners can do, the Chinese, through hard work, can accomplish as well (Beijing Review 1990). In March 1986, four distinguished scientists wrote to the government, suggesting that China join the international race for high-technology development. They claimed that only in this way would China be able to improve its status and stand at the forefront of the international community. Deng Xiao Ping, who had earlier affirmed that science and technology were productive forces (Deng 1978) instructed that this matter should be decided quickly. The State Council called together 124 senior Chinese scientists to draft China’s strategic high-technology plan (the 86-3 Plan). The plan was to monitor high-technology research in the world and, more importantly, to develop and commercialise technologies produced by Chinese scientists. The State Science and Technology (S&T) Commission was delegated the authority to implement the plan. Pockets of internationally competitive research had been created since 1949. But until the late 1970s, when China embarked on its modernisations, the policy of bridging the gap between research and production was not spelled out by the government: China must be ready to adopt all advanced production methods found in foreign countries, whether socialist or capitalist. Policies for science and technology had first to restructure the S&T institutions, copied from the Soviet model in the 1950s, that had downgraded research in universities and centralised research in institutes under an Academy of Sciences (Simon and Goldman 1989). The changes to the S&T system and the education system since Mao are summarised in Table 8.1. To implement the 86-3 Plan, the State S&T Commission designed the Torch Programme (Wei 1988). The aim of the programme is to tap the potential research findings of Chinese S&T workers, to promote innovation in SOEs, and to encourage state-owned research institutes, universities and enterprises to set up research-intensive enterprises. The Torch Programme seeks to commercialise high- and new-technology research findings, and to internationalise the high- and new-technology industry. It looks to create a favourable environment for Chinese high-technology development. Under the leadership of the Torch Programme, several HNTIDZs and innovation centres have been built.

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High Tech Zones 171 Table 8.1 Reform of science and technology education systems in China Problems to be solved

Reform measures

Research institutes in the Chinese Academy of Sciences and Universities were guided by a central plan and funded by an annual budget from the central government

Available funding for research is directed to major projects to ensure better returns on investment The basic operating funds of many research institutes have been heavily reduced Stimulating a technology market for technology commercialisation Bridging the gap between research and production. Allowing S&T personnel to have more opportunities to choose their jobs Sanctioning of private scientific and technological activities

Technology was considered a free goodz Research was isolated from production Restricted mobility of professional manpower

The Torch Programme is master-minded by the State S&T Commission, under which a government agency (Torch Programme Office) was created, responsible for the development of HNTIDZs. An important task of the Torch Programme Office was to establish HNTIDZs in selected cities, employing technical manpower and enjoying a good environment for opening to the outside world, to accommodate and nurture China’s own high-technology industries (State S&T Commission 1994). The concept of HNTIDZs is similar to Japan’s Technopolis. However, the two policy initiatives have different origins: Japan’s Technopolis is a form of industrial policy initiated by the Ministry of International Trade and Industry, while HNTIDZs are a tool of S&T policy initiated by the State S&T Commission. The background of Japanese Technopolis is an acute regional imbalance, while the starting point of Chinese HNTIDZs is the isolation of S&T research from production. Even so, the final targets of the two programmes are similar in both regional balance and infant industries. For China, it is supposed that the transformation of S&T research findings into competitive commodities would occur in HNTIDZs. As new technologies developed, they would then be diffused to other regions of the country, revitalising traditional SOEs. The government infused some dynamism into the system by letting some forms of commercial activities act as incentives to technical development and diffusion. The basis for this entrepreneurial approach is a

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belief in market forces as the prime regulators of advanced technical change. The six self-principles (liuziyuanzi) of non-interference mean that Chinese new-technology enterprises may choose partners by themselves, finance for themselves, operate by themselves and be responsible for all losses caused by the venture, master themselves, develop themselves (ziyoujiehe, zichouzijin, zizhujingying, zifuyingkui, ziwoyueshu, ziwofazhan). The fledgling new-technology firms are called jihua wai, meaning listed outside the national plan. They are allowed to look for profitable projects by themselves without receiving increased financial support from the government. Strictly speaking, China has only a small high-technology industry, though it is growing. However, nowadays, some of the vogue words in Chinese society are high-technology (gaojishu) or high- and newtechnology (gaoxinjishu), or even high-S&T (gaokeji). These concepts are far broader than those envisaged in the 86-3 Plan. Since it was thought that China could not afford to fund advanced research on a broad front, the 86-3 Plan selected only seven areas as priorities – biotechnology, space technology, information technology, laser technology, automation technology, advanced energy technology and advanced materials. According to the 86-3 Plan, the concept of high-technology industry in China should be similar to the global concept of high-technology industry (Glasmeier et el. 1983). However, by the time that the 86-3 Plan had been transformed into the Torch Programme, high-technology industry had transformed into high- and new-technology industry. The Torch Programme called for creating S&T enterprises and establishing experimental zones for the development of high- and new-technology industry. The S&T enterprises (or high- and new-technology industrial enterprises) are defined as a new type of enterprise, integrating technology, industry and trade with S&T personnel as the mainstay. From that point on, the term high-technology industry has been loosely used to include all the underdeveloped technologies in China. Similar changes can be observed in comparing the State S&T Commission’s Requirements and Measures for the Determination and Ratification of Highand New-technology Enterprises in National HNTIDZs issued in 1991 and the Beijing municipal government’s Interim Measures for the Appraisal and Certification of New-Technology Enterprises in Beijing Experimental Zone for the Development of New-technology Industries promulgated in 1988. Chinese HNTIDZs were also intended to create technology incubators. The concept of incubator was first presented to the State Council at the same time as the argument about the challenge of a revolution in newtechnology (1983). Song Jian, the former leader of the State S&T Com-

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mission elaborated the concept of Chinese high-technology incubators in 1987 with the president of United Nations’ Development Promotion Foundation of S&T. In June of the same year, the first incubator in China (Wuhan Donghu) was set up. Not long after, the innovation centre of Shenzhen S&T Industrial Park was created in Shenzhen SEZ. The development of innovation centres is a major task in the Torch Programme issued in 1988. Compared with SEZs and Economic Development Zones, HNTIDZs specifically serve advanced technology activities and were originally oriented towards domestic investors (though foreign investors are welcome). The HNTIDZs give tax concessions only to high- and newtechnology enterprises that are qualified in terms of products or expenditure on R&D. Despite the supposed agglomeration economies to be garnered from locating near other high technology firms, perhaps the most important factor stimulating the expansion of China’s HNTIDZs were the preferential policies. These included: • For processing export products, no import license is required. • Bonded warehouses and bonded factories are allowable for high- and new-technology enterprises. • Each zone can set up a technology import/export agency. • Successful high- and new-technology enterprises may earn the right to run foreign trade business. • The income tax of enterprises in the zone was levied at a reduced rate of 15 per cent from the date of their ratification. • A start-up enterprise in the zone may be exempt from income tax in the first two years. High technology policy in China thus has a variety of origins. The desire to catch up technically has become bound into a process of detailed spatial planning that owes a lot to imported ideas about innovation and agglomeration. The nationwide HNTIDZs have become new industrial spaces in China, along with the SEZs, the economic and technical development zones and the coastal open cities. They stand in witness to the idea of growth poles. About half of all Chinese research institutes in the fields of manufacturing, transport, telecommunication and medicine have created enterprises in the HNTIDZs. In practice, however, HNTIDZs blur the concepts of science park, science and technology (S&T) park and industrial park, as they are deployed to incubate new forms of industrial production.

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2. Proliferation of HNTIDZs New- and high-technology enterprises are, with the township enterprises, China’s two wings for painful post-cultural-revolution take-off. Thanks to the more liberal attitudes of late 1970s towards entrepreneurship, the township enterprises in the rural area of China boomed and became one wing readied to take off. Since the 1980s, urban and industrial reforms have been in full swing, along with the emergence of a small but growing number of high- and new-technology enterprises – the second wing to take off. A number of electronics firms firstly established by intellectuals in Zhongguancun Street of Beijing’s Haidian district, represented a breakthrough for the Chinese economy (Wang and Wang 1998; Yu 1999). The high- and new-technology firms can be regarded as spin-offs from state-run research institutes and universities. Spin-off activities have been most intensive in the Chinese Academy of Siences (CAS) and the major universities, such as Beijing and Tsinghua Universities. In March 1985 the determination on the reforms of the S&T system, issued by the Central Committee of the Communist Party, proposed to select several intelligence-intensive areas in the country and adopt special policies there, forming new-technology development zones. In July 1985, Shenzhen Science Park was created by CAS and the municipal government of Shenzhen, becoming the first science park in China. In February 1988, a group representing the Central Committee of the Communist Party, the national S&T Commission, the national Education Commission, the Chinese Academy of Sciences, the S&T Association of China, the Beijing S&T Association and the government of Haidian District proposed to establish Zhongguancun new-technology development zone as an experiment in setting up HNTIDZs. In 1988, when the Torch Programme was announced, 14 HNTIDZs were set up by provincial and municipal governments. One was the Beijing New-Technology Industrial Development Experimental Zone (BEZ), approved by the State Council. In about two years, provincial and municipal governments built another 13 HNTIDZs. The State Council approved the first group of 27 national-level HNTIDZs in March 1991. A critical turning-point came in 1992, after Deng’s whirlwind visit to south China, when a research group sponsored by the S&T Commission suggested to the State Council that it approve another 20–25 HNTIDZs. The group argued that the formation of a fully-developed HNTIDZ needed one or two decades and that the modernisation of China could not be achieved without 50–100 fully-developed HNTIDZs. Therefore,

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in early 1993, the State Council approved an additional 25 national HNTIDZs (the 53rd HNTIDZ, located in Shaanxi, was approved separately in 1997 as an agricultural high-tech zone). During the same period, the number of provincial HNTIDZs grew to 68. In addition, some municipal governments conceived their own so-called science parks or high-technology parks (though these zones are not under the control of the State S&T Commission nor provincial S&T Commissions). Since 1992, the geographical areas of HNTIDZs have been enlarged. Many zones are not even contiguous; some zones consist of several parks (sub-zones) (yiquduoyuan), such as a Beijing zone with three parks, a Shanghai zone of six parks, and a zone of four parks in Tianjin. Some zones started from Policy Zones (zhengcequ) in built-up areas of the cities and later diffused to new development zones in new, purpose-built areas (kaifaqu). For example, Shangdi Information Base in Beijing with an area of 180 hectares was built in 1993 adjacent to Zhongguancun newtechnology area. By the end of 1995, the Base accommodated 85 new-technology enterprises, including 38 joint ventures with foreign investment. Famous Chinese high-technology enterprises, such as Legend, Founder, Stone, Rainbow, and some multi-national enterprises, such as Novo Nordisk (Denmark), IBM (USA) and FANUC (Japan) entered the Base one by one. By 1997, the national HNTIDZs could be analysed into three categories – S&T industrial parks, industrial bases and new towns. The three categories accounted for 66 per cent, 25 per cent and 8 per cent respectively of the output of HNTIDZs. In 1997, a new national HNTIDZ that is specialised in agriculture was set up in Yangling (Shaanxi). The distribution of the HNTIDZs is shown in Table 8.2. According to the S&T Commission of China, the location of national HNTIDZs reflects several principles. First, R&D oriented zones should be located in provincial capitals and other cities where S&T personnel are concentrated. In China there are at least 5000 S&T research institutes attached to ministries, provinces, municipalities and the Chinese Academy of Sciences (CAS). The institutes are largely concentrated in the provincial capitals. For instance, under the Maoist defensive policy, the Chinese S&T University and a branch of CAS were established in Hefei (Anhui) and many scientific research institutes were set up in Xi’an (Shaanxi) during the 1960s. The concentration of research facilities in the three northeastern provincial capitals of Shenyang, Changchun and Harbin can be traced back to the 1950s when huge investments were made there. The technopoles have been created to commercialise the research of these institutes.

No. of firms 3,046 1,484 322 100 128 103 872 623 99 382 86 292 136 290 340 105 76 179 210 114 105 45 94 222 43

HNTIDZ

Beijing Tianjin Shijiazhuang Baoding Taiyuan Baotou Shenyang Dalian Anshan Changchun Jilin Harbin Daqing Shanghai Nanjing Changzhou Wuxi Suzhou Hangzhou Hefei Fuzhou Xiamen Nanchang Jinan Qingdao

123,635 68,553 24,641 29,551 20,979 18,386 55,093 58,515 22,649 46,720 27,004 56,421 18,890 64,005 39,519 20,382 23,198 46,884 14,036 32,389 16,194 7,726 15,344 42,116 19,860

No. of employees 27.223 12.305 3.442 3.236 2.196 1.680 8.966 6.907 1.038 11.160 4.049 7.033 3.338 11.995 12.674 3.978 10.556 15.057 7.042 5.895 6.108 2.707 2.834 8.176 13.085

Value of product (RMB B) 40.603 13.039 4.659 3.263 2.402 1.729 9.903 7.035 0.843 10.899 4.238 8.161 2.987 15.323 13.018 3.815 10.094 15.447 7.186 5.965 5.837 2.727 2.693 11.081 12.841

Total income (RMB B)

Table 8.2 Performance and characteristics of 52 national HNTIDZs, 1997

Y

Y

Y

Y

Y Y Y Y Y Y Y Y Y Y Y Y Y

Production base

Y

Y Y

Y Y Y

New town

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Y

Y

S&T industry park

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86 33 49 162 162 338 47 253 75 409 34 52 29 184 31 142 153 32 125 304 57 64 106 817 46 235 150

31,740 15,342 21,096 19,157 30,214 45,693 32,170 25,577 6,522 21,018 16,344 4,652 18,543 36,970 7,184 9,166 16,901 1,961 20,704 21,969 38,475 22,037 15,610 40,483 19,620 13,466 9,799

3.862 2.632 3.092 5.907 3.736 9.505 2.175 6.995 1.457 4.802 9.687 1.819 6.794 8.514 3.662 1.264 2.382 .380 4.532 5.384 14.003 1.340 1.647 8.623 2.241 1.291 0.547

4.074 2.669 2.675 6.318 4.061 10.202 2.082 7.799 1.687 7.395 9.315 1.645 6.139 8.156 3.587 1.438 2.133 0.267 3.920 6.088 12.992 1.254 1.927 10.299 2.087 1.453 1.029 Y Y Y

Y Y

Y

Y

Y Y Y

Y

Y Y Y Y Y Y

Y Y

Y Y Y Y Y Y Y Y

Y

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Source: Office of the Torch Program 1997.

Zibo Weifang Weihai Zhengzhou Luoyang Wuhan Xiangfan Changsha Zhuzhou Guangzhou Shenzhen Zhuhai Huizhou Zhongshan Fuoshan Nanning Guilin Hainan Chengdu Chongqing Mianyang Guiyang Kunming Xi’an Baoji Lanzhou Urumqi

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Secondly, traditional industry-oriented zones should be located in industrial production bases in the interior. From the 1950s to the early 1980s, industrial production in China was largely managed through central mandatory planning. Thousands of important industrial projects were spatially allocated, setting up the scattered geographical framework of industrial bases that was described in Chapter 6. The projects concentrated China’s fixed assets, professional talent and technology, became a central component of its productive development, and contributed much of its revenue. However, the rigid and overcentralised economic system weakened industrial producers’ demand for new technologies and emphasised technology for military rather than civilian uses. The industrial structures of these important interior industrial bases are antiquated. Despite their outdated technology, the skills of the engineers and technical workers in those cities is relatively high. Although universities and colleges exist there and some industrial enterprises have their own research facilities, their research capacity is much less than in the central and capital cities. Technical development in such places relies heavily on personal, informal and historical channels of information flow. The government’s purpose in setting up HNITDZs in these old industrial locations is to encourage industrial innovation and regional economic restructuring. Several such zones are even located in remote cities and towns. For example, the Guiyang HNTIDZ is located in the town of Xintianzhai, a suburb of the capital of Guizhou province. An even more remote provincial HNTIDZ is located in the small town of Dahekan in Hanzhong (Shaanxi). The provincial government of Guizhou took the opportunity of setting up a HNTIDZ to relocate some enterprises from the ThirdFront region. By the time the zone was established in 1985, the military enterprises that had been built in the mid-1960s in mountainous regions were being relocated into central cities under the approval of the State Council. Such HINTDZs serve as a spatial focus of reinvestment that seeks to take advantage of agglomeration economies and technology transfer. Thirdly, foreign-investor-oriented zones are located in fast growing or newly built coastal cities. Compared with the other locations, some sites selected under this criterion have advantages neither of research nor prior industry. Such zones include Shenzhen, Foshan, Huizhou (Guangdong), Suzhou (Jiangsu) and Haikou (Hainan). These zones were confirmed as national HNTIDZs because of their new concentration of electronics assembly plants and other new-technology activities with

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foreign investment. Since the mid-1980s, some R&D and production facilities have moved from intelligence-intensive areas, such as Zhongguancun of Beijing, to coastal cities in southern and eastern China. High- and new-technology industrial sectors thus become possible in some cities that lack S&T personnel. This so-called Zhong (China), Zhong (China), Wai (foreign) model combines China’s S&T results and China’s land and factory buildings, with foreign business or foreign investment. Joint ventures in these zones enjoy a good financial environment and access to overseas markets (see also section 3). During the early 1990s, planners sought to generalise the zone model by encouraging the development of High- and New-Technology Industrial Development Belts. Five such belts are envisaged, interconnected through existing transport and communication networks: • Yangtze River delta in Jiangsu: Suzhou, Wuxi, Changzhou, Yangzhou, Zhenjiang and Nanjing; • Pearl River delta in Guangdong: Guangzhou, Shenzhen, Zhuhai, Foshan and Huizhou; • The QiLu Belt in Shandong: Jinan, Zibo, Weifang, Qingdao and Yiantai; • The ShenDa Belt in Liaoning: Shenyang, Anshan, Yingkou, Haicheng and Dalian; • The JingJin Belt: Beijing and Tianjin. The State S&T Commission has planned the first and second belts, hoping that a high density of HNTIDZs, high-technology projects and capital will come to characterise them.

3. Signs of development During 1992–94, the central government invested about RMB 50 billion in constructing 53 HNTIDZs, covering 148.3 sq km of newly built area. It is estimated that the post-Mao S&T reforms and the Torch Programme’s support for high-technology have since 1988 led to the definition of more than 150 HNTIDZs at various levels over the country. Of these, 53 are central level zones, 68 are provincial level zones, and 30 are university level zones. They have nurtured over 15,000 high- and new-technology firms, many of which are among the fastest-growing firms of China. By the end of 1997, 13,681 new-technology firms had been formed in the 53 central HNTIDZs, providing 1.4 million jobs and yielding an annual income of RMB 338.78 billion and a profit of RMB

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10.74 billion. About RMB 6.9 billion of tax had been paid and US$2.88 billion of revenue created. Many research findings have been deployed in production. The rates of increase are shown in Table 8.2: HNTIDZs have grown rapidly. Between 1992 and 1997, the gross value of industrial output, value of production, profit and tax payments increased 13, 16 and eight times respectively (Yu 1998). The electronics and information, optics–machinery–electronics integration, new materials, and bioengineering/pharmaceutical industries are regarded as the four important fields in HNTIDZs. Between 1992 and 1995, the sales of the first three industries accounted for 41.8 per cent, 9.9 per cent and 8.5 per cent of the total respectively. A number of highand new-technology firms occupied over 20 per cent of the domestic market of their industry. After ten years of development, some firms have become large. HNTIDZs have played increasingly important roles in some cities. The value of output and of revenue in some HNTIDZs account for more than 10 per cent of the local totals. The rate of growth of output in HNTIDZs is generally is 5–10 per cent greater than the local average. The value of output and of profit per capita are commonly several times the local average. Take Beijing Zone as an example. In 1997, 40 enterprises produced a gross value of industrial output that exceeded RMB 100 million, 16.7 per cent higher than in 1996. The values of output of 23 products exceeded RMB 100 million, 15.0 per cent higher than in 1996. Sixtythree enterprises paid more than RMB 10 million tax to the state, 20.6 per cent more than in 1996. The gross value of industrial output accounted for 20.13 per cent of Beijing’s GDP. The value of industrial output accounted for 9.51 per cent of Beijing’s total. The gross values of industrial output of the three biggest firms – Legend, Stone and Founder – amounted to RMB 20 billion, a half of Beijing’s total high- and new-technology output. Likewise, in Suzhou, the HINTIDZ accounted for 33.2 per cent of the city’s value of output; in Xi’an and Harbin, the proportions exceeded 14 per cent. The incubator programme also shows signs of development. The first group of managers of Chinese incubators was trained in the International Training Class for the Development of Innovation Centres in Guangzhou in March 1989. The next two training classes were held in 1994 and 1996. The State S&T Commission approved the first group of innovation centres in 1987. By 1996 there were about 80 innovation centres in the whole country. They have fostered more than 3000 highand new-technology projects. The total revenue of incubated enterprises has reached RMB 3.63 billion. The approximately 2500 enterprises in

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incubators and the 648 incubated enterprises have become important in the economies of HNTIDZs. In 1997, the State S&T Commission ranked innovations centres according to performance, appointing ten national innovation centres – in Tianjin, Chongqing, Chengdu, Xi’an, Harbin, Changchun, Wuhan, Daqing, Beijing and Suzhou. The leading innovation centre is in Tianjin. The centre provides management training, consulting, information, advice on writing proposals, and so forth. Other innovation centres provide offices and workshops, an exhibition hall for products and rooms for training. In the vicinity, there are universities and institutes. Furthermore, the innovation centres offers a one-stop service, so that project approval, enterprise registration and taxation are located under one roof, together with customs bonded warehouse, transport, insurance, banks, commodity inspection, human management, intellectual property protection, and booking offices for air tickets. The aim of the central government is to develop the nation’s hightechnology industry. However, HNTIDZs at the local level are often agglomerations in a designated area of high- and new-technology firms that essentially manufacture. Ultimately, like technopoles, those zones more closely resemble new-style industrial districts than innovative milieux. The main concern of the developers of such a park is to attract firms of higher technical level. Hence, judged by the criterion of creating an innovative milieu, few HNTIDZs are a success. Moreover, the attempts to encourage innovation through commercialisation were directed primarily at research institutes and universities, and many of the essential preconditions for enhanced innovation at the level of industrial enterprises and agricultural units were given less attention. It remains to be seen whether the tasks that Chinese policy-makers set themselves in their effort to create an innovative milieu can respond to the exogenous changes caused by globalisation.

4. An interpretation of HNTIDZs The emblem of Zhengzhou national HNTIDZ, in Henan, best represents the image of HNTIDZs. It was designed specially for the Zone by a group from the Central Academy of Fine Arts. The pattern is composed of a geometrical circle, which implies unity and development. A pair of hands within the circle symbolises welcome and attraction. Four isolated lines identify that the Zone is a newcomer to high- and newtechnology, a concentrator of foreign investment, a demonstrator of economic management, and the experimental field for structural

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reform. The lines are parallel, and thus unclosed, symbolising openness to the outside world. The pattern generally reflects a new, modern city, dominated by high- and new-technology industries and an exportoriented economy, guaranteed by a comprehensive infrastructure, sustained by its urban environment and efficient service sector. The development of HNTIDZs marries official approaches to development and entrepreneurial approaches. The technopoles are quite different in different parts of China. In some cases, they have become breeding grounds for new firms and entrepreneurship based on innovation. In other instances, technopoles are simply instruments of renewed economic growth based on technological diffusion from other centres. Yet other technopoles bear little relation to technological diffusion, rather resembling industrial parks intended to attract investment from the outside world. These differences in the characteristics of HNTIDZs reflect the variety of motives that have driven their formation. Quite apart from the external factors that caused techno-shock, the formation of HNTIDZs has four other causes. First, there was a release of internal technical energy. During the three decades after 1949, the Chinese government invested heavily in research institutes and universities. The Beijing New-Technology Industrial Development Experimental Zone (BEZ), the first national HNTIDZ, appears to represent genuinely entrepreneurial growth based on new firms that had spun off from local research institutes and universities. The Beijing HNTIDZ is a built-up area of 100 square km with a high density of universities and research institutes. Around 1985, a number of researchers and professors from this area turned their back on the old system and pioneered some small-scale enterprises to commercialise their laboratory achievements. Most of these enterprises were engaged in electronics on one street nicknamed Electronics Street in Zhongguancun district. The goal of the pioneers was ambitious: to build this street into the Silicon Valley of China. When the Chinese government decided to establish HNTIDZs in 1988, the area centred on Zhongguancun Electronics Street became the first and the only candidate. Beijing’s Zhongguancun illustrates how in China some high-technology centres were developed from scratch – the entrepreneurial way of integrating technology, industry and trade. The productive capacity generated by this new productive force needed a new institutional arrangement, the HNITDZ. Secondly, though, the establishment of HNITDZs only imitated a world-wide fashion for technology parks. The Chinese HNTIDZs match the notion of technology parks defined by Castells and Hall (1994).

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They aim to concentrate in a designated area a number of hightechnology industrial firms that will provide jobs and skills, and eventually generate enough income and demand to sustain economic growth, in a region that is seeking to survive in the new conditions of international competitiveness and information-based production. Their emphasis is on manufacturing, although some specialise in the R&D component of manufacturing (Castells and Hall 1994). Furthermore, the development of high technology zones reflects a particularly Chinese attempt by governments at various levels to regain control over development by establishing new agencies of regulation with advanced capacities to administer. Two types of development zone have been encouraged by two different authorities. One is the HNTIDZs, promoted by the S&T Commissions of different levels. The other is the Economic and Technological Development Zones (ETDZs) encouraged by the Administrative Office of Special Economic Zones attached to the State Council and by the Offices of the Development Zones attached to municipal and provincial governments (Zhang 1991). Although HNTIDZs should be oriented to high technology, while ETDZs should be labour-intensive, thus attracting different forms of investment, in practice the existence of two types of development zones has confused local governments. Therefore, local governments set up both HNTIDZs and ETDZs on their territories regardless of potential. This has increased the number and expanded the scale of the development zones. Thus the Chinese technopoles are structured by a three-level administrative hierarchy – national, provincial and municipal – enjoying different preferential policies according to level. Finally, much as in other countries, in China a bandwagon effect accompanies programmes that award special status to places. Notwithstanding their S&T base, some local governments think that a piece of encircled land plus some preferential policies can attract or incubate technology-based enterprises. Many such plots are called Science Parks. However, some of those areas have remained idle for a long time, with no real prospect of science. Some zones reflect no clear idea about which projects should be attracted and include no R&D activities at all. Thus, Chinese HNTIDZs face real challenges. China’s hightechnology development has been nagged by a shortage of capital and skilled labour. The amount of money China spends annually on science and technology research accounts for a meager 0.5 per cent of its Gross Domestic Product (GDP), compared with the 2–3 per cent of GDP in developed countries (Yu 1999). There are insufficient funds for the dissemination of research results and the institutions of higher education

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make only small contributions to research. Many research results remain in the laboratory. A survey of the Shanghai Electric Alliance Corporation indicated that the most important factor causing failure of prototype production was backward skills and techniques (Study Group of the State S&T Commission 1994). There is a danger that the limited capital of China has been invested in property and infrastructure of the HNTIDZs instead of R&D. Skilled labour shortages are particularly evident in the rapidly growing cities, due to the low percentage of the population receiving tertiary education and continuing interregional and inter-firm restraints on migration. These problems arose from the strategy of relying mainly on building facilities to attract foreign capital and technology rather than advancing indigenous Chinese technology. The rapid phasing-out of preferential policies has also challenged HNTIDZs. The varieties of preferential treatment have caused unequal competition and protection of backward enterprises. Numerous Chinese policies for privilege became out-of-date with the rapid changes caused by marketisation and opening up (Jin 1993). Recently, in spite of the request by HNTIDZs that national preferential policies be continued and even broadened, the central government began to narrow their scope, with the intention of eventually withdrawing most preferential treatments. The reform of the state tax system in 1994 tells the changes affecting HNTIDZ enterprises: • A new tax was levied, calculated on the basis of the value added in finished products. • Construction and investment in fixed-assets became no longer taxexempt. • Exemption from and reduction in corporate income tax became strictly limited to the first five years only, with no possibility for extension. The first change hit HNTIDZ enterprises especially hard because hightechnology companies mostly produce high value-added products, and much of their profit needs to be retained to support R&D of new products and to compensate for the losses incurred from unsuccessful R&D activities. Then in April 1996, exemptions on import tariffs were cancelled; that is, normal tariffs are charged on the import of all materials and parts, even if they are used to make products for export. As well, the import of equipment and instruments that are needed by high-

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technology enterprises for production is now subject to normal tariffs (People’s Daily 29 December 1995). These policy changes, which apply to both domestic- and foreigninvested ventures, derive from two main considerations (Wang 1999). First, as it was preparing to become a full member of the World Trade Organisation (WTO), China was obliged to bring down most trade barriers and remove many forms of government protection to its industries. In the future, HNTIDZs must not rely on preferential policies, but find their own means of raising capital. Second, the Chinese government wants to discourage quick profit-makers that rely on imported equipment and materials and on cheap Chinese labour for assembly of high-technology products, and to encourage those producers that use Chinese-made equipment and domestic materials to produce for export. Much of the development of S&T in China rests on preferential treatment plus pieces of encircled land. It has often been thought that simply planning the provision of real estate is itself a sufficient factor to stimulate new industry. This is property-driven development. An excessive focus on the genesis and management of Silicon Valleys may obscure the exploration of other models of technically dynamic regional economies. The search for new organisational structures for HNTIDZs has been only partially successful. The original purpose in creating management offices in HNTIDZs as new institutions was to cut red tape and avoid inefficient bureaucracy. At first, the main duty of these offices was to coordinate the functions of government agencies in the zone and to provide services for enterprises. Gradually, local governments released more and more power to the management offices of HNTIDZs until the offices became one of the departments of municipal governments. As a kind of special economic zone for S&T development, most of the management offices of Chinese HNTIDZs have the authority of economic management at the municipal level; indeed, some HNTIDZs are combined with former administrative districts. The pre-existing bureaucratic rigidity is tenaciously reflected in the system of organisation and management of HNTIDZs, for old institutional arrangements persist. Some of the offices of HNTIDZs continue to deal with general social affairs instead of concentrating on high- and new-technology development. This phenomenon illustrates the Chinese saying, putting on new shoes, taking the old road (chuan xin xie, zou lao lu). The introduction of foreign capital did not really bring about the dramatic changes that China expected. Since the production process of foreign-capital companies in the zones usually involves only simple

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assembly, most companies do not offer training or educational programmes or facilities, and little advanced technology and skills have been introduced. The entry of foreign capital has not vitalised the Chinese economy as much as was hoped. In fact, the Chinese government’s rush towards high-technology development has already met criticisms. A senior economist, Fan Gang, warns that government regulations granting approval only to large-scale investment projects would lead to the uneven and inefficient distribution of limited funds. The hightechnology, capital-intensive development strategy would sacrifice the Chinese people for technology. It would reduce job opportunities and sharpen income disparities and social divisions with a minority of highly paid jobs concentrated in a few sectors and business groups.

5. Fundamental dilemmas in China’s high-tech development Originally, HNTIDZs were to concentrate on the domestic development of advanced technology based on China’s own capabilities of R&D. However, the rapidity of technology change makes a strategy of selfreliance untenable. The growing awareness of the rapid pace of technical change and China’s own backward R&D has forced policy-makers to contemplate global linkages. Since the 1990s the three forms of foreignrelated enterprises (sanzi qiye) – foreign sole investment, joint venture and cooperative enterprises – have appeared in national HNTIDZs and developed rapidly. They have become important actors in the HNTIDZs. A survey of 1997 shows that the sponsors of the HNTIDZs commonly expect to rely on foreign technical collaborations for development. The importance of foreign enterprises coupled with weak national enterprises posed a dilemma for policy-makers. Especially in hightechnology sectors, there is a difficult task of balancing the trade-offs between independent innovation and the existing technology of developed countries. Since China began its development of HNTIDZs in 1988, especially since foreign investment penetrated into the zones, tremendous changes have taken place as markets have developed and the economy becomes more open. However, the influx of foreign products has caused apprehension about the ability of domestic sectors to grow in the face of competition from foreign products. China is viewed by multinational corporations (MNCs) as only a minute source of high-technology products but a huge and profitable market for their own products. MNCs have also noticed that Chinese science and technology personnel have

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impressive R&D potential. While MNCs now need rather less to seek out low-cost labour manufacturing sites, they need increasingly to seek out sources of R&D. Two trends illustrate the issue. One is the increasing amount of foreign capital in China’s HNTIDZs – invested not only in branch assembly plants for high-technology products, but also in R&D centres, tailoring products designed originally for customers in other countries to meet the needs of the Chinese market. The second is that a growing number of international high-technology companies are establishing their branch organisations not only in Chinese export processing zones, but also in its science parks. A 1996 report by the United Nations Industrial Development Organisation (UNIDO) explains: The rapid pace of technological development and innovation and the establishment of new organisational structures in developed countries pose a formidable challenge to developing countries and economies in transition in their efforts to develop new technological capabilities, to innovate and to ensure sustained industrial growth. The emergence of generic technologies . . . has significantly changed the nature and scope of industrial competitiveness and the organisational structures at the firm level. At the same time, rapid technological development has further concentrated innovative capabilities in the industrialised countries, leading to a growing gap in such capabilities between industrialised and developing countries . . . Many developing countries . . . would then have to adapt to new forms of competition arising from rapid technological change, because low wages will no longer guarantee success in sustaining competitiveness. The acquisition of innovative capabilities is becoming essential, for somewhere in the world someone will almost certainly be developing innovative technology that will pose a competitive threat to existing producers (UNIDO 1996, pp. 4 and 10). Thus, Chinese high- and new-technology firms are concerned at the growing number of prestigious MNCs establishing themselves in Chinese knowledge-intensive regions. There is a wide technical gap between China and developed countries. China’s future economic development lies in blending domesticallyand foreign-generated technologies to its advantage. China is now caught up in the paradox that faces all peripheral countries: to develop its own high-technology sectors empowered by foreign capital without

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releasing its technology to potential competitors across the world. Chinese policy-makers, even as they seek to attract foreign investment into the high-technology sector, try also to create local innovative environments, both to bridge the gap between domestic research and production and to develop its own high technology. This has not been spelled out yet in clear terms by Beijing. Certain pockets of innovative capacity have been created since the end of the 1970s. The Chinese government has actively issued a set of programmes and measures to promote the development of hightechnology industry under multifaceted reforms, especially of the scientific and technical system. The new milieu has nurtured several high- and new-technology firms that have become substantial companies. However, according to statistics from the National Education Commission, the potential for research links between universities and industries has been exaggerated. Of the scientific research findings made in the institutions of higher learning during the early 1990s, only 30 per cent found practical application in production and only 10 per cent created measurable economic advantages. Moreover, 85 per cent of industrial enterprises now believe that scientific findings of research institutions remain at a relatively low level (Duo 1992). The process of innovation is complex. It incorporates feedback from the market to production, engineering, and design, and it requires integration of a firm’s R&D and manufacturing with related activities of suppliers and customers. Regional and local innovation networks that are based on long-term cooperative relations between businesses, politicoadministrative authorities and scientific institutions are thought necessary to overcome the barriers to innovation in a systematic way (Braczyk and Heidenreich 1996). In comparison to such Western experiences, the Chinese local system of innovation has some unique features that cannot be understood fully within a Western theoretical context. The organisation of industry in China exhibits tendencies to both vertical integration and networking, but (so far) little of the cooperative learning processes that are said to be important in the development of local innovative districts. Western theory might interpret this characteristic as ignorance of how high technology develops and as inappropriate management and organisation.

6. Conclusion There are several reasons for the government to push to establish HNTIDZs: to realise the four modernisations in China, one of the most

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important of which is modernisation of science and technology; to reduce the gap in science and technology between China and other developed countries; and to improve long-term competitiveness under the process of globalisation. The development of HNTIDZs is a combination of government policy initiatives and grass-roots efforts to commercialise research and innovation in a market economy. The formation of Zhongguan Cun Electronic Street is a typical example. The development of HNTIDZs has been transformed since the early emphasis on self-reliance to the recent approach of global linkages. However, this transformation is under several pressures and has also created more challenges for future development. The most important pressures are the shortages of capital and of advanced technology and expertise, including human resources. By encouraging foreign investment in HNTIDZs and providing preferential policies for technology transfer between foreign companies and local organisations, the government may speed up the development of HNTIDZs and raise the level of their R&D. Meanwhile, more foreign competition in HNTIDZs and the domestic market threatens the survival of local organisations. Hence, policy makers are challenged to maintain a certain balance and encourage cooperation between foreign companies and local organisations. Although HNTIDZs have many different features from SEZs – such as size, function, development history and outcome – there is a common issue that needs to be addressed here, for they all demarcate special areas within the national economic boundary. Why does the government manipulate microgeography in this manner? Several explanations arise. The development of a more market-oriented economy in China under the process of globalisation is new: there is no blueprint for such development. SEZs and HNTIDZs have an experimental function. In SEZs, policy seeks to develop different markets (for materials, finance and labour), adopt the methods of international business and financial operations, and link domestic and global economies. HNTIDZs are designed to develop advanced technology, commercialise innovation and R&D, and improve the quality of both products and human capital. These activities are spatially contained rather than nation-wide because the government is concerned to limit the potential negative outcomes of these experiments. Globalised competition through markets threatens the political control of the government and the capacity of local producers to provide employment and incomes for many of the Chinese people; social stability is thus potentially under threat. If plans go astray,

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the government can limit the negative impact within that spatially contained territory. If plans succeed, then the government can encourage other parts of China to follow suit and can gradually open up the domestic market as an incentive for foreign companies to invest in China. One of the crucial problems in developing the new economic environment, high technology and innovation is the shortage of capital and human resources. The Chinese government has neither the financial capacity nor the experienced experts to support the infrastructure of markets and technical change without spatial limitation. By concentrating on key places that have the preconditions or the potential for such development (and some that are politically important), the cost of development can be minimised and the advantages of geographical location (such as nearness to international transport, harbours or university and research institutes) fully exploited. The manipulation of microgeography has a certain basis in resource allocation too. But whereas the development of SEZs rests of a clear technical basis – a spatially delimited legal and infrastructural environment that attracts some kinds of multinational firms – the policy of delimiting HNTIDZs reflects a much more poorly defined set of ideas. The literature that explains the benefits of agglomeration and local innovative milieu is beset by conceptual slippages and weak empirical support and it often ignores evidence about the social conditions of work in such iconic places as Silicon Valley. The development of HNTIDZs in China reflects this confusion – multiple goals, varieties of strategies and tactics, and uncertain implications for social and economic conditions – as well as a confusion about whether they are to encourage technology in China or Chinese firms’ technology.

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9 Structural Adjustment: Creating a New Textile Industry Wei Houkai, Shen Zhiyu and Mark Wang

China’s approach to the global economy has been orchestrated at several levels. There are macro-level changes to systems of trade, investment and social relations (as indicated in Chapters 2 to 5), some initiated by the state, some local, others matters of external innovation. There have also been reorganisations of the Chinese space economy, both at the level of large regions (Chapter 6) and at the level of the smaller zones and districts that pepper the country (Chapters 7 and 8). Yet in large measure, the global economy is approached in practice by changes within individual industries, changes at the micro-level. It is in the details of policy to individual industries, in the details of the development of competition and new forms of enterprise that the implications of China’s approach to the global economy can most clearly be seen. This chapter and the next spell out some of those implications. They examine the recent historical geography of two iconic industries in China – the textiles industry (this chapter) and the PC industry (Chapter 10). The textiles industry is old, well-established and even now dominated by state-owned enterprises. It has been the site of some of the most aggressive restructuring undertaken by the Chinese state; the result is a substantial transformation of social relations. By contrast, the PC industry is largely a creature of the period since opening, and its firms have never been largely state owned. The interaction of state and market forms of industrial change has thus been more subtle than in the textile industry. In both industries, regional restructuring has formed an essential component of recent history.

1. Introduction According to China’s current statistical classification, the textile industry includes textiles and clothing manufacturing, chemical fibre 191

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production, textile machinery manufacturing and chemical fibre machinery manufacturing (SSB 2000). China’s textiles industry has been not only the key traditional industrial pillar but also one of the country’s main foreign exchange earning industries. It played an important role in China’s industrialisation, export success and national employment growth. Particularly in the 1980s, the textiles industry in China was the largest in the world in terms of output, production capacity and exports. This position symbolised the vigorous development of the textile industry. From the early 1990s, however, the textile industry in China started to falter. The industry’s performance hit a low point in the mid-1990s: the state-owned textile enterprise (SOTE) sector made aggregate losses throughout the period 1993–98, the highest deficit of RMB 10.6 billion (about $US1.3 billion) occurring in 1996 (SETC 2001). The state-owned textiles sector has become the most problematic of all industries for policy makers and workers who have to adapt to the new China. Since 1996, when the ninth Five-Year Plan started, both central and local governments have been trying to promote structural adjustment and to create a new system for the textile industry. The textile industry was selected as China’s first SOE sector for restructuring, causing enterprises to lay off many textile workers as they sought more efficient forms of operation. This chapter serves as a case study of the manner in which China has developed its responses to, and created its owns forms of globalised industries. Competition in global markets, the international flows of products and capital, the increasing marketisation of the economy and the pressures that have arisen from China’s application to join the World Trade Organisation (WTO) have all led governments to deeper and deeper restructuring of the troubled SOE sector. The next section of the chapter analyses the reasons for the poor performance of China’s textile industry in the mid-1990s. Then the focus shifts to government actions and their results. The final section discusses what has been planned for the industry and the major challenges posed for China’s textile industry by the country’s imminent membership of the WTO.

2. What was wrong? As a traditional pillar of industry, the textile industry did contribute to China’s industrialisation. During the years from the founding of the People’s Republic to 1978, the textile industry made RMB 1.25 billion profits for state revenue. This was 7.8 times the total state investment in the textile industry during those years (Wu 1997). However, the

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Creating a New Textile Industry 193

industry failed to meet the demands of a growing population and the Chinese people had to buy cloth only with coupons issued by the government (bu piao). The open door policy introduced in the late 1970s offered China’s textile industry a golden opportunity. Indeed, the decade 1980–90 witnessed an historical transformation of China’s textile industry: from a traditional, domestic-market-oriented to an export-oriented industry. To encourage the export of textiles, the state earmarked development funds for key textile export enterprises in twelve exporting cities (Guangzhou, Dalian, Shanghai, Qingdao, Tianjin, Suzhou, Wuxi, Changzhou, Nantong, Hangzhou, Beijing and Foshan); other major textiles producers in other cities started exporting in the mid-1980s. From 1987, each enterprise was earmarked RMB 0.40 as development funds for each $US increase in foreign exchange earnings over the previous year. The vigorous development of the textile industry in China during the 1980s was, however, mainly a growth in quantity, which made China a big textile producer, not a strong producer. Such an expansion in production had many internal and external factors. Among the domestic reasons, three are especially important. First, to clothe over a billion people properly became an attractive proposition. When the clothing coupon system was terminated in 1983, rising living standards in post-Mao China generated a huge demand for garments. More importantly, local governments and small entrepreneurs believed that the textile industry was a quick way to make profits, because it is labour-intensive and employs relatively simple technology (Qian and Meng 1998). There was a popular ditty among the local government officers in the 1980s and early 1990s: Yao xiang fu, Xie zhi bu (wish to get rich, set up textile factory first). This belief led to a wave of new textile factories, many of which were established by local governments (and thus contributed to the spectacular growth of township and village enterprises in the 1980s). The number of textile enterprises increased from 37,900 in 1980 to 83,800 in 1990, reaching 102,500 in 1995 (Table 9.1). This development was made possible by financial decentralisation and changing central-local government relations, which offered local governments increased autonomy (Chapter 4). And thirdly, the growing supply of cheap natural fibres (produced by increasingly marketoriented farm households) offered another favourable condition for the textile industry to expand. The international environment favoured the development of China’s textile industry in the 1980s. Labour resources in China are abundant and relatively cheap. As the firms in first, Japan, and later Hong Kong,

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194 China’s Transition to a Global Economy Table 9.1 The status of the textile industry in China’s national economy 1980 Number of enterprises (000) Total value of output (billion RMB) % of national industrial output Total profit (billion RMB) % of national revenue Added value (billion RMB) % of national industrial value added Number of workers (millions) % of national total industrial workers

1985

1990

1994

1995

1996

2000* 89.3

37.9

46.7

83.8

95.5

102.5

89.3

88.5

149.1

373.5

797.3

839.7

858.0

–

17.7

18.0

16.2

14.6

12.6

12.6

–

16.5

20.1

23.0

35.3

26.6

21.9

57.9

14.2 –

10.2 –

7.8 –

6.8 169.8

4.3 149.4

3.0 172.7

– 267.8

–

–

–

11.5

9.7

9.6

5.0

9.5

12.4

12.8

12.4

11.6

4.8

7.7

8.8

9.6

8.3

7.8

–

13.0 –

Notes: The number of enterprises and the total value of output of the textile industry include figures from village-owned and township-owned enterprises, but the other items do not include figures from village-owned enterprises. The number of workers in the textile industry and its percentage of the national total number of workers in 1980 and 1985 refer to those working within the textile industry only. Source: National Textile Association of China 1997, pp 4–5. *Data for 2000 from SETC 2001.

Taiwan and South Korea – which were supplying their domestic markets as well as markets in Western Europe and North America – began to feel the effects of wage rises demanded by their employees, they began to source their production from the nearby east coast of China. Over the years, the textile industry has become an important earner of foreign exchange. From 1979 to 2000, the textile industry earned $US513 billion in exports (SETC 2001). Textiles and clothing have consistently comprised about one-quarter of the total exports of all commodities from China (Figure 9.1). In the period 1979–97, the industry accumulated funds for China’s national economic construction by making a profit of RMB 398.4 billion. The output of the textile industry has been more than 12 per cent of the national total value of all industrial output. About 8 per cent of the national labour force has been employed in the textile industry.

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60

Export (billion US$) 50

Share in China's total (%)

40 30 20 10 0

1978

1983

1988

1993

1998

Figure 9.1 China’s exports of textile and garments, 1978–2000 ($US billion, percentage) Source: CNFTI 2001

Since the mid-1990s, however, the textile industry has suffered low efficiency and a poor record on other indicators. The exports of textiles account for a declining share of China’s total exports. The textile industry’s share of national industrial output value, of total national revenue as well as total national industrial value added are all falling (see Figure 9.1 and Table 9.1). The opportunity in the 1980s did not improve the competitiveness of China’s textile enterprises, especially SOEs. Huge deficits have been accumulated. Between 1993 and 1997, China’s textile industry was in continuous deficit and was the worst performing industrial sector in China. The net losses of all SOTEs increased from RMB 1.9 billion in 1993 to RMB 10.6 billion in 1996. In 1997, the net losses of all China’s textile enterprises were RMB 7.27 billion. China’s textile industry became the country’s worst performing industrial sector in the mid-1990s. In 1996, for example, 42 per cent of SOTEs were in deficit (50.4 per cent in 1997 and 31 per cent in 2000), about 8 percentage points higher than in other industries (SETC 2001). During that year, 1031 large or medium-sized SOTEs were in deficit and 1.8 million textile workers, about half of the total number of workers in the state-owned textile industry, were affected (Wu 1997). The losses were more than double the profits made by the remaining textile industry enterprises (see Table 9.2). On the other hand, among the non-stateowned textile enterprises, foreign-funded firms have been developing

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196 China’s Transition to a Global Economy Table 9.2 Deficits of state-owned (above township level) textile enterprises, 1997 Number of Number of Percentage Deficit Profit enterprises enterprises of (billion (billion in deficit enterprises RMB) RMB) in deficit

Ratio of deficit to profit (%)

Total

4785

2431

50.4

128.37

55.67

230.6

Textiles

3391

1867

55.1

110.22

44.67

246.7

Clothing & its products

935

330

35.3

3.34

1.96

170.4

Chemical fibre manufacturing

204

92

45.1

10.32

6.79

149.6

Textile machinery manufacturing

218

122

56.0

4.39

2.15

204.2

Chemical fibre machinery manufacturing

10

2

20.0

0.10

–

–

Source: State Bureau of Textile Industry 1997.

rapidly and are making large profits due to advanced equipment, flexible operations and their smaller welfare payments (which are a heavy burden on SOTEs). Many factors have contributed to this history. First, there is overstocking of textile products and insufficient work in enterprises due to overcapacity. As discussed above, local governments set up many textile factories in the 1980s and early 1990s to get rich quickly. This led to blind investments in, and repetitive construction of, textile plants all across China in the 1980s and early 1990s, causing overcapacity. In the domestic market, consumption behaviour is changing as Chinese living standards continue to rise: the demand for textile products is no longer simply having enough to wear but is increasingly about improved quality and better style. Quantitative growth of demand has slowed. Thus, initial processing capacity exceeds market demand. More than a thousand out of an estimated 3277 stateowned textile enterprises were idle or partially idle in the first quarter of 1996. Secondly, the rapid expansion of spinning capacity led to fierce fights for raw materials among enterprises all over the country. Such tensions were reflected in the 1980s’ ‘wool war’ and ‘cotton war’, when governments and firms in the coastal region fought for inland China’s wool

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and cotton supply and the inland regions sought to protect their cotton and wool exports to the coast of China (see too Chapter 3). Thus since 1993, the internal price of cotton has been rising by an annual average of 38 per cent, much higher than international price rises (Qian and Meng 1998), encouraging some firms to invest in cotton farms in Australia. The price of chemical fibre, a third of fibre inputs to the textile industry, and the prices of other means of production such as energy have also been increasing. The (coastal) Chinese industry’s original cost advantages are disappearing. Furthermore, other developments are eroding the international competitiveness of Chinese textile products and reducing their net foreign exchange earnings. Many other developing countries use their cheaper labour forces and input materials to compete with China in the low- and medium-grade textile market. Thus, exports of Chinese textile and clothing products have been increasing, yet their net earnings of foreign exchange are decreasing (Figure 9.1). Serious structural problems in the textile industry also remain to be resolved. One of the structural problems many SOTEs faced is that their product structure does not match the structure of market demand. The output of general and low-grade products far exceeds that of branded or medium- and high-grade products. There are more initially or simply processed goods than highly or carefully processed goods. Another problem which many non-foreign-funded textile enterprises share is that technology is outdated. For example, in 1995, China had about 41 million cotton spindles, but 25 per cent of them needed to be replaced. Of the 3.6 million woollen spindles, only 15 per cent were of international standard, and 500,000 were outdated. Of all the equipment for post-sorting of printing and dyeing, only 6 per cent was up to international standard. Chemical fibre equipment is of higher standard than spinning equipment; even so, it is also aging in comparison to international standards (Ma 1997). For instance, 40 per cent of polyamide fibre equipment is for low-speed spinning, and 40 per cent of polyester short fibre equipment needs to be replaced. By the end of 1996, China had 76,000 shuttleless looms, which accounted for only 7 per cent of its 1.1 million looms. But the world’s textile industry averages 27 per cent of shuttleless looms (90 per cent in some industrially developed countries, according to Chen G 1998). Finally, state-owned textiles firms face a problem common to all SOEs in China. Under the centrally planned regime, workers were provided jobs for life and their social services – including education, housing, health and pensions – were provided through their work units. This is

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a logical means of delivering social services to an urban workforce in a closed, centrally planned economy, but it is hopelessly ill-adapted to the circumstances in which state-owned firms now find themselves: competing on an international market and against firms which do not face such fixed costs. While wages are higher in foreign invested enterprises than in state owned and collective enterprises, to compensate workers for their need to provide their own social services, nevertheless foreign invested and private enterprises do not have the enormous pension liabilities that are incurred by state owned firms. (In 1999, in manufacturing, SOEs paid an average wage of RMB 7611 per staff member and worker, urban collective enterprises paid 5327 and other types of enterprises (including individually owned and foreign invested firms) paid 9316 (SSB 2000).) Comparisons of the economic performance of state-owned and foreign-funded enterprises are revealing (Table 9.3). The state-owned textiles manufacturers have three times as many employees per enterprise as the foreign-funded manufacturers, but their productivity per worker is less than half that of their competitors. Among garment producers, the differences between state-owned and foreign-funded enterprises are less acute, though still clear. In aggregate the state-owned textiles manufacturers were making losses; and the ratio of profits to Table 9.3 Comparison of state-owned and foreign-funded textiles and clothing industries, 1999 Enterprises (number)

Textiles 3,011 SOE Textiles 2,032 FFE Garments 792 SOE Garments 2,864 FFE

Employees/ Value enterprise added (number) RMB billion

Sales RMB billion

Profits Productivity RMB RMB per billion employee

903

41.70

148.24

-2.15

15,325

299

23.41

88.30

1.29

38,496

303

4.04

13.52

0.17

16,833

332

24.52

90.91

2.64

25,800

Notes: data refer to enterprises with annual sales exceeding RMB 5 million. State-owned enterprises include state majority owned enterprises. The industries in this table are those that manufacture textiles and garments, rather than the textiles industry as more broadly defined in the remainder of this chapter. Productivity is measured as value added per employee. Source: SSB 2000.

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sales among garment producers was only 1.26 per cent among SOEs but 2.90 among FFEs. The state-owned corporations are obviously not competing effectively in this new environment.

3. What has been done? In the early 1990s, the Chinese government realised that it needed to restructure its textile industry. The government attempted to cut the number of spindles but failed. For example, from 1992 to 1996, 4.65 million spindles were eliminated; however, 4.44 million new spindles were added at the same time (Shi G 1998). The main problem was that the government could no longer control the factories producing looms. As the government tried to reduce spindle numbers, more spindles were being made. The lesson of the failure of such direct attempts to restructure seemed to be that enterprises should be given incentives to change themselves rather than being cajoled by the government. Thus, starting in 1996, the central government chose the textile industry to pilot a scheme to reorganise China’s SOEs, attempting to revitalise the textile industry by transforming the mechanisms through which enterprises work. These objects were sought in two sets of changes: one to reorganise the SOTEs and the second to encourage the growth of non-SOTEs. To restructure its SOTEs, the central government listed three targets for 2000: to eliminate ten million outdated cotton spindles, to lay off 1.2 million textile workers and to turn SOTEs from deficit to profit (Table 9.4). The first target was aimed at reducing overcapacity; and second was to increase productivity; and both of them were to reach the third target – no more deficit. However, to fulfil these targets was difficult. This time the central government implemented two sets of programmes to eliminate the ten million spindles. On the one hand, it

Table 9.4 China’s SOTEs reform targets and fulfilment, 1996–2000 Targets

Fulfilment by the end of 2000

To eliminate 10 million cotton spindles To lay off 1.2 million textile workers To turn deficits to profit

9.4 million cotton spindles were eliminated 280,000 wool spindles were eliminated 1.4 million were laid off

Source: CNFTI 2001.

RMB 6.7 billion profit was made by SOTEs

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provided a financial subsidy to enterprises that scrapped spindles. Each scrapping of 10,000 spindles earned a subsidy of RMB 3 million, of which a half was paid by the central government and the rest by local government. The financial subsidy was mainly from State bank reserve funds for bad and doubtful accounts (in 1997, these reserves totalled RMB 9.73 billion). In 1998, RMB 12.6 billion was set aside for this purpose. The additional funds were mainly used to pay to scrap spindles and re-organise cotton textiles enterprises. Meanwhile, RMB 2 million of low-interest loans were also arranged. The subsidised interest on the loans was paid out of local finances and the loans could be repaid in five to seven years. On the other hand, the government imposed a strict control on new cotton spindle production. During the period of the Ninth Five-Year Plan (1996–2000), no region, department or enterprise could add any new spindles or shift any outdated spindles. The manufacture and sale of looms (such as cotton spinning frames) was strictly monitored by a system of production certificates and approved purchase certificates. Import of textile machinery was also strictly controlled. Policies were also implemented for the other two targets. For laid-off SOTEs workers, each enterprise was required to set up a Re-employment Service Centre. The basic living needs, and the old-age and medical insurance of the laid-off workers were supposed to be guaranteed by the enterprise. However, many enterprises have failed to provide all these services to their laid-off workers. To turn SOTEs from deficit to profit and export more made-in-China textile products was difficult. During the Asian financial crisis, the competitiveness of China’s textile industry in international markets was weakened by competition from many southeast Asian countries. In order to encourage increases in exports of textiles, from 1 January 1998, the Chinese government raised the rate of tax return for textiles exports uniformly from 9 per cent to 11 per cent. The export of textile machinery enjoys preferential treatment of export credit and full tax return. Meanwhile, 15 per cent of the total quota for the export of textiles to America and Europe was directly allotted to these manufacturing enterprises with self responsibility for export. The second focus of change was the central government’s encouragement to non-SOTEs to expand. Like other industrial sectors in the post-Mao era, non-SOTEs have registered rapid growth in the textile industry. More and more textile products have been produced by non-SOTEs. The state-owned sector’s share is declining dramatically. For example, the SOTE’s share of the total value of output of the whole

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textile industry dropped from 67 per cent in 1985 to 54.25 per cent in 1991, 29.39 per cent in 1995 and 24.25 per cent in 1997, before recovering slightly to 30 per cent in 2000 (State Bureau of Textile Industry 1997; SETC 2001). Meanwhile the share of joint-venture firms, collective and private firms reached 29 per cent, 26 per cent, and 15 per cent respectively in 2000 (SETC 2001). These policies did have the desired effect. As Table 9.3 shows, by the end of 2000, about 9.4 million outdated cotton spindles had been eliminated, 1.4 million textile workers had been laid off and RMB 6.7 billion profit was made by SOTEs. According to Sheng Huaren, Minister in charge of the State Economic and Trade Commission, the textile industry had by the end of 2000 attained its target of reducing cotton spindles and employees and ending losses. This result was achieved one year ahead of schedule, representing a model for other industries in which reform of SOEs was continuing (SETC 2001). Although the state-owned textile industry has been steadily declining in relative terms, it still plays a decisive role in the development of China’s textile industry. In 1997, the total assets of all state-owned textile enterprises comprised 44 per cent of those of all independent accounting textile enterprises, and its value of output was 30.5 per cent of the total of all textile enterprises. During that year, the income of these state-owned textile enterprises comprised a third of the income of all independent accounting textile enterprises; SOEs paid 41.6 per cent of the total tax bill of the textile industry. The state-owned textile industry is not only an important pillar of China’s industrial economy but also a key source of state revenue.

4. What are the next challenges? Textile industrial restructuring in the last few years has created many new problems and more challenges for the further development. One of the most important consequences for the fulfilment of the three targets by 2000 is a large number of laid-off workers. The existence of unemployed state-owned employees raises serious concerns about social stability in China (FEER 25 February 1999: 46–8). There are many reports about the laid-off workers accounting for a majority of the urban poverty population and unpaid workers taking to the streets in Chinese cities (Li X 1998; Sheng 1999; Qian and Wong 2000). In some places, huge numbers of people have been laid off. In Shijiazhuang, about 200 kilometres southwest of Beijing, more than 50,000 workers in the city’s factories (a third of the SOE workforce) have

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been put on indefinite leave since the mid-1990s as the city’s 12 textile mills were restructured or closed down; only four remain in operation (Divjak 2001). More than 3000 workers were dismissed in 2000 by the Daqing Blanket Factory after its sale to a private owner; several hundred of them have clashed with police during demonstrations over the level of unemployment benefits they are paid (Radio Free Asia 2001). Workers in these cities and through Heilongjiang have repeatedly demonstrated to protest against their enterprises for delays in paying wages (often several months in arrears), their layoff, and their forced retirement on living allowances instead of pension (the amount of living allowances is only one-third of the regular pension). The textile industry created the first large group of SOE jobless workers. Among these 1.4 million laid-off textile workers, more than 60 per cent are women. They are mostly middle aged: about 30 per cent are under the age of 35, a half between 36 to 45 and 20 per cent above 46 years. Most of them are spinners, with few other skills, and about half of them had only junior schooling or less. Only small proportions have been offered jobs by their local authority. Many have to find a job themselves. According to our interviews in Shenyang in 2000, less than 10 per cent of the laid-off workers had found a regular job or were selfemployed; the rest of them hardly found casual jobs. Their household daily budgets show that they are living from hand to mouth. For them, to survive is very tough in a city with hundreds of thousands of laidoff workers. The workers that we talked to thought that many of their female fellow workers began to work as prostitutes after being laid off, especially the younger ones. Worst of all, family violence and quarrels became common in those families with laid-off workers. Many families became dysfunctional and the proportion of divorces was well above 20 per cent. Life is so tough for many laid off workers that they prefer Mao’s regime to the present, since there were then fewer income disparities and no worries about jobs or food. Although the Chinese government has reached its 2000 target for reorganisation of SOTEs, many SOTEs are still performing poorly. SOTEs as a whole had turned from deficit to profit by the end of 2000; even so 31 per cent of SOTEs were making losses (compared with over 50 per cent in 1997) (SETC 2001). To improve the economic performance of state-owned enterprises, the State Textile Industry Bureau is pushing SOTEs to accelerate technical change and to form larger enterprise groups. The intent is to transform China’s SOTEs from big producers to strong producers. To be a strong producer, China’s textile firms are supposed to shift to high-value-added and high-tech products. The Chinese

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government is requiring textile firms to increase their investment in R&D and to set up a science-technology development fund, which should account for 1 per cent of their total textile sales (Qian and Meng 1998). Furthermore, China’s textile producers still lack famous name brands (Gu 1997). Much international competition is between the brands of a commodity. The competitiveness of textile products is largely determined by the power of the brand. No good brands or no famous brands means lack of market power. At the moment, China has no world famous brands of textiles goods. On the one hand, China’s domestic market for top-priced garments is taken by foreign brands. According to data from the Beijing Business Information Centre, those garments in the front rank of sales in large department stores are almost always foreign brand products made by joint ventures or firms whose products are registered in China. High-grade garment markets are dominated by imported garments or those from invested enterprises. On the other hand, although China is the world’s largest exporter of garments, each garment is on average worth only $US4, far below the retail price in China’s domestic market. Between 1981 and 1991, China’s foreign exchange earnings per tonne of garments exported increased by only 3.2 per cent; virtually all of the increased value of exports of garments is due to increases in quantity. Compared with Italy – another giant garment exporter – China earns one-fifth of the foreign exchange per tonne of garments exported (Deng 1998). As a consequence, the rate of profit per garment is going down when the rising cost of raw materials and labour is deducted. During the 1970s, the profit per dollar of sales from producing export garments was 5 per cent, but now the highest profit is less than 2 per cent. Most enterprises that produce garments for export do not earn any profit: exports simply help keep their enterprises running. As both cause and effect of the level of profits, the quality of China’s garments and the added value of brands are low. Overall, after a series of restructurings, many of China’s state-owned textile firms are in a stronger position than they were at the beginning of the 1990s. China is approaching the WTO and becoming integrated into the world economic system. It is believed that China’s textile industry will be a principal beneficiary of the country’s entry into the WTO. Better access to the global market may also help China’s textile industry upgrade its management, technology, and trade system. But membership of the WTO will not resolve the underlying problems of the textiles industry, reflecting the need to improve quality and develop new materials rather than increase output. It is also unrealistic for China

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to expect its WTO membership to rapidly increase its exports of textiles, since exports under quota account for only a quarter of China’s textiles exports: China’s WTO membership will not remove non-tariff trade barriers other than quotas. And special measures are going to be needed to assist those textile workers who are already laid off: of itself, membership in the WTO will do little for them. Such a pattern of restructuring represents an attempt by the government to place SOEs in the textile industry on a footing comparable to private and foreign-invested firms. The norms of the market economy are being imposed by opening China’s consumer and factor markets to foreign and private corporations and by direct state management of the restructuring of the enterprises that it owns. Many SOEs have survived – perhaps more than might have survived comparable competitive pressures in a liberal, market economy: from the point of view of enterprises, planned change remains possible in a socialist market economy. But more than a quarter of the workforce of SOTEs have been laid off in the process, much as might have happened in more market-oriented economies. Since the socialist market economy still has feeble nonenterprise based institutions of social welfare, many of the newly unemployed urban workers have been poorly served by this imposition of market rules of industrial governance.

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10 The Trajectory of the Personal Computer Industry Wang Jici and Mark Wang

1. Introduction Globalisation reflects not only the emerging forms of state, class and production relations within China, but also the rearrangement of industries and corporations to allow China to approach the global economy. The PC industry has been one of the targeted industrial sectors for the development of the new globalised economy in China. Both internal actors, such as governments and Chinese industrialists, and external actors, such as foreign MNEs, are keen on such development. Since the mid-1980s increasing propaganda has led to the acceptance of the argument that rapid development of high-technology sectors will enable China to leap-frog traditional stages of development and thus close the techno-economic gap with developed countries faster than if more investment had been placed in traditional sectors. Since 1998, the country has jumped into the phrase sea of the knowledge-based economy. From the central government’s point of view, there are several benefits from developing a PC industry: one stone can kill several birds. A viable PC industry would enable the Chinese economy and society to catch up to the so-called global information age, both improving means of communication through the internet and lifting the level of automation of office work and the efficiency of government administrative systems; such an industry would develop advanced technology and skills within the country and create new employment opportunities for a skilled workforce; it would assist China in raising the technological content of its exports by taking a proportion of the global PC market; and it would attract more foreign capital into China. From local industrialists’ point of view, developing the PC industry 205

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would enable them to improve their technology, skills and competitiveness. For a large number of SOEs that are being reorganised, the PC industry provides a new avenue for their industrial restructuring, allowing them to upgrade the skills of their workforces and abandon some traditional or polluting sectors (for example, Beijing Capital Steel has developed a PC-based production system in Beijing and is planning to move its steel production line to Shangdong province). From MNEs’ point of view, China provides a huge PC market and there is potential for further development. Since marketisation and open door policies were implemented, demand has grown as average incomes and disparities in income have both increased and the PC has become a necessary, affordable commodity in the homes of the middle class. On the supply side, a large number of joint ventures and wholly foreign-owned enterprises have emerged in the PC industry, after the restrictions on foreign entry were phased out between the 1980s and the 1990s. Now that China has joined the WTO, this trend will continue even faster because not only will China be a huge market for MNEs’ PC products, but also China will become a huge production base for the global PC market. Recently, the annual rate of growth of the PC industry has been as high as 42 per cent. With PC production taking the lead, the electronics industry was identified as a leading industry in the National Ninth Five-Year Plan, and the annual growth rate of the sector was planned to be 20 per cent, aiming at a total value of output of $US84 billion by the year 2000. Unlike the textiles industry, the PC industry is a recent entrant in the Chinese economy. Thus its history is parallel to that of industrial development in other late industrialising economies of east Asia, reflecting a mixture of government leadership and private capital. Of course, the particular history of the PC industry in China does reflect local characteristics, notably in the manner in which some of the larger firms have evolved out of older state enterprises and in which the interaction of mainland China and the other Chinas (in Hong Kong and Taiwan) has influenced the location and forms of development. This chapter surveys these issues. It begins by describing the market for PCs in China (Section 2) and then examines some aspects of the global PC industry (Section 3). In the fourth section, the chapter goes on to describe the evolution of some of the larger firms in the Chinese industry, focused in Beijing, and reflects on their relationship to earlier state-owned enterprises and to newly-arriving MNEs. The chapter then identifies some of the characteristics of the regional cluster of smaller producing firms located in the Pearl River delta, noting in particular

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The Personal Computer Industry 207

their relationship to producers and markets in Taiwan and Hong Kong. Thus the information in the chapter reflects heavily the development of the PC industry in two regions of China: Beijing’s Zhongguan Cun (Zhongguan District) and the Pearl River delta. Finally, the chapter draws conclusions about the development of the PC industry’s markets and location patterns within China.

2. The PC industry in China In the late 1970s, the PC industry was viewed as a technological curiosity. The tremendous growth of the PC market and manufacturing in China in the short period since represents one of the most rapid diffusions of technology in history. The sales of PCs in China grew moderately in the 1980s and have taken off since 1991. Since the 1980s when China opened its door to the outside world, most government ministries in China have been encouraged to use computers in their offices. To modernise existing industrial facilities, many enterprises in China have experimented with computers. In addition, China has established several nationwide information networks for posts and telecommunication, finance, energy, transport, weather forecasting, and national defence. In the 1990s, various government programs were initiated to accelerate the development of the Chinese information industry, such as the three-golds project (Gold Cards, Gold Custom and Gold Bridge). The size and development of the domestic market has played a significant role in the industry’s growth. For China, the demand for PC products has grown tremendously. Sales of PCs increased several times faster than GDP in the 1990s (Zhang and Wang 1995). From 1992–97, the average annual growth of the PC market of China was as high as 50 per cent, one of the fastest growing markets in the world. In 1996 China became the second largest PC market in Asia, second only to Japan (Tables 10.1 and 10.2). PC installation in Mainland China has reached nine million (Shi Y 1998). The PC market of China in the 1990s can be divided into three groups: domestic-made PCs, compatible PCs and imported PCs. The domestic PC industry of Mainland China has grown from almost zero to a sector with manufacturing and marketing capabilities, which has been recognised by local customers as well as foreign PC makers. The latter group has started to perceive Chinese PC companies as important partners in both marketing their PC products in the country and in globalising their production (Zhang and Wang 1995).

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208 China’s Transition to a Global Economy Table 10.1 China and global PC markets

World sales (million sets) Sales in China (million sets) China’s share of world market (%)

1992

1993

1994

1995

1996

1997

1998

32.06

38.16

46.94

58.96

68.40

80.00

92.00*

0.25

0.35

0.63

0.98

1.92

3.03

4.50*

0.80

0.90

1.30

1.70

2.80

3.80

4.90

Note: *forecast. Source: SSB 1999a.

Table 10.2 PC market in China (million sets), 1995–97 1995

1996

1997

Domestic-made PCs Compatible PCs Imported PCs

0.21 0.37 0.57

0.546 0.630 0.924

1.34 1.00 1.16

Total

1.10

2.10

3.50

Source: SSB 1999a.

Foreign PC-related companies penetrated China systematically. At first, in the 1980s, foreign companies concluded agreements with Chinese companies, acquiring a position in the Chinese market without the expense of building a manufacturing plant. They imported complete PCs into China, tested and distributed them. Later, when the Chinese companies had grown large and experienced enough, foreign companies imported PC kits to be assembled and resold. Finally, some foreign companies have built their own manufacturing plants in China. At the same time, MNEs work closely with Chinese PC makers, promoting a strategy of original equipment manufacturing (OEM). They regard China as a big market as well as an important partner in their global strategy. For example, there are now the following strategic alliances in Beijing: • Legend Group with Toshiba; • Tongfang Group (founded by Tsinghua University) with Lucent; • Huasun Computer Ltd (founded by the Sixth Research Institute of the Ministry of Electronics Industry) with Intel and Sun;

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The Personal Computer Industry 209 Table 10.3 China’s PC market share, 1996 Firm

Sales (million RMB)

Market share (%)

Legend IBM Compaq AST HP Digital Great Wall Tongchuang Acer

138.87 124.77 122.13 101.82 97.09 67.35 67.00 49.73 38.23

9.39 8.44 8.26 6.89 6.57 4.55 4.53 3.36 2.59

Source: Yuan and Bai 1998.

• Lianbang Co Ltd with Hewlett Packard; • Founder Group (founded by Bejing University) with DEC, IBM, SUN and Cannon; • Stone Group with Compaq, Mitsubishi and National; • Ufsoft Group with IBM and Microsoft. Although the current PC market is only 5 per cent of the world total, the huge potential of the market has attracted all the world’s largest PC manufacturers – including IBM, Compaq and AST – to pursue opportunities aggressively (Zhang and Wang 1995). A survey of 420 managers of global electronics and computer companies revealed that 60 per cent of them will invest in China in the five years to 2003, including 40 per cent that have already invested in China. American companies forecast that between 1998 and 2001 their sales would double (Yuan and Bai 1998). An interesting case is IBM. Now, it shares its business with about 400 partners in China. Five of its 18 strategic partners come from China, including Beijing University’s Founder Group and Ufsoft (Group). Founder has signed an agreement with IBM to take the IBM operation system as the basis for its software products. IBM will help market Founder’s products. With the aid of IBM, Founder has succeeded in the Japanese software market. Within Beijing are located not only IBM’s solely owned China Research Center, but such joint ventures as Dingxin Co (joint invested by IBM and Tsinghua University), and Founder IBM Software Development Center (joint invested by IBM and Beijing University). Table 10.3 shows the market shares of major domestic and foreign PC suppliers in China in 1996. The firms with sales in 1997 exceeding RMB

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0.1 billion are Legend, IBM, Compaq, Tongchuang, HP and Founder. They together sold 10.46 million PCs in 1997, 30.7 per cent of the national market. (Founder, the inventor of the first Chinese desktop publishing system, appeared in the top six in 1997.) China’s own PC industry is expected to become internationally competitive. The rapid maturing of domestic firms has proved that China’s computer market is not as easy to enter as MNE’s imagined earlier.

3. Capturing new opportunities: a global perspective The global PC industrial system can be seen as a self-organised, coneshaped structure. The apex of the cone – the highly capital-intensive upstream dominated by large MNEs – produces active components including semiconductors, integrated circuits and microprocessors. For example, Intel, AMD and Cyrix have almost complete control of the global market for microprocessors. The base of the cone, the downstream end of the PC industrial system, is largely composed of many small and medium enterprises (SMEs). The SMEs are mainly involved in producing passive components, including resistors, capacitors, switches, wires and cables and connectors, and assembly activities. The downstream and upstream industrial activities can be geographically separated (Dicken 1992). The PC industry is characterised by extensive market segmentation, of both products and regions. On the one hand, the existence of learning economies in making active components means that there is increasing concentration among a few large firms which control three types of assets: finance, global distribution channels and the technologies of design and production. On the other hand, there are still new opportunities for latecomers, as technical and organisational change has led to the erosion of established market structures. First, they can learn from the experience of the leading oligopolists, particularly their failures to reduce costs and adapt products or distribution to buyers’ needs. Imitation allows latecomers to avoid being trapped by huge R&D cost burdens. Second, by acting as original equipment manufacturers, latecomers can also avoid the huge investment outlays required for marketing and distribution networks. Finally, as least for products in which technical change is incremental, latecomers can set clear targets for development and engineering activities. Therefore, many new entrants have begun to compete with the leading multinational firms. They have been successful not only in cloning compatible PCs, but also in making passive components and peripherals.

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Thus, despite the oligopolistic nature of competition, it is possible for latecomers to enter the fray by means of product differentiation and market strategies. Computer companies worldwide are increasingly sourcing their peripheral equipment from outside sources. This has created a booming OEM business in peripherals, as well as enhancement cards, which has given opportunities to the new firms of developing countries. Taiwanese firms have been most active in exploiting those opportunities and have established large world market shares in computer monitors and terminals, keyboards, and graphics cards (Amsden and Wang 1992). Since the early 1990s, the new firms of the PRC have followed the paths of Taiwanese firms. Soon, Chinese firms will have not only the capacity to produce PCs at a large scale, but also to gain international competitive advantages in PC production. After all, the quality of good Chinese PC products and foreign PC products is similar because their core components often come from the same upstream firm (and may, indeed, be made in China). As Zhou Weikun, a director of IBM China, observed:

The four companies – IBM, Compaq, AST and HP – can not eat the whole PC market of China. Their production needs to locate in China. It remains to be seen which will win in the future – the Chinese or foreign companies. The sales of PC products of the four companies account for less than 40 per cent [of the Chinese market]; that is, 60 per cent is still in the hands of Chinese firms (Yuan and Bai 1998).

The industry in China thus consists of both producers of domestic brands of PCs (Ma J 1997) and of PC components (in which smaller firms are mainly involved).

4. Exploring new paths of growth: Zhongguan Cun Electronic Street Before the 1980s, the computer industry of China followed a pattern of self-reliant development. The nationalistic strategy caused the computer industry of China to lag further and further behind leading technology. There was little desktop PC manufacturing in China. The onset of the Chinese computer boom in the early 1980s coincided with the spread of a worldwide revolution in microchip technology.

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4.1 Import substitution and cloning in the 1980s In the early 1980s, the prohibitive cost of purchasing a foreign-made computer in China reflected the government’s deliberate attempt to pursue a policy of high-tech import substitution. The bulk of Chinese PC production consisted of final assembly of partially knocked-down, imported components and subassemblies. In 1985 China imposed a tariff of 100 per cent on all fully assembled computer products brought into the country, while at the same time retaining lower duties of 25 per cent and 7.5 per cent, respectively, on partially pre-assembled and completely knocked-down units. During this period, some venturesome Chinese officials and aspiring enterprises, often with Hong Kong merchants as middlemen, imported Taiwan and Hong Kong-made Apple and IBM PCs, with many unlicensed copies reaching the domestic market (Baum 1989). Between 1983 and 1985, the number of microcomputers in China rose from about 40,000 to over 250,000 with the help of imports (many, though remained in storage due to lack of trained personnel). In 1986 alone, Beijing spent US$6.8 billion to import foreign PC-related and other high-tech products. The large revenues derived from cloning and sale of imported kits attracted many clone players. Through such popular PC assembly activities China was becoming one of the largest PC assembly factories in the world. Since then, market-driven PC-related industrial and commercial activities have taken shape in the country. At first, the cloning assembly activities concentrated in Beijing and Shanghai. In 1985, those two cities together accounted for almost 40 per cent of the 100,000 computers existing nationwide and over half the country’s 84,000 trained computer operators. A few years later, PC cloning activities started in many other major cities as well. DIY (Do It Yourself) PCs have been produced in residential apartments and dormitories dispersed in many cities. A milestone in the history of China’s computer manufacturing was the appearance of the Great Wall 0520 PC (similar to an IBM-PC/XT, with built-in Chinese-character processing capacities), which represented the first step in building a more credible domestic computer industry. 4.2 Beijing’s electronics street: China’s biggest PC market The history of Electronics Street in Beijing is critical to the development of the Chinese PC industry. The Street illustrates the start of the infant information industry as a whole. The origin of Electronics Street was essentially unplanned. It emerged in Zhongguan Cun, a newly developed region located in the south-

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eastern part of the Administrative District of Haidian, a western suburb of metropolitan Beijing. (For the modern definition of the zone, see Figure 10.1.) The region has been renowned as the largest ‘intellectintensive’ area of China for the Chinese government had invested To Changping

Changping Zone 0

5km

The locations of the zones are approximate

Haidian Zone

Qinghua University To Airport Chinese Academy of Science

Peking University

Ring One

Ring Two

Ring Three

Ring Four

The Electronic Zone

Chang’an Avenue Tiananmen

Fengtai Zone To Shijiazhuang

To Majuqiao

Yizhuang Science & Technology Zone Figure 10.1 Location of Zhongguan Cun in Beijing Notes: The shaded areas are Zhongguancun Science Park. Haidian is the original Zhongguancun Science Park. Now it consists of 5 zones: Haidian Zone, Changping Zone, Fengtai Zone, Yizhuang Science and Technology Zone, and The Electronic Zone. Source: Beijing Zhongguancun website: www.zgc.gov.cn

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in this region for decades to promote research and tertiary education (Chapter 8). However, it was not until the early 1980s that the commercial values of scientific and technological (S&T) knowledge were recognised by the government and there had been few incentives for researchers to commercialise their research. The problem was compounded by the restricted mobility of professional people. 4.3 Rising domestic entrepreneurship PC-related entrepreneurs emerged first in Zhongguan Cun. An innovative culture began to materialise in the early 1980s as the economic changes in China began. The central government restructured the existing research institutions (universities and academies) by establishing some market-oriented mechanisms. For example, the state cut the basic funds for research and development (R&D) in all institutes under the Chinese Academy of Sciences (CAS), and the CAS was encouraged to set up self-financing and market-driven firms. Researchers in the old stateowned institutions were pressed to commercialise their knowledge. A local trial started in 1980 when a few professionals acted as risktakers and devoted themselves to an early experiment in establishing non-state-owned firms in the region. Chen Chunxian and his partners from the Institute of Physics of CAS created the first embryo eclectronics firm. At the beginning of 1983, in its plan to guide the further development of the Zhongguan Cun region, the central government identified Chen’s business as the first Chinese non-state-owned innovative firm. Since then, new firms have set up one after another, opened by academic researchers. Electronics Street had appeared. Many small giants among Chinese PC and software makers, such Legend and Founder were born here. Since 1985, more and more organisations – including universities and research institutes attached to the CAS and ministries, army- and stateowned large and medium sized firms – have set up technology-based firms in the new business. Consequently, the population of newly created firms increased from 90 in 1985 to 400 in May 1988. Beijing’s Zhongguan Cun firms have played the most important role in the development of China’s PC industry. They became clone makers in computer-related products, such as printers, UPS, computer office materials, Chinese word processing characters, scanners and the like. Since 1988, a batch of Chinese entrepreneurs and their firms have become well known. An example is Liu Chuanzhi and his Legend Group (Lianxian Jituan). Established in 1984, Legend started with 11 research staff from the Institute of Computing Technology, one of the institutes of the CAS. The

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initial capital was RMB 200,000 ($US23,000). Its accumulated total revenue in the past 12 years has amounted over RMB 24 billion. Legend has set up 26 subsidiaries in China and 21 overseas branches, including a laboratory in San Jose, California. Users include government departments. Furthermore, relying on its own R&D staff, Legend focuses on designing and developing computer motherboards and attached cards for the international market, and manufacturing personal computers packed with advanced Chinese word processors for the domestic market. In the mid-1990s, approximately 200,000 of Legend’s motherboards and cards were being sold per month in about 40 countries and regions, about 10 per cent of the international market (Wang and Wang 1998). However, not every new-tech start-up was lucky enough to establish itself quickly. Among other difficulties, lack of venture capital hindered many entrepreneurs. They had to become involved in commercial activities, not selling their own innovative products, but clone computers and computer components, in order to accumulate capital. In the early 1980s, when the domestic computer market in China was growing, about 80 per cent of the firms along the street initially accumulated capital by selling imported electronic products. The new-tech industry was developed from scratch in a distinctively Chinese way, in which the peculiar spatial phenomenon – Electronics Street and its surrounding new-tech agglomeration – came about. A retail agglomeration was created in order to become an industrial district. In 1988, Beijing Municipal Government established Beijing Experimental Zone (BEZ) for the development of New Technology Industry around the Zhongguan Cun Electronics Street. Since then, some 500 firms have emerged and survived each year. Compared with 527 enterprises in 1988, there were 5657 enterprises in BEZ by the end of 1997. Around 10,000 jobs were created. The total sales of new-tech firms in BEZ was RMB 54.1 billion ($US6.52 billion) in 1997, annually increasing by an average of 44 per cent in the past decade. BEZ is becoming an important centre of the information industry in China. The total sales of software in BEZ account for 40 per cent of the domestic market, and information services for about 47 per cent (Lin W 1998). In 1993 the new-tech firms of BEZ were market leaders in computer parts and peripherals and character and graphic processing technology and apparatus (Gu 1996). Their competitiveness in both categories is underpinned by their special ability in Chinese character processing technologies, which were commercially developed in new-tech firms. This is also the focus of both the imported computer market and the market for application-oriented technologies developed in China.

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Nowadays, Electronics Street and its surrounding area is the busiest market in China for electronics, especially for the PC industry. Trucks and buses coming from northern cities of China wait on the sides of the road for the door-to-door transport of PCs and other goods, including domestic and foreign brands. 4.4 OEM relationships in the early 1990s Meanwhile, with the deepening of the open door policy, China shifted its emphasis from imports to technology transfer. The role of Sino-foreign computer joint ventures has emerged since then. The foreign partner, in addition to contributing capital, can ensure the availability of components and other elements needed for production, a problem that frequently plagues domestic manufacturers. Besides, foreign partners introduced better quality control, thereby boosting domestic sales since many Chinese end-users had little confidence in the quality of computers made by Chinese manufacturers. Foreign partners resolve some of the difficulties faced by infant PC firms in China – including lack of capital, technological and organisational skills – though problems concerning property rights, commercial and financial laws, share holding laws, and the like remain. Given these conditions, in the 1990s some Chinese firms began to act as sale agents for MNEs. Sales of foreign products help maintain the firm’s own market network and earn profits. More significantly, by acting as service agents they could learn some of the related technology, accumulate capital, and acquire marketing and management experience. These benefits could also be used to support the firm’s own R&D activities. Since the early 1990s, many Chinese new-tech firms found the OEM option the easiest route to wealth. While these activities brought much revenue to the assembly firms, they did little to stimulate indigenous technological progress. 4.5 Brand name recognition Nevertheless, after several years’ accumulation, Chinese PC makers started to make brand name computers. Beijing’s electronics innovators – the so-called small giants, such as Legend, Founder and Stone – began to engage in computer manufacturing. Some companies have established themselves as international competitors, with their own brand names. They have understood that the work of assembly itself needs little technology; what requires capital, technology and management skills are the guarantee of the quality of computer products and product standardisation, as well as large-scale production, quality control and marketing.

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Chinese PC manufacturers have developed the capacity to produce both standardised and customised components and have found ways to cut costs. The production of peripherals such as disk drives, printers, and monitors has grown rapidly. Of course, domestic PC makers still rely extensively on imported active components in order to sustain quality and to keep products up-to-date with the development of technology worldwide. Legend has become China’s best-selling PC maker. Hong Kong Legend Group, established in 1989 and jointly ventured with the New Technology Development Inc, DAW Computer System and China Technology Trade (HK), listed its stock on the Hong Kong stock market in 1994. This reflected the fact that its technology for manufacturing motherboards and add-on cards had reached world level. Legend’s Pentiumbased PC was announced and displayed in 1993 at COMDEX, one of the world’s important computer shows in Las Vegas (Zhang and Wang 1995). Legend continues to grow: in the first half of 1996, it increased its market share from 8 per cent to 10.4 per cent. In the same period, IBM’s share fell from 7.9 to 6.7 per cent and Compaq’s fell from 8.2 to 6.2 per cent (Harding 1997).

5. Booming PC-related SMEs in western Pearl River delta Now in the early twenty-first century, the most prosperous market, as well as the headquarters of many important PC makers remain in Zhongguan Cun in Beijing. Yet the manufacturing of PCs and peripherals is concentrated in the western section of the Pearl River delta. In fact, the production of electronics in China, especially the PC industry, is highly concentrated in the Pearl River delta. The Centre of Computer and Microelectronics Industry Development Research (CCID), calculated in 1997 that 86 per cent of the total Integrated Circuit (IC) sales of 100.7 billion pieces (including 96 billion pieces of imported IC) were sold in the Pearl River delta. In 1996, the province of Guangdong was the top producer of PC hardware among all provinces in China (Science Commission of Guangdong 1996). The Pearl River delta is now the major site at which are assembled the brand name PC components that are imported into China. For example, most of the $US1 billion global purchases of components of CHP (China HP) in 1997 were supplied from south China, replacing the traditional position of Hong Kong (Niu 1998). The Pearl River delta is located in southern China’s Guangdong province. It includes 16 cities, such as Guangzhou, Foshan, Jiangmen,

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Zhongshan, Dong’guan, Zhuhai and Shenzhen, covering an area of 44,300 square km, with a population of 11.13 million, and contributing about 70 per cent of the provincial GDP in 1995. It is being transformed into a large urban region with a dense network of cities and towns. Guangdong Province has taken a leading role in China’s drive to open its economy, benefiting from special and flexible policies, the founding of three Special Economic Zones – in Shenzhen, Zhuhai and Shantou – in the 1980s, the designation of Guangzhou and Zhanjiang as open coastal cities in 1984 and the demarcation of the Pearl River delta Economic Open Region in 1985 (Yeung and Chu 1994; Chapters 7 and 8). In the 17 years from 1978 to 1995, the annual growth rate of GDP of Guangdong was 14.7 per cent. In the first four years of the 1990s, the Pearl River delta achieved an annual growth rate of GDP of 22.7 per cent, 2.5 percentage points higher than the provincial average (Guangdong Province Planning Commission 1996). SEZs such as Shenzhen and Zhuhai in Guangdong Province have played an important role in the development of the new economy of China (Chapter 7). 5.1 Internal geography of the delta The recent development of the PC industry in the Pearl River delta has a particular geography. It makes sense to divide the Pearl River delta into two sections, separated by the main stream of the Pearl River. Clear regional differences of development appear between the eastern section and the western section. The cluster of cities of Guangzhou, Foshan, Shunde, Nanhai and Panyu forms the core of the Pearl River delta, with Dong’guan, Shenzhen, Zhuhai, Zhongshan and Jiangmen functioning as the periphery (Yeung and Chu 1994). All the core cities are located in the western section, while the peripheral cities are located in the eastern section. However, the east section of the Pearl River delta – including Shenzhen, Dongguan and Huizhou – is also growing quickly. The development of the western section of the Pearl River delta has been attributed to its location close to the economic core of Guangzhou. During the 1980s, it made remarkable economic changes. The eastern section of the Pearl River delta has grown in the wake of the development of Shenzhen Special Economic Zone and the evolution of a global information industry. Rapidly, the cluster of cities of Shenzhen, Dongguan and Huizhou formed the second economic core, or ‘new electronics section’ of the Pearl River delta. (Huizhou City contains the mountainous counties of Huidong and Boluo that are used to define the boundary of the delta.) These developments reflect an emerging regional division of labour

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in Guangdong itself. The relatively backward peripheral areas are turning into the production bases of the delta. The case of Dongguan City exemplifies the pattern. The city is located in the middle of the corridor between Guangzhou and Hong Kong. It covers an area of 2465 square km, consisting of a city proper and 33 towns; it has a population of 2.8 million. The connection with 0.65 million Dong’guanese emigrants in Hong Kong is a powerful resource for local enterprises. The emergence of approximately 9800 foreign and private enterprises has caused significant changes in the city. The city’s diversified activities cover the processing and assembling of clothing, handbags and electronics. In recent years many PC-related enterprises emerged there, of which more than a hundred have individual investments above $US2 million (Figure 10.2, Table 10.4). Most of these firms hold contracts with Hong Kong and Taiwan. The 43 PC-related firms with the largest capital are all from Taiwan. Many MNEs have founded their branch plants in the Pearl River delta. For instance, with an investment of $US42.5 million, IBM opened its

Guangzhou Zhongtang Wanjiang Mayong Wangniudun Daojiao Hongmei

Huizhou

Shijie

Gaobu

Shilong

Fucheng

Hengli

Dongguan city

Dongkeng Liaobu

Changping

Dalingshan

Panyu

Qiaotou

Xiegang

Dalang

Houjie Shatian

Humen

Qishi

Shipai Chashan

Zhangmutou

Qingxi

Chang’an Tangxia

Xinwan

Guangdong Town with PC related products manufacturing 0

Feng’gang

Shenzhen

10km

Dongguan Figure 10.2 Location of PC-related products manufacturing in Dong’guan City, Pearl River Delta, China

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Table 10.4 The distribution of PC-related products manufacturing in Dong’guan City, Pearl River delta Location (town)

No. of SMEs

1. Chang’an

6

2. Changping 3. Chashan

5 3

4. Dalang 5. Dalingshan

2 2

6. Daojiao

2

7. Dongkeng 8. Dongguan

1 1

9. Feng’gang

4

10. Fucheng

7

11. Gaobu 12. Hengli

2 2

13. Houjie 14. Hongmei

8 1

15. Huangcun 16. Huangjiang

2 1

17. Humen

17

18. Qiaotou

2

19. Qingxi

9

20. Qishi

2

21. Shijie

8

22. Shilong 23. Shipai

1 1

24. Tangxia

10

25. Wanjiang 26. Zhangmutou

2 6

Source: Author’s survey 1998.

PC-related products

Display cards, multi-function cards, mother boards, speaker parts, remote controllers Computer keyboards, plastic fixtures Transformers, coils, connectors, computer periphery equipment (metal and plastic) Computer furniture Microelectronic devices, computer circuit boards, calculators Calculators, microphones, computer micro radiator fans Disks, CD cases, CD shelves Office furniture, parts of household electronic appliances, special materials Keyboards, computer cases, switches, disk cases, transformers, desktop computers, computer network system design, software, sockets, resistors, computer digital control drilling processing, circuit board testing Computer cases, electronic circuit boards, computer accessories, power controllers, computer metal parts, computer peripheral equipment Metal punching accessories, plastic cases for disks Computer cases, electronic lines, monitors, connectors Disks, metal watchcases Computers, monitors, computer fax cards, computer switches Printers, metal accessories, cables, circuit boards Computers, motherboards, function interface cards, switches Computer wiring, terminal cards, computers, disks, inductance coils, buzzers, cables, metal part accessories Computer shells, transformer shells, speakers, computer cases Mainboards, interface cards, switches, computer cases, computer metal accessories, computer transformers, power packs, disk drivers, keyboards, monitors, computer shells, mouses Computer lines, capacitors, integrated circuits electronic boards IC boards, software, scanners, mouses, sockets, plugs, electric wire, electronic function cards Circuit boards, scanners Computer function cards, game consoles, electric disk shelves Magnetic heads, modem cards, disk cards, other cards, motherboards Colour monitors Computer accessories, keyboards, computer cases, boards, display cards, disks, disk drivers

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second branch plant, HSPC, in Shenzhen Science and Technology Park in 1997. The plant specialises in making a module for disc drives. The first such branch plant, jointly ventured by IBM and Great Wall Group of China and specialising in electronic boards and cards, was set up in 1995 in the same city. Another example is Epson, which built an electronic printer plant in Shenzhen. MNEs are pressured to use as many locally produced components as possible. Recently the director of IBM (China) PC stated that all the products of the company except the server are produced in China (Wang H 1998). 5.2 Market forces for growth and location The PC industry of China is a product of the opening and marketisation policies of the last couple of decades. Two factors have in particular influenced the achievements of domestic PC manufacturing since the 1980s. The first is the development of a regional division of labour for PC production within China. Compared to traditional centres like Beijing and Shanghai, the Pearl River delta holds many local advantages for the production of PC, so that Beijing and Shanghai are no longer the important PC manufacturing regions of China. The emerging location pattern of SMEs in the Chinese PC industry shows how market forces have been playing an increasingly important role in shaping the geography of the national economy. The clusters of PC-related SMEs in the Pearl River delta reflect two trends. In the context of the PRC, the clusters are the consequence of the development of both Beijing’s Zhongguan Cun PCrelated firms and the Shenzhen SEZ: they are the marketisation of these initiatives. In the context of the whole of China including Hong Kong and Taiwan, the clusters are the result of production shifts from Hong Kong and Taiwan, especially from the latter: they reflect the opening up of China’s economy. In the delta itself, there are few linkages among local SMEs that provide agglomeration economies. In the PRC, external forces have played more important roles than internal forces. The PC hardware production system in east Asia is expanding, with the upgrading of PC production in Hong Kong, Taiwan and South Korea as important contexts. The Pearl River delta has been chosen by overseas investors as the first production base of PC components on China’s Mainland. The initial development of an electronics industry in the delta has been mainly attributed to the production shift from Hong Kong to the Shenzhen SEZ. At the beginning of the 1980s, the overseas linkages included such assembly industries as radio-cassette recorders, watches,

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calculators, televisions, communications technology, and electronics research (Wang 1986). There were already a number of SMEs as the motors of an expanding PC industry. However, the shift from Taiwan has contributed largely to the ongoing development of PC-related SMEs in the Pearl River delta. As Taiwanese firms gear up to produce laptops, more of their desktop PC production is being transferred offshore. The SMEs in the Pearl River delta have gradually become international suppliers of PC components. Two examples are the production of monitors and printed circuit boards (PCBs). In the 1980s, 40 per cent of PC monitor production was located in Taiwan and 30 per cent in southeast Asian countries. During the 1990s production has shifted to some locations in the PRC, including the Pearl River delta, southern Fujian and the Yangtse River delta (though the most advanced research into monitor production remains in Taiwan). Of the total output of monitors in China, 60 per cent is made in Dongguan and Huizhou, in the Pearl River delta. Likewise, more than one hundred PCB plants operate in the Pearl River delta. The most important factor inducing this shift is the large difference of wages between Taiwan and the PRC. Recently, a Taiwan-based company opened its new branch plant for D-Link products in Dongguan city, the first such plant on the mainland; it is estimated that production costs five per cent less than in the Taiwanese parent (Li M 1998). There are more than 1600 PC-related firms including 300 software firms in Shenzhen. Furthermore, specialised market facilities and channels have developed, accompanying the increase in local production capacity in the Pearl River delta. For instance, an electronics market in a building called Saige has been operating in Shenzhen since the early 1980s. It provides electronic parts and components and attracts vendors, many of whom are from Hong Kong and Taiwan. The second influence over the achievements of the Chinese PC industry is its market niche for Chinese language support systems. A sufficiently large and sophisticated domestic market is an essential prerequisite for developing close interactions between users and producers. Without sophisticated users who can conceptualise a need and translate it into a requirement for goods and services, there will hardly be sufficient pressure to improve the technological capabilities of producers. Chinese computerisation faced various obstacles in the early 1980s, such as poor software support, reflecting a shortage of software capable of processing Chinese characters. A Chinese-language support system is necessary for many PC users. A revolution from the traditional mechanical Chinese printing and typesetting to an electronic one

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occurred due to the work of Professor Wang Xuan of Beijing University, the father of the Founder Group (Fangzheng Jituan). Over 10,000 sets of his product – an Electronic Printing System for Publishing – have been sold in China and overseas. Other software developers of Chinese language support systems include Suntendy Electronic Technology Institute, Wangma Computer Company, Stone RichWin Company and Beijing Hope Company. (Beijing Stone Rich Sight Information Technology Company and American Sun Micro-system Company cooperate in producing a cross-platform Chinese information processor, RichWin Java-set.) Such companies develop and market Windows-based Chinese-language support software products, facilitating the development of Chinese PC hardware.

6. Conclusion: market forces, creating clusters and north–south movements The geographical pattern of the PC industry of China has experienced great change in the last two decades. The change of the sector can be attributed to the transition of the Chinese management mechanism from a bureaucratic hierarchy into an entrepreneurial network. The changing spatial division of labour in the Chinese PC industry reflects the shift from bureaucratic to marketised decision making, but those market-oriented decisions themselves opportunistically exploit local patterns of advantage (such as SEZs and Open Regions) created during the period of bureaucratic control. The initial location decisions for the electronics industry of China reflected influences of the central government. There was a noticeable influence of social relationships (guanxi) in the intense competition between Beijing, Shanghai and Wuxi (in Jiangsu) for the position as national electronics base (Pehn 1989). In a lively debate, arguments were at first put forward in favour of both Shanghai and Wuxi as possible sites for a Silicon Valley-type microelectronics centre. In July 1986, a final decision was made at a work conference of the Ministry of Electronics Industry (MEI) in Shanghai. Further development of the electronics industry in China would generally be centred around four areas: Beijing, Shanghai, Jiangsu and Guangdong. A division of labour among these different cities and provinces was identified according to the existing comparative advantage in terms of the concentration of research institutes, universities and important enterprises. That is, Beijing would focus on sophisticated electronic R&D; Shanghai would be a centre for the broad application of electronic technology, especially

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aimed at transforming traditional industries; Guangdong would be transformed into a Chinese electronics export area; and Jiangsu would take advantage of its high concentration of electronics enterprises to realise economies of scale and set up large corporations to produce world-standard products (Pehn 1989). Yet computer and component production boomed outside these planned constraints: Beijing’s research expertise, often in state-owned institutions, spun off brand name and other producers; smaller component producers emerged in the Pearl River delta, under the influence of foreign investors and the geography of zoning in China. Indeed, many of Beijing’s innovative producers have themselves relocated to the Pearl River delta. For example, Legend’s largest exports of motherboards and cards are from Shenzhen City. The sales network includes 20 overseas offices which make its brand QDI (Quality Design and Innovation) the top selling motherboard and add-on cards. A few years later, a plant manufacturing computer motherboards and add-on cards as well as assembling computers was established in Huiyang City industrial park (Pearl River delta), employing about 2700 workers. A branch plant of Legend, employing 400 workers, is located in Dongguan City. Founder, China’s leading software developer, has begun making PC hardware: a monitor plant, jointly invested by Founder and a Malaysian company, is located in Dongguan city. The chief motivation for locating in the Pearl River delta was the lure of locating near existing PC-related firms there (and, perhaps, escaping from the more rigid control over SOEs in Beijing). Certainly, the small giants of the domestic PC industry depend on the agglomeration of PC-related smaller firms. Agglomeration economies occur when links between firms, institutions and other economic agents, located in geographical proximity, generate advantages of scale and scope, such as the development of general labour markets and specialised skills, and enhanced linkages between suppliers and customers. The proliferation in the Pearl River delta of smaller firms specialised in producing passive components has benefited the assembly firms like Legend, Founder and IBM. Equally, the cost-minimising input sourcing decisions of both multinationals and the major PC makers of China has played an important role in the development of the PC-related firms in the Pearl River delta: both seek secure supplies of cheap components of appropriate quality. The highly localised agglomeration of PC-related firms in the Pearl River delta facilitates multiple sourcing, as Legend and Founder discovered. The development of the PC industry has certainly introduced new

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skills and technologies and created new job opportunities for skilled workers in China. The industry has not only economic implications – such as more efficient office work, more convenient communications, and new forms of trade – but also social implications, such as training and education in information technology, easier and freer flows of information, heightened awareness of events around the globe. The PC industry is an integral part of global political, economic and social networks: it enables Chinese society become more open to the rest of the world. The future political and economic relationships between China and the global community will be two way: global opinions on political, economic and social issues will become much easier to discover in the PRC, while the influences of the PRC on the global stage will be even more profound.

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11 Conclusions: Opening the Gate to the World Economy Michael Webber, Mark Wang and Zhu Ying

As we write this last chapter (early 2002), the World Trade Organisation has just voted to accept China into the Organisation and China has signed the document of accession. Early in December 2001, China formally joined the WTO. After nearly a quarter of a century of approaching the global economy, China has arrived at the gate that marks entry to the global economic club of nations. That gate is about to the opened and China – its governments, peoples and enterprises – will be subject to new and more powerful external forces for change. The central question for China concerns the degree to which these new forces will constrain or modify local action. However, China has arrived at this gate in a shape different from that of other members of the WTO. For China has followed a highly particular form of globalisation, a form that reflected both its inherited (and evolving) internal political economy and the changing international political and economic structure. The original premise of the new policies was quite straightforward. Since the Third Plenary Session of the Chinese Communist Party’s Eleventh Central Committee (in December 1978), reconfiguring the domestic economic system and re-establishing connections with the world economy have been the twin objectives for China’s economic development (SSEZY 1985). The central themes of economic transformation and opening the door have not been about fully implementing a free market and opening up to all forms of global competition. They have been about legitimising the leadership of the Party-State and achieving economic development and social stability. These three goals are inter-related. The central planning system proved in the end not to work very well in China: the Great Leap Forward and the Cultural Revolution led the national economy close to bankruptcy. In order to 226

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Opening the Gate to the World Economy 227

regain the support of the masses, the Party-State chose a new way, economic transformation. The leaders who survived the death of Mao and the fall of the Gang of Four believed that only economic development could bring a better life for the Chinese people; in return, the country could achieve stability and prosperity, and the leadership of the PartyState could be sustained. The path chosen for economic development involved a form of globalisation. Economic development is thus the central priority. In 1997 Deng’s slogan, ‘Development is the irrefutable fact’ remained prominently at the entrance to Zhangjiagang city in suburban Shanghai. It is the key to understanding China’s domestic reform and opening up. This book’s title, Transition to a global economy, refers not the purpose of reform and opening, but one of the means that are expected to serve the purpose of development (or modernisation). In the more modern language of the Tenth Five Year Plan, development is the theme; economic restructuring is the central task; reform and opening-up and technological progress are the driving forces; and improvement of the people’s living standards is the goal (Feng 2001). After the social and political upheavals of Mao’s Cultural Revolution and Great Leap Forward, the economy became a principal focus for resurrecting the support of the masses for the CCP. The method chosen to identify the appropriate form of globalisation consisted of a series of experiments. Those experiments were evaluated in terms of their consistency with the continued leadership of the PartyState (that is, whether the Party-State continued to be pre-eminent yet still enjoyed broad support from the masses). Many of the experiments were initially localised, both geographically and sectorally. Some of the experiments were decided to be inconsistent with the goals of the government (one such was the relaxation of political controls in the late 1980s; the subsequent redirection of policy was signalled by the Tiananmen incident). Other experiments became generalised across the economy as a whole. While this method of experimentation minimised political risk, it did mean that the consistency of policies with the continued leadership of the Party-State depended on (i) changes in other arenas of the economy and society and (ii) changes in the organisation of the international economy. China’s approach to the global economy has therefore been path dependent (that is, conditioned by existing political economic circumstances), within a set of constraints imposed by global conditions of production, trade and finance. The degree of influence of those constraints was one policy choice (and itself subject to experimentation).

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Thus to understand how China has sought to engage with the global economy, the extent of that engagement and its influences over daily life require an understanding of the nature of the policy experiments and the factors that have conditioned their success. This is the understanding that we have sought to provide in this book. It is not a story about a (supposedly too slow) transition to a known end state – the internationalised market economy. It is rather the historical geography of an industrialising state that is groping for the means to sustain the power and prestige of its leadership in the context of changing social forces within the country and new forms of external organisations. In this final chapter, we seek to bring together the lessons that we draw from the history of these experiments, explaining how they have advanced the globalisation of the Chinese economy. We seek also to reflect on debates within the social sciences, particularly arguments over the forms and processes of globalisation in a developing economy that is not subject to strong influence from international economic agencies; the nature of transition economies; and the reformation of regions within a globalising economy.

1. Engaging the global economy In the past 20 or so years, the Chinese government has conducted two key experiments: to open the economy to internationalised forms of production, trade and capital; and to develop market forms of organisation. The nature of these experiments is reviewed in Chapters 2, 3 and 4. Two of the characteristics of the experiments are that they have been initiated in localised places (Chapters 7 and 8) and in specific sectors (Chapters 9 and 10); they have also, though rather more weakly, been accompanied by several forms of regional planning (Chapter 6). Some of the consequences of the policies for the people who live, and the institutions that operate, in China have been discussed in the individual chapters as well as more directly in Chapter 5. China has become far more open to the world since 1978. But this experiment has not simply represented a freeing of trade. The government has encouraged FDI into China, imported high technology and expertise to upgrade China’s industrial capacity, has invested overseas and exported products with technology content to the rest of the world. China has used its openness as a tool to search for access to sources of technology or to expand its export performance. Imports have been used to increase China’s export capacity in the areas China needs badly (particularly technology), in a model of import technologies – digest –

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export. China has been able to deploy its huge domestic market to buffer against fluctuating global markets, lessen dependence on overseas markets and bargain for the technology it needs. In these respects, China’s experience (so far) of the opening up has made it seem much more like an east Asian late industrialiser than an economy in transition to a liberal trading regime. Of course, the global economy is now different from that which faced the Asian NIEs when they were developing growth strategies in the 1950s and 1960s and when Japan was growing so fast. Thus, supplementing the export-led engagement with the world economy, accompanied by a search for secure supplies of raw materials, that characterised late industrialising growth models in the 1960s, China has exhibited much higher levels of foreign direct investment – both inward and outward – and its outward investment sometimes reflects a variety of different considerations (including the search for resources, markets and efficiency, the penetration of regional trade blocs and the contest with Taiwan). Yet state-led, strategic management of links to the global economy are common to all the east and southeast Asian late industrialisers, as they seek to escape from the limits of a comparative advantage-determined role in the world economy. The Chinese government’s strategic directions are often implemented through its large transnational firms that are intended to replicate Germany’s multinationals or South Korea’s chaebols. Evidently since 1978 the Chinese economy has become increasingly commodified. Market prices and local decisions are now a standard form of business. The share of household production and of state-owned enterprises in total output has declined. Communal enterprises have become increasingly subject to the demands of markets. Private and foreign-funded enterprises, more subject to market controls than other forms of enterprise, have become of increasing weight in the economy. The conditions of valuation are probably becoming more equal in different enterprises and industries, but not in different regions within China. Yet the changes have been slow and subject to periodic hesitations. There has slow abolition of pre existing social and economic forms but rather the establishment of new forms. Although these new policies have induced rapid increases in average standards of living since the end of the 1970s, nevertheless markets are by no means all-pervasive: state-owned enterprises remain significant employers of labour; much labour remains outside market forms of control; and capitalist production is much less well developed than production for markets.

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These experiments have had a specific (though changing) geographical focus. The models for regional development in China have been periodically reoriented to reflect the close association between China’s domestic development and external conditions (including international relations and increasing international linkages). While the changing spatial foci only marginally altered relative standards of living between the large regions, they have induced very wide differences in living conditions between the country at large and the specific localities that have been picked out by investors; they have also led to spectacular differences in economic structures between the macroregions of the country. The experiments in globalisation were also geographically local, at least initially. One form of this localisation was the creation of Special Economic Zones, to act as a bridge to link the national and international economies, and as an experimental area for implementing new reform policies and legislation. The SEZs have been used by the government as a window through which China can know the outside world, and foreigners can understand China. The recent transformations of SEZs into fully free trade areas reflect the government’s commitment to open up the economy further. As SEZs acquire wider capacities and broader competitiveness, the government hopes that they can lead the national economy through a new wave of global competition. The establishment of high and new technology industrial development zones has been apparently less successful than the establishment of SEZs, even though they shared similar general aims. The government sought to acquire new technologies by attracting appropriate firms to locate and produce in China. High and New Technology Industrial Development Zones offered such firms special policies and better infrastructure than was available in the rest of the country. These manipulations of microgeography seem to reflect several motives: to enable the government to control the experiments and, in particular to limit the negative effects of failure; to minimise the capital costs and human resource needs of the new experimental areas; to allow the government and local competitors to learn how to deal with the new global forces that are entering the country. The experiments were also sectorally specific, at least initially. The textiles industry has been at the forefront of government plans to restructure state-owned enterprises by reducing their workforces, upgrading their technology and forming large, corporatised enterprise groups. China’s textile firms are supposed to shift to high-valued-added and high-tech products. Overall, after a series of restructurings, China’s

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textile firms are in a stronger position than they were at the beginning of the 1990s, though still a third are making losses. Yet the new forms of organisation of the textiles industry have demonstrated the impacts of this new wave of change for the workers in the old SOEs: the laid off workers account for most of the urban poor, raising concerns about social stability in China. The changes in the personal computer industry of China in the last two decades reflect a transition in the Chinese management mechanism from a bureaucratic hierarchy into an entrepreneurial network. The initial location decisions for the electronics industry reflected influences of the central government, culminating in the planned development in Beijing, Shanghai, Jiangsu and Guangdong. Yet computer and component production boomed outside these planned constraints: Beijing’s research expertise, often in state-owned institutions, spun off brand name and other producers; smaller component producers emerged in the Pearl River delta, under the influence of foreign investors and the geography of zoning in China. Indeed, many of Beijing’s innovative producers have themselves relocated their production to the Pearl River delta, reflecting the advantages of agglomerating with similar and supplier firms. Yet to understand the characteristics and motivations of China’s new economic and social directions, it is as important to understand the changes that were not introduced as to understand those that were implemented. Of course, an indefinite number of potential policy changes were not implemented, including changes to the form and composition of the central government and to environmental management. However, in keeping with the socio-economic focus of this book, we here focus on four areas of policy that have received rather little attention from the government: global governance; international finance; inequality; and protections for workers. Of all the forms of globalisation, China has had least impact on global economic governance. It is not a member of the OECD or G7 groups; it participates in APEC and other regional forums, though these are relatively unimportant yet; and it has only just joined the WTO (and its representatives are pronouncing themselves as being there to learn, for the time being). Of course, China’s policies have greatly influenced the directions taken by the developing global economy, for it is the largest of the former socialist countries to have joined the general trading community of nations and it has become a major source of and destination for foreign direct investment. But China has so far had little impact on the construction of a form of governance for the global economy.

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Likewise, there has been little internationalisation of the finance sector. The value of the RMB does not float. Foreign banks operate only in the open cities and foreigners can trade in only selected shares in the country’s two stock markets. There have been, as we note in Chapter 2, huge inflows of foreign capital into China; but most of that is in the form of direct investment or official loans, rather than trading in shares, debt or commercial loans. Foreign financial institutions have limited access to China’s internal financial markets. There remain, of course, serious financial problems to be solved: the four large banks – Bank of China, Industrial & Commercial Bank of China, China Construction Bank and Agricultural Bank of China – have bad loans of over RMB 1.4 trillion (O’Neill 2001), some of which are now being tendered to domestic and foreign investors. And the government must have noted the contrast between China’s relatively steady growth of the past three or four years and the turmoil caused in South Korea and other east Asian countries by the 1997 financial crisis. Financial pressure has been a key means through which international markets have constrained the freedom of late industrialisers to set internally-validated policy goals; China has so far evaded many of these constraints. These are two senses in which opening up has been limited, supplementing our observations about the spatial limits of the open economy in earlier chapters. The development of market forms of organising the economy has also been constrained by the continued operation of state-owned (even if corporatised) enterprises and various forms of collective enterprises in the market. The history of reform of markets reflects the sensitivity of social conditions to the manner in which work is organised and the amount of it available. In this respect, the hesitant changes to the organisation of enterprises reflect social policy and the importance attached to social stability by the government. But the government has elected not to impose new forms of constraint upon the operation of markets in order to modify the impacts of restructuring on people’s lives. Thus, there have been quite limited experiments to temper the increasing levels of inequality within China. Levels of inequality have probably been rising within China, at an interregional scale and within provinces (see, for example, Long 1999; the discussion in Khan 1996; and Wang and Hu 1999), though rural absolute poverty may have fallen. Hukou remains an important barrier to long-term migration to the bigger cities; and once in the cities, migrants face multiple discriminations (see, for example, Chan 1996; Dutton 1998; Solinger 1999; and the stories collected in Jacka 2000). There is some evidence that

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discrimination according to gender is becoming increasingly significant in relegating girls and women to lower educational opportunities and positions of lower status and income than boys and men (Fan and Huang 1998; Woon 2000). Quite apart from inequalities that might be derived from the operation of the price system in capitalist market economies, there are two principal ways in which levels of inequality within society can be controlled. These are first, through the system of personal and corporate taxation and secondly, through investment in the people and regions that are disadvantaged. In China, where levels of interprovincial capital flows are low and foreign direct investment is directed principally to the provinces where incomes are higher anyway (Wang and Hu 1999: 143–68), it falls to the central state to direct investment to poorer people and regions. Yet in the 1980s, Deng sought to let the coast grow rich first; and in the post-Deng era when the state has sought to direct some investment to the poorer regions in the west (Chapter 6; Beijing Review 28 June 2001), it has lacked the budgetary resources with which to accomplish this aim (the central government’s revenue as a share of GDP fell from 31 per cent to 11 per cent between 1978 and 1995 and its share of fixed capital investment from 30 per cent to 3 per cent: Wang and Hu 1999: 168–98). Having unleashed the rapid economic development of the richer provinces along the coast and encouraged entrepreneurship, the central government has essentially let go of its capacity to control the resulting levels of interpersonal and interregional inequality. Similarly, there have been only small moves to modify the impact on workers of marketisation. In an economy where unemployment and underemployment are high, workers are in a weak position with which to bargain with employers. We describe two principal problems. As SOEs are instructed to become corporatised and profit-oriented and to hire workers on contract only, so the level of unemployment in urban areas has risen, perhaps to 5 per cent or more. Yet the central government has provided only a weak system of social security to replace the long-term guarantees that once were provided by SOEs. Workers who are removed from the payroll of an enterprise are supposed to receive unemployment benefit (typically three-quarters of the minimum wage) from the local government for up to two years. The scheme is financed by a contribution from enterprises of 0.6–1.0 per cent of their wage bill, supplemented by local governments. Commonly, however – and particularly in poorer regions – workers who have been fired receive far less than this entitlement, sometimes no more than RMB 10,000–12,000

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(CLB 2001b); perhaps less than a third of urban workers are actually covered by the scheme (CLB 2000). ‘Is it possible that this society is simply going to abandon the working class?’ (a worker, in a seminar organised in 2000 by Hunan’s Fenghuang TV station, cited in CLB 2001a). Similarly, the government has paid little practical attention to the conditions of employment within both state-owned and private (or foreign) forms of enterprise. The appalling safety record of China’s coal mining industry receives regular coverage in the world’s press (see, for example the reports in the South China Morning Post or the CLB web site http://iso.china-labour.org.hk). (Though the government has closed many small mines, to raise standards of safety, it is also privatising the smaller state-owned mines and failing to oversee the closure orders.) In Chapter 5 we have described working conditions within foreigninvested enterprises in China, an account that could be replicated with thousands of individual stories (Frost and Wang 2000; Hong Kong Christian Industrial Committee 2001; Kwan 2000; Teng 1999/2000). Such conditions reflect rural poverty, an ignorance on the part of potential workers of actual conditions in factories, and the unwillingness of local officials to regulate employment (for fear of losing investment to jurisdictions in which regulations are less scrupulously enforced). Although the central government increasingly extols the virtues of competition between firms, it has refused to permit competition between unions that might organise workers themselves to mitigate these conditions. China’s path towards globalisation, its opening and marketisation, is realistic and pragmatic, directed to the goal of technical or economic modernisation (as opposed to say social or environmental modernisation). On the one hand, markets and the open door benefit China’s economic development and have improved the living standards of the majority of the population. Foreign trade and investment create jobs, sponsor new industries, earn foreign exchange and lead to increasing prosperity for many people. However, the central government has taken the position that the transformation toward a market-oriented economy and the integration of China with the global economy will proceed pragmatically within the constraints of political power balances, and that the process of change will proceed cautiously and slowly. Each experiment in market and social openness has been evaluated in terms of political as well as economic objectives before it is generalised. One important characteristic of Chinese reform is therefore ‘crossing the river by feeling the stones’. The historical legacy of institutions and

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economic structure, the pressure of population (in terms of size, education and ethnicity), the sheer size of the national economy, and the political and social structure – all require a careful and pragmatic transition. Globalisation is a double-edge sword: it can benefit a national economy, but it also can hurt people. The recent regional economic crisis reinforced this lesson, as have the history of inequality and working conditions. What is striking, however, is that the government has experimented widely in economic restructuring, using sectors and regions in the manner that we have illustrated, without experimenting as deeply – even in individual places – with constraints upon the operations of markets and the open economy. The result is increasing inequality, increasing levels of unemployment and poverty in urban areas, and poor working conditions. The central government has globalised the economy by letting go of controls and sources of revenue and empowering the provinces and local administrators. This strategy is realistic not only in being gradual, but also in circumventing bureaucratic opposition in the central government itself. However, the government has been far less successful in making positive moves – in sponsoring new industries (witness the examples of the PC industry and high and new technology policies) and in intervening through regional planning (witness the limited spatial shifts in development). In the same vein, the government has not been successful in inventing new means of controlling inequality, poverty and poor working conditions. Perhaps, that is, in giving more and more control to the market and to lower levels of government, the central government has given away many of the means with which to intervene effectively in these directions and has created new sources of power (rich provinces, rich people, profitable enterprises) that would oppose such interventions: this is path dependence with a vengeance.

2. Transition, adjustment and late industrialisation Outside western Europe and north America, three principal approaches to the global economy have been identified. The formerly socialist countries of Eastern Europe, the former USSR, China and Vietnam are said to be in ‘transition’ from socialist forms of allocation to market mechanisms. Other countries, notably in Africa, Latin America and the Indian subcontinent, have marketised their economies and opened them to global flows during ‘structural adjustment programs’ supervised by the International Monetary Fund and the World Bank. Yet other

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countries (Japan, Korea, Taiwan, Singapore) are identified as ‘late industrialisers’, that have followed plan-dominated strategies of exportoriented industrialisation designed to support an upgrading of technology, economic structure and living conditions. But these are empirical generalisations, classifications of countries during particular periods. (Naturally, countries move on: the transition is essentially complete in some countries, such as the Czech Republic; Japan, Korea and Taiwan are no longer plan-dominated; and countries such as Brazil shifted from one category – late industrialiser – to another – structural adjuster.) As empirical generalisations, these typologies classify countries according to selected common characteristics of social and economic policy, ignoring other characteristics that differ between them. Consider, for example, the category of transitional economies. The lumping together of eastern Europe, the former USSR, China and Vietnam ignores profound differences in their social and economic circumstances. The countries were in vastly different conditions before the communist period: whereas (the then) Czechoslovakia was a relatively rich, industrialised economy, integrated into western Europe, the Balkan states, Russia, China and Vietnam were rural and relatively poor. Onto these different conditions were superimposed different histories of communism: from a 70 year history in the USSR to only 30 years in China (and even less in Vietnam); though the communist countries shared a common focus on heavy industrialisation funded by a surplus extracted from a collectivised agricultural sector, the weight of the state and the role of more private forms of organisation certainly differed between them. China and Vietnam remain far poorer economically than their eastern European and Russian counterparts. The states of the transitional economies have suffered different fates: the states of eastern Europe and the USSR collapsed and the countries of Yugoslavia, Czechoslovakia and the USSR themselves disintegrated, while East Germany became part of Germany; yet the Chinese and Vietnamese states have both survived, albeit in new forms. The sole factor that in this classification unifies these countries is the transformation from authoritarian, plan-dominated forms of allocation in closed economies to more market oriented forms of valuation and more open relations with the rest of the world. Yet this factor is not unique to these countries. In the 1950s and 1960s, authoritarian, plan-dominated economies with high degrees of state ownership were the rule outside western Europe and North America: they included Brasil, Korea and Taiwan. Of course, the communist world tolerated

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private property and markets to a much lower degree than did Brazil, Korea or Taiwan; importantly, agriculture was not a household enterprise for most of the communist period. The difference, say, between China on the one hand and Korea on the other, was really one of the extent of private property (rather than the fact of private property), of the degree to which the state used incentives not bureaucratic control to achieve its ends (rather than whether the state was dominant economically) and on whether industrialisation was export oriented or closed (rather than whether policy was to industrialise on the back of agricultural surpluses). In particular, the evolution of China since the late 1970s has been quite different from the evolution of eastern Europe and the former USSR. In China, marketisation has been hesitant, subject to periodic reversals, and implemented experimentally in specific regions and sectors. New institutional forms have been introduced without abandoning the old. Change has sometimes been led by government, has sometimes been spontaneous. There has been little opening of the financial sector. The state has not collapsed, but has orchestrated change. In all these respects, China differs from eastern Europe and the former USSR. In view of the differences between them and of their similarities with some other states, the fact of being formerly communist is a weak basis for categorising eastern Europe, the former USSR, China and Vietnam as one group. Similar difficulties afflict the category of states subject to structural adjustment programs of opening and marketisation. Although the World Bank has not mandated structural adjustment in China, and although China has not yet opened its financial sector to global competition, nevertheless there are two respects in which China is similar to structurally adjusting states. First, the World Bank does have influence in China. Its continual advocacy of market allocations and of open economies strengthens the political power of those sectors in Chinese society that favour these policies. The Bank – and other similar international institutions – provides an external validation for policies of globalisation. Secondly, many of the reported effects of structural adjustment on citizens in these countries are not dissimilar to those reported in China during the globalisation process. In particular, the restructuring of SOEs in China and their privatisation or break up in other countries have similar consequences: loss of job security, loss of jobs, loss of welfare entitlements. And likewise, the category of late industrialisation. Certainly, the post-Mao period in China has witnessed an export-oriented industriali-

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sation funded by agricultural surpluses, directed to upgrade technology, economic structure and social conditions. But the differences in the economic and social histories of Japan, Korea and Taiwan since decisions have become increasingly decentralised suggests that the category is not now relevant to an understanding of their political and social circumstances. Even the structure of firms is different, as the large corporations of Japan and Korea vie with the smaller corporations of Taiwan. And despite following some elements of the late industrialising model, China has encouraged and relied upon large inflows of FDI to encourage structural and technical change. The role of SOEs in China and the social problems associated with their restructuring are widely different from those even in Taiwan, where SOEs also used to dominate the economy. China has followed policies that have similarities with each of the three categories. Indeed, the looseness of some of the categories and their inability to encompass cases such as that of China suggest that the categorisations are themselves inappropriate. Perhaps, that is, such categories as transition, strategic adjustment and late industrialisation should be applied to policy orientations rather than to countries. In other words, it is inappropriate to call China a transitional economy; rather it has followed some transitional policies. It is inappropriate to call China a late industrialiser; rather, it has followed some late industrialising policies. But to say that China has followed some transitional and some late industrial policies is not to put China in the same analytical category as eastern European or former USSR countries or in the same category as Japan, Korea and Taiwan. If path dependence means anything, it implies that a common policy – whether instituting markets and opening up to the rest of the world, structurally adjusting or late industrialising – is a weak basis for analysis: outcomes depend on preconditions and local circumstances as well as on the policy that is imposed. Economies are not in transition, structural adjustment or late industrialisation; it is policies that fall to a greater or lesser degree into these categories.

3. Regions under globalisation Regions are abstractions, products of an observer’s mind. States, provinces, counties, zones – these are real entities, having effectivity. But regions in general do not have effects until they become in some way institutionalised. Regions can become institutionalised either through being granted formal powers by other institutions or through being recognised informally in the actions of people or institutions.

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Both forms of institutionalisation have occurred in China since Mao: provinces, counties and zones have all been granted increased power to collect revenue and to set policies; and regions such as the coast or the west have become the objects of state policy. Since regions are abstractions, their definition depends on the object of study. Our object is the study of globalisation in China, so we define regions in terms of systems of valuation. Regions, that is, are sites of characteristic modes by which commodities are valued. They are areas over which those modes are generalised. Valuation has two aspects: first, a qualitative one, the mechanisms through which values are defined (through the market, social custom, or bureaucratic fiat, for example); and secondly, a quantitative one, the magnitudes of the values of different commodities. Globalisation in China has introduced new mechanisms of valuation – the market – and set local systems of valuation in competition with those of the rest of the world. There has therefore been a profound relation between globalisation and the formation and development of regions in China. As generalisations, regions cannot always be precisely defined, do not always have identifiable borders. This observation has led some, such as Allen et al. (1998), to propose that regions be regarded as discontinuous and without fixed boundaries: discontinuous because development is uneven within regions; and without fixed boundaries because a region is open to the rest of the world and can itself be only imprecisely identified. Certainly it is important to regard regions such as the coast, the west, south Jiangsu or the Pearl River Delta as open to the rest of the world and as unevenly developed. But such regions, by being recognised informally, have become objects of state policy and as such have acquired rather precise definitions (even if those definitions change over time). Allen et al. are writing of the UK, a country that, like New Zealand, has a centralised form of government and few traditions of strong local policy making (compare Peck 2001). China, by contrast has, since the early 1980s, become a state in which power is decentralised. Provinces and counties existed before 1980, of course, but they were largely the means through which central government power was brought to bear in localities. They were then simply part of a hierarchical structure of administration. Despite the truth in the phrase ‘Policy from above, counter-policy from below’, The People’s Republic before 1980 constituted a single region in respect of methods of valuation, though there existed differences in the magnitudes of value in different places. Since the changes of the 1980s, provinces and other localities have been

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empowered, by being granted greater access to revenue and greater power to act, particularly in economic development. The extent of this power and the manner in which it has been exercised transformed these administrative areas into regions. The 1980s, then, was a period during which the central government institutionalised the framework for a hierarchical system of regions – provinces and municipalities, counties, townships and villages, as well as all manner of special zones. These institutional changes transformed China into its present structure as an overlapping mosaic of regions, some formally institutionalised, some informal, for a variety of reasons and through many mechanisms. First, institutional changes were during the 1980s and 1990s exploited by local officials and by emerging market structures in many different ways (Cheung 1998). The visions, strategies and abilities of local leaders differed widely. Some leaders, in localities where ‘The mountains are high and the emperor is far away’, could exploit their remoteness from centres of power to make distinct local policies. Furthermore, the central government has granted different powers in different places. The south and the coast could develop markets and open their economies earlier than the north and centre or west. Special zones were created with different systems of valuation. Then, too, the linkages of places to the resources of overseas Chinese differed widely. Of particular importance has been the access of Guangdong and Fujian to the capital of Hong Kong and Taiwan (Lin 1997). All these mechanisms have become generalised within regions through mimicry and networks (Nee 1994). As foreign owned enterprises establish within a region, other firms seek to emulate their methods and techniques. As some people find high paying jobs in private enterprises, other people are enticed to seek such jobs too, and employment in state owned enterprises is made to seem unattractive. As one township finds a route to development, others seek to imitate it. Paths to globalisation have thus become locally defined, varying widely over the country. There is, though, another sense in which regional formation has been bound up with globalisation in China. Regions have been the means through which globalisation was made possible. The existence of a set of spatially delimited areas meant that change could be initially localised, and opposition to change defused. Localised changes were experiments, the negative effects of which could be readily overcome; the experiments could be reversed. It was not, however, the social or economic characteristics of the regions that was important – only their existence. Provided that there existed a set of institutionalised regions, they could be exploited as sites of experimentation in economic and

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social policy. Without the capacity to localise experiments in this way, change in China might have been even slower, or as disruptive as in other countries with transition policies. Thus, the path to a global economy in China has been trod by regions. The central government has set the framework, by allowing new forms of enterprise and new forms of price setting, by rearranging the distribution of power, and by planning the development of new sectors (such as high-technology industries) and the restructuring of others (such as the textiles industry). But many of these innovations were initially spatially specific and they were all taken up in different ways in different places. Globalisation in China has a regional character. Whereas we have thought of globalisation in China as encompassing the development of markets and opening up to the global economy, it is perhaps better to add a third characteristic: regionalisation, the development of a system of differentiated places. Whereas Florida (1995) observed that globalisation and regionalisation are part of the same process, in China regionalisation is a means as well as an effect of globalisation. And whereas in Europe there is debate over the institutionalisation of regions (Brenner 1999; Keating 1997), in China the process is not one of regions becoming institutionalised, but of institutions becoming regions. The reformation of regions in China is thus not a form of the withering of the state, but a reallocation of state powers within a preexisting administrative hierarchy.

4. Paths to a globalised economy The central state has created the possibility of markets. It has legalised new forms of enterprise, sanctioned increased levels of migration and revised the ways in which prices are set. The central state has opened the economy to imports and foreign direct investment as well as permitting local firms to export. The central state has institutionalised the framework for a new regional structure. But these possibilities have been exploited by people, enterprises and institutions in localities – to create operating markets, to import, to trade, and to develop regions. Change in China since Mao is the product of central state permissions and encouragement on the one side, and local action on the other. These possibilities and the manner in which they were taken up have empowered some people, sectors, places, forms of enterprise and disempowered others. Enterprises without large welfare obligations and those that have permission to export have advantages over other enterprises. Places that were the sites of early experiments and those

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that have easy access to the rest of the trading world have advantages over other places. Sectors in which China’s cheap labour supply attracts foreign enterprises or that are supported by the government have advantages over others. Local residents in richer regions or those with connections and education have advantages over people inland, without connections or education. The arguments for the next change thus come from different sources and in different strengths than did the arguments for the previous change. China is redefined, as the constellation of class, sectoral and regional interests that constitute the country evolves. The next change is therefore different than that which would have been anticipated before the previous change. The path to a global economy is, though, subject to rules of consistency. The central government’s experiments added new forms of economy to the existing forms: do not abolish the old, just add the new. The old was insurance, if the new did not succeed, and could satisfy people who did not want to change. But there is a tension: the continued ability to sustain the old forms against competition from the new. Thus, regional leaders have been empowered, but have restricted room to manoeuvre. The firms that they sponsor or encourage must be able to compete in the market; High and New Technology Industrial Development Zones might be defined, but they must be able to attract appropriate firms; spending on education needs to produce an attractive labour force. State-owned enterprises might be retained as bastions of social stability, but they must change too. SOEs carry a long history of labour relations and the burden of welfare obligations, both of which hinder them in their competition with private and foreign invested enterprises. Some managers of SOEs attempt to circumvent this competition by themselves adopting joint venture partners; others agitate for institutional reform that will permit them to shed their obligations (Johnston 1999). Township and village enterprises might circumvent markets in hiring, but they are increasingly subject to claims of efficiency and competitiveness too. Localism and guanxi have long been important ways of finding jobs in TVEs, but as the market becomes generalised and as successful managers gain power (because of their success), so efficiency and productivity begin to become more important principles for hiring (Sargeson 1999). The dance that has seen the global economy, the central government, the country’s regional formations and competing systems of valuation lead China towards a globalised economy is thus supervised by new rules of competition. These rules are set by central government regulation, by forms of interaction with the global economy and by the social

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and legal principles of markets in regions. Although the central government continues to seek legitimacy, China has been altered – not simply as being more market oriented, more open and more regionalised, but more importantly as a place in which the rules of social change have been and are being redefined.

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Index Page numbers in bold print refer to main entries abbreviations, xi Acer, 209 Africa, 7, 21, 22, 34, 40, 41, 47, 50, 51, 56, 57, 235 agents, 64, 69 agglomeration, 169, 173, 178, 181, 190, 215, 221, 224, 231 Agricultural Bank of China, 75, 156, 157, 232 agriculture, 9, 46, 48, 62, 64, 71–2, 73, 74–5, 76, 79, 81, 83, 88, 100, 123, 130, 132, 135, 151, 165, 166, 237, 238 airports, 139, 148, 161 All China Federation of Trade Unions, 97 Allen, J, 239 AMD, 210 Anhui, 8–9, 85, 175 Anshan, 120, 176, 179 APEC, 4 arbitration commission, 110 ASEAN, 34, 36, 37, 58 Asia contracted projects in, 21, 22 exports of labour to, 21, 22 FDI inflows to, 34, 35, 40, 41, 45, 47 NIEs of, 7–8, 25, 36, 37, 41, 56, 60, 68, 104, 161, 229 see also East Asia; South East Asia Asia-Pacific, 35, 36, 58 Asian financial crisis, 2, 7, 10, 18, 19, 33, 94, 95, 111, 158, 165, 166, 200, 232, 235 assimilation, 4, 138 AST, 209, 211 auditing systems, 48, 49 Australia FDI inflows to, 40, 41, 45, 52, 54 globalisation and, 6

natural resources of, 45, 52, 57 automobile industry, 33, 36, 53 Balkan States, 236 bamboo network, 133 Bangladesh, 22 bank loans, 155 Bank of China, 157, 158, 232 banking system, 10, 29, 145, 155–7, 164, 165, 232 bankruptcy, 80, 84, 89 Baoding, 120, 176 Baoji, 177 Baoshan Steel complex, 130 Baotou, 120, 176 Beijing, 52, 81, 85, 120, 133, 174, 175, 176, 179, 181, 193, 209, 212–14, 216, 221, 223, 224, 231 Beijing Capital Steel, 206 Beijing Friendship Store Service Company, 42 Beijing Hope Company, 223 Beijing New-Technology Industrial Development Experimental Zone, 174, 180, 182, 215 Beijing University, 209, 223 Benson, J, 83–4 BIS, 4 Boluo, 218 bonded factories, 173 bonded labour, 105 bonded warehouses, 173 bonuses, 68, 76, 98 brain drain, 23 brand names, 216–17, 231 Brazil, 4, 8, 54, 236, 237 Bretton Woods System, 3 Bryan, D, 3 Bureau of Prices, 155 Burma, 22, 26 259

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260 Index cadres, 68, 69, 76, 90 Cambodia, 35, 54 Campbell, I, 109 Canada, 25, 26, 39–40, 41, 57 Cannon, 209 Cannon, T, 123 capital accumulation, 120 capital-commodity market integration, 15 capital flows, 10, 23–4 capital formation, 3–4, 9 capital inflows, 15, 23–4, 31 see also foreign direct investment inflows capital investment return ratios, 128–9 capital outflows, 23, 24, 31 see also foreign direct investment outflows Capital Steel Complex, 45 capitalist enterprises, 8, 65, 83, 89 capitalist market economies, 64–5, 66 carpet factories, 52 Cartier, C, 2 cash crops, 132 Castells, M, 168, 182 cement, 117 Central America, 57 Central Asia, 51 central China, 114, 120, 130, 131, 132, 135, 136, 137, 140–1 central government economic transformation and, 227, 233 experimentation and, 227–8, 230–1, 234–5, 240–1, 242 FOEs and, 94, 100, 110 foreign trade policy of, 17–18, 29 HNTIDZs and, 170–2, 173, 179, 181, 184, 186, 188–9, 190, 230, 242 human resource exports and, 19–20 ILO conventions and, 97 labour regulation/law and, 94–5, 97, 100, 106, 107–9, 110, 111 market reform and, 62, 70–1, 89 old with the new policy of, 229, 237, 242

open door policy and, 143, 146–7, 166, 167 overseas investment initiated by, 32, 37, 38–9, 41, 43, 45–7, 48–50, 52, 54, 55–8, 59–60 personal computer industry and, 205, 206, 207, 231 power of, 13, 62–3, 67–8, 69, 91, 97 rural markets and, 70–1, 72 SEZs and, 189, 190, 230 spatial shifts of development and, 113–42 taxation and, 66, 67, 69 technology policy and, 24–5, 26–8, 29 textile industry and, 192, 193, 199–200, 230 transformation of, 11, 14 see also decentralised control; government; gradualism; regionalisation; special economic zones; state-owned enterprises central planning, 62, 66, 226–7 Centre of Computer and Microelectronics Industry Development Research, 217 chaebols, 34, 36, 59, 229 Chan, A, 104–5, 109 Chanchun, 120 Changchun, 175, 176, 181 Changsha, 177 Changzhou, 176, 179, 193 Channar iron ore mine, 39, 52 chemical fibre machinery manufacture, 192, 196, 197 chemical fibre production, 192–3, 196, 197 chemical industries, 25, 36, 83 Chen, H, 42 Chen, Z S, 66, 75 Chen Chunxian, 214 Chengdu, 177, 181 Cheung, P T Y, 69 China Chemical Industrial Import and Export Corporation, 45 China Construction Bank, 156, 157, 232 China defined, 11, 62–3

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Index 261 China International Trust and Investment Corporation, 40, 41, 45, 156 China Investment Bank, 156 China National Petroleum Corporation, 40, 59 China Research Centre, 209 China Technology Trade, 217 Chinese Academy of Sciences, 174, 175, 214 Chinese government initiated outward investment, 31, 32, 33, 37, 38–9, 41, 43, 45–50, 52, 54, 58, 59–60 Chinese guerillas, 41, 59 Chinese language support systems/character processing technologies, 214, 215, 222–3 Chinese overseas enterprises, 41, 43, 45, 50–5, 56, 58, 59–60 Chinese restaurants, 42, 44, 47, 48 Chinese students, 22–3 Chongqing, 120, 124, 139, 177, 181 cities, 62, 74 see also townships class structures, 6, 8, 11, 12, 79 clothing coupon system, 193 clothing industry, 32, 54, 104, 191, 193, 194, 195, 196, 197, 198, 199, 203 see also textile industry coal, 117, 127, 132 coastal China, 52–3, 63, 70, 104, 113, 114, 115, 116, 117, 118, 120, 122, 123, 124, 126, 127, 128–9, 130, 132, 134, 135, 136, 137, 138, 139, 140, 141, 142, 143, 159, 161, 178, 179, 196–7, 233, 240 cold war, 8, 115, 126, 129 collective agreements, 108–9 collective bargaining, 97, 108 collective negotiation and collective agreement, 108–9 collective-owned enterprises, 14, 65, 71–2, 73, 75, 81, 82, 83, 84, 87, 98, 99, 100, 101, 102, 103, 104, 108, 111, 152, 153, 198, 201, 229, 232

colonialism, 1, 33, 115, 117 commercialisation, 5 commodity markets, 64, 74, 75, 78, 88–9, 90 commodity production bases, 132 communication technology, 96 communism, 236–7 company culture, 103 company values, 103 Compaq, 209, 210, 211, 217 comparative advantage, 55, 56, 60, 115, 116, 130 competition, 4, 5, 12, 13, 19, 80, 83, 86, 88, 90, 234, 242 competitiveness, 152, 153, 161, 162, 167, 184, 187, 189, 195, 197, 198, 200, 203, 206, 215, 230 computers see personal computer industry conglomerates, 33, 35, 36 see also transnational corporations construction industry, 43, 44, 100 contract employment, 75, 76, 84, 97, 100–1, 104, 106, 107, 108, 109, 111, 154, 158–9 contractual joint ventures, 93 cooperative design/production, 56 core-periphery structure of production, 96 corporatisation, 4–5 corruption, 94 cotton, 52, 73, 83, 196–7, 200 counties, 67, 68, 91 Cox, R W, 3 credit allocation, 68 credit policy, 18 crops, 71–2, 74 cultural environment, 133 cultural relations, 4, 5 Cultural Revolution, 123–4, 226, 227 currency markets, 3 Cyrix, 210 Czech Republic, 236 Daewoo, 36 Dahekan, 178 dairying, 73 Dalian, 176, 179, 193 Daqing, 176, 181, 202

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262 Index DAW Computer System, 217 DEC, 209 decentralised control, 61, 115, 116, 193, 235, 238, 239–40 decollectivisation, 71, 79 defence industries, 169, 178 Deng Xiaoping, 113, 114, 116, 117, 129–36, 140, 141, 142, 152, 158, 167, 170, 174, 227, 233 Denmark, 26 developing countries competition between, 160–1 FDI and, 31, 32, 33, 39, 42, 50, 56, 58 joint ventures with, 56 markets in, 54, 56 rapid technological change and, 187 textile industry and, 197 see also late industrialising economies; newly industrialised economies de Vylder, S, 66 Digital, 209 Dingxin Co, 209 direct investment see foreign direct investment discrimination, 232–3 distribution, 61 DIY PCs, 212 domestic investment, 150 domestic private enterprises, 152 domestic trade/market, 21, 29, 45, 50, 137, 150, 193, 196, 229 Dong’guan, 218, 219–20, 222, 224 Dunning, J H, 59–60 East Asia, 33–7, 58, 145 Eastern Europe, 7, 9, 40, 51, 59, 60, 161, 235, 236, 237, 238 economic and technology development zones, 144, 183 economic change, 1, 2, 5, 6, 7, 9, 11, 14, 15, 218 economic cooperation, 149–50 economic development, 3, 7, 12, 27, 69–70, 90, 145, 148, 150, 151–2, 163, 173, 187, 226, 227, 233, 234, 240

economic development shifts, 113–42 economic growth, 1, 2, 4, 53, 55, 63, 67, 69, 72, 93, 101, 110, 122, 123, 130, 142, 150, 163, 165, 232 economic policy, 3, 4, 24, 62, 63–4, 71, 88–9, 91, 113–42, 146, 173, 184–5, 189 economic power, 67–8 economic reform, 1, 2, 5, 8, 9, 11, 14, 31, 42, 62, 63, 66–7, 71–9, 102, 107, 113, 133, 147–8, 152 see also special economic zones economic transition, 2, 7, 8, 62, 63–4, 160–6, 235, 236–7, 238 economic transformation, 227, 236–7 Education Commission, 174 egalitarianism, 118 Egypt, 26 86-3 Plan, 170, 172 electric power industry, 117, 121, 132 electronics industry, 25, 36, 46, 50, 174, 178, 180, 182, 206, 207, 219, 221, 222, 223–4, 231 see also personal computer industry employee recruitment, 98, 101, 159 see also labour allocation system employment, 240 COEs and, 98, 99 FOEs and, 94, 97–104, 110 HNTIDZs and, 176–7, 179 labour market development and, 158–60 PC industry and, 205, 215, 225 SEZs and, 149, 154 SOEs and, 98, 99 textile industry and, 192, 194, 195, 198, 200, 201–2, 204 see also labour abuse; labour migration; labour relations; labour resources; rural employment/labour; urban employment/labour employment conditions, 87, 94, 104–6, 109–10, 234 employment growth, 18 employment (labour) contracts, 75, 76, 84, 97, 100–1, 104, 106, 107, 108, 109, 111, 154, 158–9

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Index 263 Employment Promotion Law, 109 energy and water, 83, 130, 132, 138, 197 enterprise associations, 107 entrepreneurship, 172–3, 174, 182, 193, 205–6, 207, 214–16, 223, 231, 233 environmental policy, 3, 4 environmental problems, 137, 140 environmental protection, 132, 140, 168 Epson, 221 equity joint ventures, 93 ethnic groups, 138, 161 Europe, 21, 22, 34 see also Eastern Europe; Western Europe European Union, 4, 40, 41, 47, 54, 57, 58 Export Development Fund, 59 export: import ratio, 17 export processing zones, 146, 147, 161 exports, 16–23, 25–6, 27, 28, 29, 38, 46, 50, 51, 53–5, 58, 132, 147, 148, 149, 151, 152, 173, 192, 193, 194, 195, 200, 203, 204, 205, 228, 237–8 external competition, 160–1 Falk, R, 96–7 famine, 123 Fan Gang, 186 FANUC, 175 Fforde, A, 66 financial markets, 3, 11, 148, 150, 155–8 financial system, 10, 34, 36, 43, 44, 47, 66–9, 71, 232, 237 floating population, 85, 86, 159 Florida, R, 241 footwear industry, 54, 104, 105 Foreign Currency Exchange Centre, 158 foreign currency loans, 95 foreign currency markets, 157–8 foreign direct investment, 8, 9, 14, 15, 16, 17, 19, 23–4, 25, 28, 70

foreign direct investment inflows, 33, 34–5, 36–7, 42, 43, 55, 58, 59, 60, 80, 93–112, 114, 130, 140, 145, 146, 147, 149, 151, 163, 178–9, 185–6, 187, 188, 189, 190, 228, 229, 232, 233, 238, 241 foreign direct investment outflows, 28, 31–2, 33, 34–6, 37–58, 59–60, 228, 229 foreign employees, 97–8 foreign exchange earnings, 192, 193, 194, 197, 203, 234 foreign exchange regulatory markets, 148 foreign exchange reserves, 14, 15, 19, 24, 27, 31, 146, 148 foreign funded firms, 18 foreign-investor-oriented zones, 178–9, 185–6, 187, 189 foreign market access, 32, 35, 37, 38 foreign-owned enterprises, 14 CNCAs and, 108, 109 contribution to economy of, 93–4, 229 employment relations in, 94 HRM in, 102–3, 111 human rights abuses in, 105–6 industrial disputes in, 107 labour conditions in, 94, 104–6, 234 labour contracts and, 154 ownership and, 152, 153 problems in, 94, 104–6, 111 regulation of, 94, 107–9 SEZs and, 148, 151, 165 total industrial production and, 153 trade unions and, 103–4, 109, 111 types of, 93 workforce of, 97–106 foreign-owned textile enterprises, 195–6, 198, 199 foreign-PC-related companies, 207, 208–10, 211, 216, 219, 221–2 foreign trade policy, 17–18 forestry, 132, 139, 140 Foshan, 178, 179, 193, 217, 218 Founder, 175, 180, 209, 210, 214, 216, 223, 224

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264 Index four-modernisation programme, 129, 145, 188–9 fractional interests, 6 France, 26 free trade zones, 54, 145, 147, 161, 162, 165 Fujian, 81, 100, 105, 115, 130, 133, 141, 146, 222, 240 Fuoshan, 177 Fushun, 120 Fuzhou, 176 G7, 4 Gang of Four, 152 Gansu, 120 gas see oil and gas geographical proximity, 36, 37, 58 geopolitical conditions, 7, 8 Germany, 26, 59, 229, 236 Ghana, 54 global civil society, 97, 112 global corporation, 3–4 see also multinational enterprises; transnational corporations global framework, 3–6 global governance, 3, 4, 5, 9–10, 11, 95, 97, 231 global information industry, 218 ‘globalisation from above’, 97, 111–12 ‘globalisation from below’, 97, 112 governance see global governance; international financial governance government marketisation and, 12, 62–3 new financial policies of, 59 power of, 62–3, 67–8, 69, 90 property rights and, 66 regionalisation and, 90 see also central government; local governments; provincial government government bonds, 3 government employees, 65, 89, 158 gradualism, 8–9, 10, 11, 12–13, 29, 42–50, 133, 166, 235 grain, 71–2, 73, 75, 83, 132 grain-for-green, 140

‘grasp the large, release the small’, 59 great leap forward, 115, 123, 226, 227 Great Wall, 209, 212, 221 gross domestic product 1950–1955, 122 Pearl River delta, 218 SEZs and, 148, 149 S&T research and, 183 growth poles, 173 Guangdong, 81, 85, 100, 101, 104, 105, 106, 115, 126, 130, 133, 141, 146, 158, 159, 178, 179, 217–18, 219, 223, 224, 231, 240 Guangzhou, 52, 177, 179, 180, 193, 217, 218 Guangzhou Number 1 Cigarette Factory, 54 Guilin, 177 Guiyang, 177, 178 Guizhou, 127, 135, 178 Haicheng, 179 Haidian district, 174, 213 Haier, 27 Haikou, 178 Hainan, 146, 161, 165–6, 177, 178 Hall, P, 168, 182 Han Chinese, 138 Hangzhou, 176, 193 Hanzhong, 178 Harbin, 120, 175, 176, 180, 181 Hebei, 85, 120, 133 Hefei, 175, 176 Heilongjiang, 120, 202 Henan, 120, 127, 181 Hewlett Packard, 209, 210, 211 high and new economic technology development zone, 144, 145, 163 high and new technology defined, 168 High-and-New Technology Development Belts, 179 high and new technology industrial development zones background to, 169–73, 242 development dilemmas concerning, 186–8 development of, 179–81, 230

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Index 265 high and new technology industrial development zones continued interpretation of, 181–6 overview of, 188–90 proliferation of, 174–9 high-technology industries, 130, 132, 162, 163, 164, 165, 172 high-technology/science parks, 55, 56, 162, 173, 174, 175, 176–7, 182–3, 187, 221 highway construction, 139, 161 Hinton, W, 79 Ho, S P S, 75, 79 Hong Kong, 11, 25, 26, 32, 34–5, 36, 37, 39, 41, 42, 43, 80, 93, 104, 131, 133, 145–6, 157, 160, 162, 163, 194, 212, 217, 219, 221, 222, 240 Hong Kong Legend Group, 217 Hong Kong-Shanghai Textile Ltd, 54 Hoogvelt, A, 94 household appliances, 25, 26, 27, 50, 59 household farm production, 74–5 household income, 135 household registration, 85–6, 88, 91, 158–9 household responsibility system, 8–9, 61, 71–2, 89, 106 housing development projects, 19 Hu, A G, 70 Hua Guo-feng, 152 Huang, C H, 32 Huasun Computer Ltd, 208 Hubei, 126, 127 Huidong, 218 Huiyang City, 224 Huizhou, 177, 178, 179, 218, 222 human resource management, 102–3, 111 human resources see labour resources human rights, 97 human rights abuses, 105–6, 112 IBM, 175, 209, 210, 211, 212, 217, 219, 221, 224 IBM Software Development Centre, 209 ILO, 97, 111

immigration, 165 imports, 16, 17–18, 26, 27–8, 29, 53, 130, 132, 149, 184–5, 228–9 incentive payments, 98 income, 4, 73, 74–5, 76–7, 79, 86, 87, 90, 91, 135 see also wages income disparities, 67, 86, 114, 135–6, 137, 206 incubator programme, 172–3, 180–1 India, 7, 8, 35, 117, 235 Indonesia, 37, 42 industrial accidents, 94, 105 Industrial and Commercial Bank of China, 156, 157, 232 industrial change, 9 industrial disputes, 94, 107 industrial output, 117–18, 119, 123 industrialisation, 50, 52, 55, 84, 115, 120–1, 122–3, 126, 127, 129, 135, 192, 228, 237–8 see also regional development inequalities, 232–3, 235, 241 see also income disparities information networks, 207 information technology, 25 infrastructure, 83, 148–9, 151, 161, 163, 165, 167 infrastructure construction, 138, 139–40, 147, 150, 151, 156–7, 184 inland China, 15, 52, 114, 115, 116, 118, 122–30, 123, 126, 127, 128–9, 130, 135, 136–7, 138, 141, 142, 143, 150, 154, 155, 196–7 see also central China; western China Inner Mongolia, 120 innovation centres, 170, 173, 178, 180–1, 188 innovation network, 188 institutional change, 8 institutionalised regions, 238–9, 240, 241 insurance companies, 43, 157 intel, 208, 210 internal competition, 160 internal conditions, 6 internal determination, 9, 10

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266 Index International Communist Union Movement, 97 international credit rating agencies, 3 international financial governance, 7 International Monetary Fund, 1, 4, 7, 9, 235 international production, 96 international relations, 230 international subcontracting, 96 internationalisation, 15 internet, 28, 205 investment barriers, 5 investment decision integration, 3, 4 investment flows, 14, 23–4 see also foreign direct investment inflows; foreign direct investment outflows investments in kind, 46, 56 Iran, 26, 53 Iraq, 53 iron ore, 39, 52, 165 ‘iron rice bowl’, 98, 154 Israel, 22 Italy, 26, 203 Jaikumar, R, 96 Jangsu, 133 Japan colonisation by, 117–18 FDI of, 33, 37, 38, 50, 57 FDI to, 42, 43 globalisation and, 7, 8 industrialisation of, 238 labour exports to, 22 offshore plants of, 56, 193–4 PC market of, 209 policy of, 6 technology capacity and, 24, 25 technology trade with, 26 Technopolis of, 171 TNCs of, 37 Jenkins, A, 123 Jiang Zemin, 113, 114, 116, 117, 137, 141 Jiangmen, 217, 218 Jiangsu, 75–6, 178, 179, 223, 224, 231 Jilin, 120, 176 Jinan, 176, 179

JingJin Belt, 179 Jinmen, 164 job allocation see labour allocation system joint-stock companies, 154 joint ventures, 14, 23, 32, 42, 55, 56, 80, 84, 93, 101, 103, 148, 150, 152, 153, 154, 156, 175, 179, 186, 201, 203, 206, 209, 216, 217, 221, 224, 242 Jordan, 22 Kazakhstan, 53 Ke, B S, 135 Khan, A R, 74 knowledge economy, 28 Korean War, 118 Kunming, 177 labour abuse, 94, 104–6, 107, 109–10, 111 labour allocation system, 61, 65, 98, 101, 158 Labour Bureau, 110 labour conditions, 87, 94, 104–6, 108, 109–10, 234 labour costs, 21, 22, 36, 38, 51, 58, 96 labour dismissals, 159 labour dispute mediation commission, 110 Labour Law 1995, 95, 107–9, 154, 159 labour law and regulations, 94, 95, 107–9, 111 labour market, 65, 71, 86–8, 89 labour market development, 158–60 labour migration, 15, 19–23, 48, 73, 85, 86–7 labour recruitment see employee recruitment labour relations FDI and, 93–112 globalisation and, 95–7 labour resources, 5–6, 12, 15, 19–23, 193–4, 200, 201–2, 204, 242 see also human resource management labour turnover, 101, 159

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Index 267 land distribution, 79, 85 land ownership, 152 Langzhou, 120, 139, 177 Laos, 22 late industrialising economies, 7–8, 10, 11, 12, 18, 24, 29, 60, 236, 237–8 Latin America, 7, 22, 51, 56, 235 Legend, 175, 180, 208, 209, 210, 214–15, 216, 217, 224 legislation, 80, 107–9, 159 Lianbang Co Ltd, 209 Lianhe Investment Corporation, 157 Liaodong, 146 Liaoning, 120, 126, 133, 179 Liu, Z X, 126 Liu Chuanzhi, 214 living standards see standards of living loans, 68, 95, 155 local authorities, 9, 12, 20, 22–3 local determination, 9, 10 local governments economic reform and, 66, 68–9, 71, 72 ETDZs and, 183 FDI outflows and, 45 high-tech parks and, 55–6 HNTIDZs and, 183, 185 labour law/regulation and, 107, 109–10, 111 power of, 67–8, 69, 91 property rights of, 66 real property ownership and, 152–3 regional development and, 113, 136–7, 138, 142 rural enterprises and, 71, 72, 75 SEZ management and, 154 taxation and, 66, 68, 72, 89 textile industry and, 192, 193, 196, 200 Lucent, 208 Luoyang, 120, 177 Ma, X, 84–5 Macao, 11, 42, 43, 80, 93, 131, 133, 145–6, 160 machinery industry, 25, 46, 50, 192, 196, 197, 200

macro foreign trade and economic cooperation strategy, 19 macroeconomic regions, 130, 131–2 made-in-China products, 15, 16–19, 26, 31, 43, 46, 54, 200 Malaysia, 22, 34–5, 36, 37, 42 Maldives, 22 managed openness balanced trade and, 16–19 capital flows and, 23– 4 human resource exports overseas contract projects and, 19–23 introduction to, 14–15 summary of, 28–30 technology trade and diffusion and, 24–8 management (HRM), 102–3, 111 manufacturing, 17, 18, 34, 35, 44, 45, 46, 47, 48, 50, 52, 54, 86–7, 93, 96, 100, 104, 121, 127, 129, 130, 148, 151, 181 see also textile industry Mao Zedong, 113, 114, 116, 117–29, 141 market control, 65, 229 market development, 88–90 market economy development stages, 61 market-oriented economic organisation, 1, 5, 7, 8, 11 market pressures, 3 marketisation, 4, 5–6, 7, 9, 10, 11–12, 14, 61–2, 64, 65, 90, 91, 142, 166, 184, 192, 206, 221, 223, 228, 232, 233, 235, 237 markets, 113 changes between centre and locality and, 66–70 forms of, 64–5 introduction to, 61–2 naming social change and, 62–6 overview of, 88–90 rural areas and, 70–9, 89 rural-urban migration and, 84–8 urban areas and, 79–84, 89 Mauritius, 54 Mazu, 164 McDermont, M, 32 McKinley, T, 79

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268 Index media, 4 Meng, X, 84 Mianyang, 177 microelectronics, 168 Microsoft, 209 Middle East, 20, 40, 41, 47, 51, 53 migrant workers, 100, 104, 106, 158–9 see also rural–urban migration mining industry, 32, 34, 40, 45, 100, 120, 121, 127, 130, 132, 165, 234 Mirza, H, 33, 36 Mitsubishi, 209 modernisation, 137, 139, 141, 145, 170, 174, 234 MOFTEC, 41, 43, 46, 47, 51 money market, 157 Mongolia, 22, 120 Mt Channar iron ore mine, 39, 52 multinational enterprises, 24, 175, 186–7, 190, 205, 206, 208–9, 210, 216, 219, 221, 224 see also transnational corporations municipal government, 174, 175, 183 see also local governments Nanchang, 176 Nanhai, 218 Nanjing, 176, 179 Nanning, 177 Nantong, 193 National, 209 national characteristics, 6–10 National Education Commission, 188 natural resources, 32, 33, 37, 38, 39, 40, 41, 44, 45, 46, 47, 48, 50, 51, 52, 53, 57, 58, 60, 117–18, 138, 161, 196–7, 229 neo-liberalism, 4 New Technology Development Inc, 217 New Zealand, 6 newly industrialised economies, 7–8, 25, 36, 37, 41, 56, 60, 68, 104, 161, 229 Nike, 96 Ningxia Hui Autonomous Region, 139

Nixon, R, 126, 129 non-bank financial institutions, 156 non-SOTEs, 195–6, 198, 199, 200, 204 non-wage benefits, 98, 101 see also social insurance North America colonialism and force used by, 1 exports to, 21, 22 FDI inflows to, 34, 36, 40, 41, 47, 54, 57, 58 labour exports to, 21, 22 see also Canada; USA North American Free Trade Agreement, 54 north China, 117, 133, 141 north-east China, 117, 120, 122, 126 Novo Nordisk, 175 nuclear industry, 127 occupational health and safety, 105, 234 ocean-going trade, 152 Oceania, 22, 34, 40, 41, 47 OECD, 4 offshore plants, 31, 46, 48, 50–7, 58, 59–60, 96 Oi, J C, 66, 68, 69 oil and gas, 40, 53, 58, 59, 83, 117, 132, 139, 165 On the Ten Major Relationships, 122 ‘one country with two systems’, 145 open door policy, 5, 7, 9, 10, 11, 14–30, 31, 36, 116, 130, 133, 134, 141, 142, 143, 145, 146, 150, 152, 166–7, 169, 193, 206, 216, 221, 226, 228, 229, 230, 232, 234, 235, 237, 241 open status cities, 115, 132, 133, 146, 148, 160, 165, 218 organisational commitment, 103 original equipment manufacturing, 208, 211, 216 Other Ownership Economic Units, 93 overproduction, 50, 196 overseas Chinese, 163, 240 ‘overseas Chinese’ enterprises, 36, 55, 115, 116, 133, 141 overseas contract projects, 15, 19–20, 21–2, 48

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Index 269 overseas investment east Asian neighbours and, 33–7 future and, 57–60 gradualism and, 42–50 introduction to, 31–3 motives for, 32, 36–7, 50–7 spatial patterns and structural features of outward, 32, 37–42 stages of, 42–50, 59–60 see also foreign direct investment outflows; offshore plants ownership, 152– 4, 165 Pakistan, 22 Panama, 57 Panyu, 218 participation schemes, 103 patent information, 37, 38, 55–6 Pearl River delta, 52, 74, 79, 100, 104, 146, 162, 163, 179, 217–23, 224, 231, 239 Penn World Table’s openness index, 16 pensions, 136, 154, 198 People’s Bank of China, 155–6, 157 per capita income, 114, 135, 137 personal computer industry brand name recognition and, 216–17, 231 central government and, 205, 206, 207, 231 cloning and, 210, 212, 214, 215 development of, 205–6, 207–10, 211, 212–17, 224–5 domestic entrepreneurship and, 205–6, 207, 214–16, 223, 231 domestic market and, 206, 207–10, 211, 212–14, 215, 216 domestic production and, 207, 208, 210, 211, 212, 216–17, 219–20, 221–3, 224 foreign companies and, 207, 208–10, 211, 221–2 global perspective on, 208, 210–11 growth of, 206, 207, 208, 212–17 import substitution and, 212 imports and, 207, 208, 211, 213, 214, 216, 217 introduction to, 205–7

market forces and, 221–3 market segmentation of, 210 market share of, 209–10 new paths of growth for, 211–17 size of, 207 SMEs and, 210, 217–23, 224 strategic alliances in, 208–9 personal computer-related products, 210, 211, 214, 215, 217, 219–20, 221, 222, 223, 224, 231 petroleum see oil and gas pharmaceuticals, 83 Philippines, 22, 35, 42 piece-rate systems, 154 pig iron, 117 Poland, 161 political change, 2, 6, 7, 8, 9, 11, 14 political goals, 55, 56–7 political power, 62 pollution, 139 Poole, M, 103 Portland Aluminium Smelter, 39, 45, 52 ports, 148, 162, 164 poverty see rural poverty; urban poverty price controls, 61, 71, 81, 83 price-system changes, 154–5, 233 principal and agent, 69 private enterprise, 5, 14, 37, 66, 72, 73, 75, 76, 80, 81, 83, 87, 88, 89, 90, 153, 229 privatisation, 5, 234, 237 production integration of, 3–4, 9, 10 market-directed methods of, 61, 89 subsistence methods of, 61 production costs, 35, 36, 58 production models, 96 productivity, 5, 18, 26, 71, 74, 135, 198, 242 professionalisation, 5 profit incentives, 80 profit leaking, 47–50 profit motive, 65 profit rates, 83 property ownership, 152– 4 property rights, 66, 68, 71, 72, 73 provincial autonomy, 69–70

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270 Index provincial corporations, 29 provincial government HNTIDZs and, 174 HTDZ and, 144 market reforms and, 29, 30, 62, 69–70, 71, 72, 90 open-door policy of, 20, 143 power of, 12, 62–3, 69, 239–40 taxation and, 66–7, 69, 72, 90 public sector restructuring, 153–4 Pudong, 133 QDI, 224 Qian Sanqiang, 170 QiLu Belt, 179 Qingdao, 117, 176, 179, 193 Qingdao Haier, 59 Qinghai, 81, 139, 140 Qiqihar, 120 quality competition, 5 quotas, 73, 74, 75, 204 Rafferty, M, 3 railways, 127, 139, 161, 163 Rainbow, 175 raw materials see natural resources real estate industry, 93, 148, 161 regional blocs, 54, 57, 229 regional boundaries, 12 regional development, 148, 150, 230 regional development shifts, 113–42 regional difference, 63 regionalisation, 36, 54, 57, 58, 90–1, 167, 239, 241, 243 regions, 2–3, 12, 15, 238– 41 regions defined, 239 research and development, 160, 170, 171, 173, 175, 179, 183, 184, 186, 187, 188, 189, 203, 210, 214, 215, 216, 223 resource allocation, 61, 71 reterritorialisation, 91 rice, 74 Riskin, C, 118 rural areas agricultural production of, 62, 64, 71–2, 73, 74–5, 79 industrialisation of, 67–8, 69, 72–3, 74, 75–6

land distribution in, 79 market development and, 61, 62, 70–9 non-agricultural production of, 75–6, 79 temporary migration from, 85, 88, 89 rural employment/labour, 71, 73–4, 75, 76, 85, 86, 87–8, 89, 100, 106 rural income, 73, 74–5, 76–7, 79, 86, 87, 90 rural poverty, 232, 234 rural–urban migration, 84–8, 89, 91, 136 Russia, 26, 53, 57, 117, 236 Samsung, 36 savings, 70, 72, 74, 75, 135 Science and Technology Association of China, 174 science and technology system, 170–1, 172, 174, 175, 179, 183–4, 185, 188, 189 self-employment, 81, 89 self-reliance, 118 self-sufficiency, 118, 123, 129 services sector, 43, 44, 45, 46, 100, 132 Shaanxi, 120, 121, 175, 178 Shan, San, Dong principle, 129 Shandong, 133, 146, 179 Shanghai, 52, 85, 115, 117, 122, 126, 130, 133, 135, 145, 176, 193, 212, 221, 223–4, 231 Shanghai Bicycle Group, 54 Shanghai Electric Alliance Corporation, 184 Shanghai Guangdian company, 54–5 Shanghai Pudong Development Zones, 157 Shanghai Textile Industry Bureau, 54 Shantou, 133, 146, 148, 163–4, 218 Shanwa Limited Corporation, 157 Shanxi, 81, 120, 127 Shapotou, 139 share holding companies, 93 Shekou Commerce Bank, 157 ShenDa Belt, 179 Sheng Huaren, 201

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Index 271 Shenyang, 120, 175, 176, 179, 202 Shenzhen, 110, 133, 146, 148, 149–50, 151, 152, 153, 155, 157, 158–9, 162–3, 173, 174, 177, 178, 179, 218, 221, 222, 224 Shenzhen Development Bank, 157 Shenzhen Science and Technology Park, 221 Shijiazhuang, 120, 176, 201–2 shipping industry, 43, 44 Shunde, 218 Sichuan, 9, 114, 115, 120, 124, 126, 127, 132, 139 Singapore, 19, 22, 25, 26, 34–5, 36, 37, 58 Sinopec, 59 small and medium sized enterprises, 34, 36, 55, 210, 217–23, 224 Smith, C J, 118 social change, 5, 6, 7, 9, 11, 14, 62–6 social development, 137 social forces, 96–7 social growth, 55 social insurance, 97, 100, 101–2, 111, 154, 159 Social insurance Law, 109 social policy, 3, 4, 232 social power, 67 social relations, 5 social responsibility, 61, 90 social security, 79–80, 90, 91, 233–4 social services/welfare, 98, 136, 197–8, 200, 202, 204 social stability, 201–2, 226, 227, 231, 232 socialism to capitalism transition, 2, 7, 8, 9 socialist market economy, 9, 151, 160, 161 soil erosion, 137, 140 Solinger, D J, 85, 86 Song Jian, 172–3 South Africa, 54–5, 57 South America, 34, 40, 41, 50 South East Asia, 41, 42, 50, 51, 56, 59 South Korea, 7, 8, 10, 11, 24, 25, 26, 34–5, 36, 37, 57–8, 59, 104, 194, 221, 229, 232, 236, 237, 238 space programme, 127

special economic subzones, 162 special economic zones characteristics of, 150–60 financial market development and, 155–8 high technology and, 173 history and functioning of, 145–50 HNTIDZs and, 173, 189, 190 introduction to, 143–5 labour market development and, 158–60 managing the economy of, 154–60 ownership in, 152–4 prices system remaking and, 154–5 role in transition of, 160–6 towards globalisation and, 14, 166–7, 230 special export zones, 146 sport, 4, 5 standards of living, 53, 63, 88, 91, 135–6, 137, 138, 141, 154, 166, 193, 196, 227, 229, 230, 234 State Council, 43, 47, 156, 169, 170, 172, 174–5, 178, 183 State Economics and Commerce Commission, 46–7 state owned enterprises, 5, 8, 14, 29, 36, 37, 42, 45, 46, 47–8, 50, 59, 61, 64, 65, 71, 79–81, 82, 83, 84, 86–7, 88, 89, 90, 98, 99, 100, 101, 102, 103, 104, 108, 111, 136, 152, 153–4, 155, 165, 167, 170, 171, 198–9, 201, 204, 206, 229, 230, 231, 232, 233, 234, 237, 238, 240, 242 state-owned textile enterprises, 192, 195, 196, 197–201, 202, 203, 204 State Science and Technology Commission, 170, 171, 172, 174, 175, 179, 180, 181 State Textile Industry Bureau, 202 steel, 117, 132, 206 stock exchanges/markets, 10, 148, 150, 157, 232 stockpiling, 50 Stone, 175, 180, 209, 216 Stone RichWin Company, 223 strategic alliances, 208–9

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272 Index strikes, 107 structural adjustment programmes, 7, 8, 235, 237 see also textile industry subcontracting of production capacity, 96 subsidies, 45, 67, 71, 73, 83, 140, 200 subsistence production, 61, 75, 79 Sun, 208, 209 Suntendy Electronic Technology Institute, 223 Suzhou, 176, 178, 179, 180, 181, 193 sweat shops, 87 Sweden, 26 Syria, 26 Taiwan, 7, 8, 10, 11, 23, 24, 25, 31, 34–5, 36–7, 42, 56–7, 58, 80, 115, 120, 123, 133, 160, 164, 194, 211, 212, 219, 221, 222, 236, 237, 238, 240 Taiwan Chinese-Funded Units, 93, 104 Taiyuan, 120, 176 tariff unions, 54 tariffs, 54, 184–5, 212 tax rates, 10, 25 taxation collection of, 66–8, 90 FDI and, 33, 45–6, 140, 147, 153 FOEs and, 94 HNTIDZs and, 173 host country policy and, 33 land use and, 152 market development and, 61 reform of, 184–5 regulation of, 63, 90 rural markets and, 71 special economic zones and, 147 textile industry and, 200 tea, 83 technological advances, 96 technological change, 169, 186, 187, 210 technological development, 22–3, 27, 29, 187, 217 technological innovation, 25, 28 technology absorption, 25, 26 technology access, 55–6

technology acquisition, 36, 58 technology and information market, 160 technology diffusion, 24, 207 technology digestion, 25, 27, 29 technology exports, 160 technology imports, 17, 18, 146, 160, 228 technology incubators, 172–3, 180–1 technology-intensive manufacture exports, 25–7 technology trade, 19, 24–8, 29, 160 technology transfer, 15, 24, 25, 27, 55, 150, 169, 178, 189, 216 technology undate, 132 technopoles, 168, 169–70, 175, 181, 182, 183 telecommunications, 83 temporary employees, 100, 101, 159 textile industry, 32, 54, 117 development of, 192–9, 201 domestic market for, 193, 196 introduction to, 191–2, 230–1 next challenges for, 201–4 overcapacity in, 50, 196 restructuring of, 191, 192, 199–201, 202, 203, 204, 230–1, 241 structural problems in, 197–8, 201 see also state-owned textile enterprises textile machinery manufacture, 192, 196, 200 Thailand, 22, 35, 42, 43 Third Front, 124–9, 141, 142 three-golds project, 207 Tianjin, 81, 117, 122, 133, 175, 176, 179, 181, 193 Tianjing, 52 Tibet, 11, 81 timber, 83 Tongchuang, 209, 210 Tongfang Group, 208 Torch Programme, 170–1, 172, 173, 174, 179 Toshiba, 208 total foreign direct investment, 93 total imports/exports, 16 tourism, 36, 48, 132, 148, 161, 165–6

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Index 273 township and village enterprises, 69, 73–4, 75–6, 81, 89, 242 townships, 61, 64, 67, 68, 75, 91, 242 trade balance, 16–19, 29 see also exports; imports trade barriers, 5, 54, 58 see also tariffs Trade Union Law (1992), 159 trade unions, 94, 95, 96, 97, 103–4, 106, 107, 108, 109, 110, 111, 112, 234 trading blocs, 54, 57 transition economies, 2, 7, 8, 62, 63–4, 160–6, 235, 236–7, 238 transnational corporations, 14, 15, 24, 31, 32, 33–6, 37, 40, 42, 43–5, 48, 51, 55, 57, 58, 59, 91, 96, 106, 130, 229 see also multinational enterprises transnational production systems, 97 transport infrastructure, 132, 139 transport technology, 96 treaty obligations, 4 trickle down theory, 70 trust investment companies, 157 Tsinghua University, 208, 209 Turkmenistan, 53 ‘two resources and two markets’ strategy, 45, 49

urbanisation, 122, 127 Urumqi, 177 USA China’s admission to WTO &, 4 China’s regional development &, 115, 116 deregulated liberalism of, 6 diplomatic normalisation with, 120, 129 FDI inflows to, 35, 39, 40, 41, 42, 54, 93 global economy and, 1 import quotas of, 54 industrial output of, 117 military threat of, 118, 120, 123, 129 system of valuation and, 5 technology trade with, 26, 27 see also North America USSR (former), 7, 40, 41, 43, 115, 116, 120, 123, 126, 235, 236, 237, 238

Ufsoft group, 209 UK, 35, 239 UN permanent membership, 56 underemployment, 233 unemployment, 94, 192, 200, 201–2, 204, 231, 233–4, 235, 237 Unified Management System, 73 unions see trade unions Upton, D M, 96 urban areas floating population in, 85 market development and, 61, 62, 79–84, 91 urban employment/labour, 80, 81, 82, 84, 89, 94, 99, 102 urban income, 87, 90, 91 urban population, 128, 149 urban poverty, 136, 201, 231, 235 urban–rural divide, 63

wages, 61, 76–7, 80, 86, 87, 90, 91, 94, 95, 96, 98, 100, 101–2, 105, 107–8, 136, 154, 194, 198, 202, 222 Wang, S G, 70 Wang Xuan, 223 Wangma Computer Company, 223 water and energy, 83, 130, 132, 138, 139, 197 wealth creation, 29, 90 wealth redistribution, 118 Weifang, 177, 179 Weihai, 177 Wenzhou, 72, 75 western China, 114, 115, 118, 130, 131, 132, 135, 136, 137–9, 140, 142, 150 Western Europe, 1, 36

value-added operations, 52, 151, 166, 184, 202 value-added taxation, 67 value system, 5, 11, 12 Vietnam, 22, 35, 37, 235, 236, 237 villages, 64, 68, 71, 73–4, 75, 242

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274 Index wholly-owned foreign enterprises see foreign-owned enterprises women, 100 wool wars, 52, 196–7 work conditions see employment conditions Work Contract Law, 109 work permits, 104 working hours, 95, 106, 107, 108 World Bank, 7, 9–10, 156, 160, 235, 237 world economic system, 14 World Trade Organisation, 1, 4, 10, 54, 60, 90, 114, 166, 185, 192, 203–4, 206, 226, 231 Wuhan, 177, 181 Wuxi, 176, 179, 193, 223 Xiamen, 133, 146, 148, 151, 164–5, 176 Xi’an, 120, 175, 177, 180, 181 Xiangfan, 177 Xiangyu Bonded Zone, 164–5 Xinjiang, 81, 132 Xintianzhai, 178 Yabuki, S, 138 Yangling, 175 Yangtze River, 132, 133, 135, 137, 139, 140 Yangtze River delta, 135, 137, 146, 179, 222

Yangzhou, 179 Yellow River, 132, 139, 140 Yiantai, 179 Yinghu Travel Agency, 157 Yingkou, 179 Yuan, P, 75 Yugoslavia, 236 Zengpeiyan, 137–8 Zhang Quan, 105 Zhanjiang, 218 Zhao Ziyang, 114 Zhejiang, 81, 85, 133 Zhengzhou, 120, 177, 181–2 Zhenjiang, 179 Zhongguan Cun Street area, 174, 175, 179, 182, 189, 212–14, 217, 221 Zhongshan, 177, 218 Zhou Weikun, 211 Zhu, J, 83–4 Zhu Rongji, 114 Zhuhai, 133, 146, 148, 151, 163, 177, 179, 218 Zhuzhou, 177 Zibo, 177, 179 Zipingpu, 139 zones, 224, 231, 240 see also foreign-investor-oriented zones; free trade zones; high and new technology industrial development zones; special economic zones

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Latvia: the transition to a market economy

A Global Economy without a Global Government

Biotechnology in a Global Economy

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Political Economy of Poland's Transition

A transition to advanced mathematics

A Transition to Advanced Mathematics

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Global Economy, Global Justice: Theoretical and Policy Alternatives to Neoliberalism

Innovation Policy in a Global Economy

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Global Political Economy: A Marxist Critique

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National Competitiveness in a Global Economy

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Learning to be Capitalists: Entrepreneurs in Vietnam's Transition Economy

Macroeconomics in the Global Economy

Rules for the Global Economy

Political Economy of the Cambodian Transition

China's Transition to a Global Economy

Transition to Socialist Economy

Lithuania: the transition to a market economy

Kyrgyzstan: the transition to a market economy

Estonia: the transition to a market economy

Latvia: the transition to a market economy

A Global Economy without a Global Government

Biotechnology in a Global Economy

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Political Economy of Poland's Transition

A transition to advanced mathematics

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The Global Internet Economy

Global Economy, Global Justice: Theoretical and Policy Alternatives to Neoliberalism

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National Competitiveness in a Global Economy

The Changing Global Economy (Global Connections)

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