In response to the challenge posed by an increasingly globalized economy, the Chinese leadership, mindful of the need to accelerate the process of reform, did, however, opt for one important element of shock treatment. During the nineties, by dismantling tariff barriers and allowing huge flows of foreign direct investment – in contrast to the economic strategy pursued by Japan, South Korea and Taiwan – they created a brutal competitive environment in which domestic companies desperately sought to survive against far richer and more advanced Western and Japanese rivals. This rapid opening up enabled the Chinese economy to take advantage of enormous flows of foreign capital and had the merit of forcing Chinese companies to learn from the outside world, [440] but the cost was high, with many struggling to survive. While their North-East Asian neighbours enjoyed a prolonged period of protection from external competition, during which their companies were given time to develop, China, in comparison, had none. Chinese companies were obliged to sink or swim, and the conditions attached to China ’s subsequent membership of the WTO meant the state faced various restrictions on the extent to which it was permitted to help state-owned enterprises, although it found various ways of circumnavigating some of them. [441]
Figure 10. The role of foreign direct investment in China compared with other Asian tigers.
Although the earlier phase of reform concentrated on stimulating the growth of the rural economy, by the end of the eighties the centre of gravity had decisively shifted to the cities and the industrial economy. Already, during the eighties, the Guangdong economy became a microcosm of the future shape and comparative advantage of the fast-changing Chinese economy, with Hong Kong entrepreneurs moving their manufacturing operations out of the city-state to neighbouring Guangdong province in order to take advantage of far cheaper labour; as a result, Guangdong rapidly became Hong Kong ’s manufacturing base. This process quickly spread north and east-wards during the course of the nineties, its magnitude transformed by the flood of Western and Japanese direct investment at the end of that decade in anticipation of China ’s membership of the WTO in 2001. Just as China pursued an open policy on trade, it adopted a similar approach towards inward investment. Since 1978 China has received $500 billion in foreign direct investment, ten times the total accumulated by Japan between 1945 and 2000. In 2003 China became the world’s largest recipient of foreign direct investment, overtaking the United States. [442] The inward investment was mainly ploughed into the local subsidiaries of foreign multinationals with the purpose, following the example of Hong Kong, of exploiting the huge resources of cheap labour in order to make exports as globally competitive as possible. Foreign firms are now responsible for up to 60 per cent of all Chinese exports, and dominate high-tech exports with a share of around 85 per cent. [443] China, in the process, has become the ‘workshop of the world’, by far the cheapest national base for low- and medium-end manufacturing on the planet.
As a result of the systematic lowering of tariffs, one of the singular features of the Chinese economy is its huge exposure to foreign trade, which accounts for around 75 per cent of GDP, far in excess of other major economies like the United States, India, Japan and Brazil, where the figure is 30 per cent or less. [444] Such exposure makes China that much more significant in the global economy; it also leaves the country more vulnerable to external shocks such as a global downturn, a US recession or growing protectionist sentiment in the West.
