Export-led growth China in the World Economy, autumn 2023 Repetition from last time •1) How does a country finance its imports? Repetition from last time •1) How does a country finance its imports? •2) What is the role of banks in an economy? Repetition from last time •1) How does a country finance its imports? •2) What is the role of banks in an economy? •3) What happened with rural land during the 1980s? Repetition from last time •1) How does a country finance its imports? •2) What is the role of banks in an economy? •3) What happened with rural land during the 1980s? •4) What was the system of „dual prices“? Repetition from last time •1) How does a country finance its imports? •2) What is the role of banks in an economy? •3) What happened with rural land during the 1980s? •4) What was the system of „dual prices“? •5) Where did FDI come from in the 1980s? Which areas were opened to it? Repetition from last time •1) How does a country finance its imports? •2) What is the role of banks in an economy? •3) What happened with rural land during the 1980s? •4) What was the system of „dual prices“? •5) Where did FDI come from in the 1980s? Which areas were opened to it? •6) Did China‘s private sector originate is a program of privatization? Repetition from last time •1) How does a country finance its imports? •2) What is the role of banks in an economy? •3) What happened with rural land during the 1980s? •4) What was the system of „dual prices“? •5) Where did FDI come from in the 1980s? Which areas were opened to it? •6) Did China‘s private sector originate is a program of privatization? •7) What was the purpose of the obligation of foreign investors to form joint ventures? Today •Continuing reforms in the 1990s and 2000s – export-led growth •The fallout from the 2008 Financial crisis •The rise of Xi Jinping and China‘s technological ambitions Return to reform and opening up •1992 – Deng‘s Southern Tour > push for reviving the reforms Obsah obrázku osoba, skupina, lidé, dav Popis byl vytvořen automaticky Return to reform and opening up •1992 – Deng‘s Southern Tour > push for reviving the reforms •New party leadership – Jiang Zenmin and Zhu Rongji – reliable party loyalists •Jiang and Zhu – from Shanghai – very conservative during the 1980s, almost no liberalization! Obsah obrázku oblek, oblečení, osoba, oblečený Popis byl vytvořen automaticky Return to reform and opening up •1992 – Deng‘s Southern Tour > push for reviving the reforms •New party leadership – Jiang Zenmin and Zhu Rongji – reliable party loyalists •Jiang and Zhu – from Shanghai – very conservative during the 1980s, almost no liberalization! •Return to a pro-market policy, but with more cautious approach than in the 1980s – fear of another Tiananmen • Return to reform and opening up •Focus on gradually reforming the urban economy – again at the expense of the countryside! • • Return to reform and opening up •Focus on gradually reforming the urban economy – again at the expense of the countryside! •Higher taxes in for rural farmers and entrepreneurs > more inequality between cities and villages Return to reform and opening up •Focus on gradually reforming the urban economy – again at the expense of the countryside! •Higher taxes in for rural farmers and entrepreneurs > more inequality between cities and villages •Increased rural illiteracy! •Resources invested in urban areas • • Return to reform and opening up •Focus on advanced technologies + large projects + foreign investment + export Return to reform and opening up •Sophisticated infrastructure – high speed trains connecting major cities Return to reform and opening up •Sophisticated infrastructure – high speed trains connecting major cities •Some SOEs transformed into joint-stock companies, but the Party usually retains the controlling voting block •= hybrid ownership – difficult to interpret who makes decisions Return to reform and opening up •Industrial policy •„Industrial policy is defined as the strategic effort by the state to encourage economic transformation, i.e. the shift from lower to higher productivity activities, between or within sectors.“ •„Industrial policy is defined as the strategic effort by the state to encourage economic transformation, i.e. the shift from lower to higher productivity activities, between or within sectors.“ • •x trade policy – attempts to influence import and export •Industrial policy – subsidies, tax breaks, grants, guaranteed loans, public procurement of products… • •Trade policy – tariffs and quotas •Industrial policy - takes place within a country (subsidies, tax break, grants, privileged access to loans…) •Trade policy – takes place at the border – tariffs and non-tariff barriers to trade •Industrial policy - takes place within a country (subsidies, tax break, grants, privileged access to loans…) •Trade policy – takes place at the border – tariffs and non-tariff barriers to trade • •> China is far more active in industrial policy! Return to reform and opening up •Industrial policy –– „national champions“ – support of highly advanced companies such as Huawei – attempts to push them to the global cutting edge Return to reform and opening up •„Letting go of the small“ – small companies can be privatized and left to their own devices •If they go bankrupt, who cares? Return to reform and opening up •The state must nurture the big ones > economies of scale, export, prestige…. Return to reform and opening up •The state must nurture the big ones > economies of scale, export, prestige…. •Largest firms – monopolistic construction companies (housing, infrastructure, electrical grid) - remained as SOEs Return to reform and opening up •The state must nurture the big ones > economies of scale, export, prestige…. •Largest firms – monopolistic construction companies (housing, infrastructure, electrical grid) - remained as SOEs •Financial sector (banks) – continues to be overwhelmingly state owned Return to reform and opening up •The state must nurture the big ones > economies of scale, export, prestige…. •Largest firms – monopolistic construction companies (housing, infrastructure, electrical grid) - remained as SOEs •Financial sector (banks) – continues to be overwhelmingly state owned •> Chinese foreign investment is based on state-owned capital! •> „state capitalism“ Return to reform and opening up •Problems – large rate of investment, relatively small growth of consumption Return to reform and opening up •Problems – large rate of investment, relatively small growth of consumption •= huge growth, but you can‘t enjoy its fruit, new wealth is immediately reinvested • Export-led growth •Focus on foreign direct investment (FDI) and export – integrating China into the world economy Export-led growth •Focus on foreign direct investment (FDI) and export – integrating China into the world economy •x 1980s – mostly homegrown growth Export-led growth •Focus on foreign direct investment (FDI) and export – integrating China into the world economy •x 1980s – mostly homegrown growth •FDI = source of foreign technologies •Push to attract investors – financial incentives, offer of access to China‘s already huge market FDI as a percentage of GDP Export-led growth •New special economic zone – Shanghai •> centre of economic activity moves into the Yantze delta Obsah obrázku stůl Popis byl vytvořen automaticky Obsah obrázku mapa Popis byl vytvořen automaticky Return to reform and opening up •Subcontractors, joint-ventures – investors need to commit themselves to transfer their know-how to Chinese counterparts Return to reform and opening up •Subcontractors, joint-ventures – investors need to commit themselves to transfer their know-how to Chinese counterparts •Sometimes outright IP theft Return to reform and opening up •Support for large state or semi-state companies + foreign capital; indifference to small businesses • •> best strategy for Chinese companies – get incorporated in Hong Kong, then do business in China as a foreign company Reforms to the „ordinary“ foreign trade •Last time – special economic zones Reforms to the „ordinary“ foreign trade •Last time – special economic zones •Now – reforms to the normal trade regime •= the rest of China •From 1980s onwards Ordinary trade •Number of monopoly FTCs increased – from 12 to several thousands Ordinary trade •Number of monopoly FTCs increased – from 12 to several thousands •But all of them were, at least officially, SOEs! Ordinary trade •Number of monopoly FTCs increased – from 12 to several thousands •But all of them were, at least officially, SOEs! •The FTC system was only completely abolished in 2004, after entering the WTO! Ordinary trade •Liberalized prices – the foreign trade companies were encouraged to make money instead of fulfilling a plan Ordinary trade •Liberalized prices – the foreign trade companies were encouraged to make money instead of fulfilling a plan •Before – artificial prices totally detached from the world market, trade guided by state direction •After reform – „export and import whatever is profitable in your business area“ Ordinary trade •Liberalized prices – the foreign trade companies were encouraged to make money instead of fulfilling a plan •Before – artificial prices totally detached from the world market, trade guided by state direction •After reform – „export and import whatever is profitable in your business area“ •> give the central government a part of the foreign exchange, keep the rest as use it to do more business Ordinary trade •„Canalization“ – if you wanted to import something and you did not have the license to do it, you had to persuade one of the monopoly SOEs to do it for you Ordinary trade •„Canalization“ – if you wanted to import something and you did not have the license to do it, you had to persuade one of the monopoly SOEs to do it for you •> even TVEs and other small companies de facto could take part in trade, but a part of the profit went to the SOEs • Ordinary trade •„Canalization“ – if you wanted to import something and you did not have the license to do it, you had to persuade one of the monopoly SOEs to do it for you •> even TVEs and other small companies de facto could take part in trade, but a part of the profit went to the SOEs •> FTCs as middlemen • Ordinary trade •Gradual devaluation of the RMB USD to RMB Ordinary trade •Gradual devaluation of the RMB •Separate foreign exchange market – foreign trade companies could exchange money and ignore the official rate Ordinary trade •Gradual devaluation of the RMB •Separate foreign exchange market – foreign trade companies could exchange money and ignore the official rate •> two exchange rates – the official one and the one used between the companies •Fix and floating at the same time (kind of) Ordinary trade •Gradual devaluation of the RMB •Separate foreign exchange market – foreign trade companies could exchange money and ignore the official rate •> two exchange rates – the official one and the one used between the companies •Fix and floating at the same time (kind of) •Which one was lower? RMB to UDS Ordinary trade •Main devaluation – 1994 – official rate set and fixed at the previous unofficial rate USD to RMB Ordinary trade •Main devaluation – 1994 – official rate set and fixed at the previous unofficial rate •= „Let‘s respect the collective wisdom of the market“ Ordinary trade •Main devaluation – 1994 – official rate set and fixed at the previous unofficial rate •= „Let‘s respect the collective wisdom of the market“ •The rate was competitive and led to a more or less balanced trade Ordinary trade •Main devaluation – 1994 – official rate set and fixed at the previous unofficial rate •= „Let‘s respect the collective wisdom of the market“ •The rate was competitive and led to a more or less balanced trade •Under floating, the rate would appreciate because of growing exports •= as China became more competitive, the rate should have gone up Ordinary trade •But China artificially kept the rate at the 1994 level all the way until 2005 USD to RMB Ordinary trade •But China artificially kept the rate at the 1994 level all the way until 2005 •+ „real depreciation“ •The price level in China rose more slowly than in the US and most other capitalist countries Ordinary trade •But China artificially kept the rate at the 1994 level all the way until 2005 •+ „real depreciation“ •The price level in China rose more slowly than in the US and most other capitalist countries •> Chinese goods became relatively cheaper Real appreciation / depreciation • •If your exchange rate is stable AND you have lower inflation than a partner country, your currency is undergoing a real depreciation Real appreciation / depreciation • •If your exchange rate is stable AND you have lower inflation than a partner country, your currency is undergoing a real depreciation •> your goods become more competitive > you export more •As if you devalued the currency USD to RMB Ordinary trade •But China artificially kept the rate at the 1994 level all the way until 2005 •+ real depreciation •> undervaluation, huge trade surpluses! Ordinary trade •The 1994 reform was connected with making the RMB convertible for current account transactions Ordinary trade •The 1994 reform was connected with making the RMB convertible for current account transactions •> every FTC could access foreign exchange whenever they wished, with no regulation – if it was for trade •= liberalization Ordinary trade •The 1994 reform was connected with making the RMB convertible for current account transactions •> every FTC could access foreign exchange whenever they wished, with no regulation – if it was for trade •= liberalization •Plans to also abolish capital controls = to make the RMB convertible for financial account transactions Ordinary trade •The 1994 reform was connected with making the RMB convertible for current account transactions •> every FTC could access foreign exchange whenever they wished, with no regulation – if it was for trade •= liberalization •Plans to also abolish capital controls = to make the RMB convertible for financial account transactions •Abandoned because of the 1997 Asian Financial crisis Special economic zones •New SEZ in Shanghai •More importantly – entire coastal region opened for „export-processing“ • Special economic zones •New SEZ in Shanghai •More importantly – entire coastal region opened for „export-processing“ •Raw materials given to Chinese companies (often TVEs) for assembly and processing Special economic zones •New SEZ in Shanghai •More importantly – entire coastal region opened for „export-processing“ •Raw materials given to Chinese companies (often TVEs) for assembly and processing •Formally no trade, no FDI! – investment was only allowed in SEZs • Special economic zones •> due to proliferation of export processing + reforms to ordinary trade, SEZs gradually became less special • The 2000s – continuing export-led growth • The 2000s – export-led growth •Progress from textile exports to electronics • The 2000s – export-led growth •Slow, gradual liberalization continued into the new millennium The 2000s – export-led growth •Slow, gradual liberalization continued into the new millennium •China‘s most capitalist moment – after entering the WTO in 2001 The 2000s – export-led growth •Exports and imports – 5 % of GDP each in 1978 •World average is about 20 % for each The 2000s – export-led growth •Exports and imports – 5 % of GDP each in 1978 •World average is about 20 % for each •China reached this level by 2001, its exports continued to soar after entering the WTO The 2000s – export-led growth •Exports and imports – 5 % of GDP each in 1978 •World average is about 20 % for each •China reached this level by 2001, its exports continued to soar after entering the WTO •2006 – exports stood at 35 % of GDP, imports at 30 % > 65 % together The 2000s – export-led growth •Exports and imports – 5 % of GDP each in 1978 •World average is about 20 % for each •China reached this level by 2001, its exports continued to soar after entering the WTO •2006 – exports stood at 35 % of GDP, imports at 30 % > 65 % together •In the United States, the sum is around 20 %! •= China was already far more opened than the world average or comparably large countries! The 2000s – export-led growth •2009 – largest exporter in the world •2011 – largest manufacturer •2012 – largest GDP by purchasing power parity The 2000s – export-led growth •Huge growth of export, current account surplus (5 % of GDP in 2006) The 2000s – export-led growth •Huge growth of export, current account surplus (5 % of GDP in 2006) = China finally overcame its problem of financing imports The 2000s – export-led growth •Huge growth of export, current account surplus (5 % of GDP in 2006) = China finally overcame its problem of financing imports •> accumulation of foreign exchange (mostly dollars) • The 2000s – export-led growth •What is China going to do with all this foreign exchange? The 2000s – export-led growth •What is China going to do with all this foreign exchange? •Keep it as a reserve – a precaution against a monetary crisis The 2000s – export-led growth •What is China going to do with all this foreign exchange? •Keep it as a reserve – a precaution against a monetary crisis •Anxiety after the Asian monetary crisis of 1997 • How a monetary crisis works •A country has a fixed exchange rate How a monetary crisis works •A country has a fixed exchange rate •- China does have a fixed exchange rate – the yuan was first tied to the US dollar, since 2005, it is pegged to a basket of currencies USD to RMB How a monetary crisis works •A country has a fixed exchange rate •Markets (banks etc.) think that the rate is overvalued and unsustainable > they start to sell the currency How a monetary crisis works •A country has a fixed exchange rate •Markets (banks etc.) think that the rate is overvalued and unsustainable > they start to sell the currency •> pressure for devaluation How a monetary crisis works •A country has a fixed exchange rate •Markets (banks etc.) think that the rate is overvalued and unsustainable > they start to sell the currency •> pressure for devaluation •The central bank needs to start buying the currency to keep the same rate – they need foreign currencies to do this! How a monetary crisis works •A country has a fixed exchange rate •Markets (banks etc.) think that the rate is overvalued and unsustainable > they start to sell the currency •> pressure for devaluation •The central bank needs to start buying the currency to keep the same rate – they need foreign currencies to do this! •If they fail > increased interest rates to stop the capital flight > drop of domestic credit > domestic recession How a monetary crisis works •= in the end, the Central bank usually freezes the creation of money, which stops capital flight, but creates recession How a monetary crisis works •= in the end, the Central bank usually freezes the creation of money, which stops capital flight, but creates recession •Did anything like this ever happen in Czechia? How a monetary crisis works •= in the end, the Central bank usually freezes the creation of money, which stops capital flight, but creates recession •Did anything like this ever happen in Czechia? •Yes, in 1997! How a monetary crisis works •China fears this scenario, so it keeps large reserves of foreign currency • •> if you sit upon a huge pile of dollars, you can defeat a speculative attack •Actually, you can deter it The 2000s – export-led growth •What else can you do with foreign exchange? •= you don‘t use it to buy imports, you don‘t want to keep it as reserves The 2000s – export-led growth •What else can you do with foreign exchange? •= you don‘t use it to buy imports, you don‘t want to keep it as reserves •Foreign investment – purchases of Western companies; Belt and Road Initiative The 2000s – export-led growth •Major exporter of advanced technology products already by 2005! •= laptops, mobile phones, scanners, cameras, medical equipment The 2000s – export-led growth •2002 – change in Party leadership – Hu Jintao and Wen Jiabao •Only transfer of power without a purge in PRC‘s history! The 2000s – export-led growth •2002 – change in Party leadership – Hu Jintao and Wen Jiabao •Only transfer of power without a purge in PRC‘s history! •Theoretically – generations of party leadership – change every 10 years (1992-2002-2012-2022) The 2000s – export-led growth •2002 – change in Party leadership – Hu Jintao and Wen Jiabao •Only transfer of power without a purge in PRC‘s history! •Theoretically – generations of party leadership – change every 10 years (1992-2002-2012-2022) •Hu leadership – continuation of previous policies •More resources devoted to social spending – healthcare, education, alleviation of rural poverty The 2000s – export-led growth •Major exporter of advanced technology products already by 2005! •= laptops, mobile phones, scanners, cameras, medical equipment •Growth continued at breakneck speed – over 10 % a year – even though the base was already quite large The 2000s – export-led growth •Major exporter of advanced technology products already by 2005! •= laptops, mobile phones, scanners, cameras, medical equipment •Growth continued at breakneck speed – over 10 % a year – even though the base was already quite large •= biggest story of the decade; the West overlooked it •Next time: •The return of industrial policy •The fallout of the 2008 Financial crisis •The rise of Xi Jinping and the US-Chinese trade war