CHINA “THE

WORLDS
FACTORY”
BY ALI DUBEER AND HUSNAIN JAVED

This Photo by Unknown Author is licensed under CC BY

 In the early years of the People’s Republic of
China, the economy was largely agriculturally
based.

BACKGROUND Due to its policies, it had very limited linkages

with the outer world. The economic progress was
sluggish and devastating as millions of Chinese
faced extreme poverty.

In 1978, China’s GDP was $149.54 billion and

its share in the global economy was only 1.75
percent. For a country of 956 million people, the
size of the economy was way too low.
 • From 1978 onwards, China made a remarkable transformation
and its economy expanded manifolds. Small towns and port cities
turned into industrial hubs, and demand for Chinese products
grew exponentially across the globe.
• In 1978, the Chinese government decided to break with its
THE REMARKABLE Soviet-style economic policies by gradually reforming the
TRANSFORMATION economy according to free market principles and opening up
trade and investment with the West, in the hope that this would
significantly increase economic growth and raise living standards.
• As Chinese leader Deng Xiaoping, the architect of China's
economic reforms, put it: "Black cat, white cat, what does it
matter what color the cat is as long as it catches mice?
 • Beginning in 1979, The central government-initiated price and
ownership incentives for farmers, which enabled them to sell a
portion of their crops on the free market. In addition, the

THE government established four special economic zones along the

coast for the purpose of attracting foreign investment, boosting
INTRODUCTION exports, and importing high technology products into China.

OF ECONOMIC • Additional reforms, which followed in stages, sought to

decentralize economic policymaking in several sectors, especially
REFORMS trade. Economic control of various enterprises was given to
provincial and local governments, which were generally allowed
to operate and compete on free market principles, rather than
under the direction and guidance of state planning
 In addition, citizens were encouraged to start their own
businesses. Additional coastal regions and cities were
designated as open cities and development zones, which
allowed them to experiment with free-market reforms and to
offer tax and trade incentives to attract foreign investment.

ECONOMIC
REFORMS State price controls on a wide range of products were gradually
eliminated.

Trade liberalization was also a major key to China's economic

success. Removing trade barriers encouraged greater
competition and attracted FDI inflows
 The policy designs were complemented with sound
implementation. In the early years of the reform era, industrial
activity was mainly labor-intensive. Since the 1990s, capital
stock per labor (capital deepening) increased which made
Chinese workers more efficient.

INDUSTRIAL Along with State-Owned Enterprises (SOEs), private enterprises

were also encouraged. The profit-oriented firms improved
POLICY business practices and productivity in China. The progress made
by private enterprises also stirred state firms to enhance their
productivity.

The SOEs are key players in China’s industrial sector and enjoy
considerable support from Chinese financial institutions.
Nonetheless, they have increasingly become profit-oriented and
are engaged in business activity globally.
INDUSTRIAL • In the earlier stages of the reform era, the Chinese
POLICY economy experienced consumption-led growth. The
agricultural reforms raised the incomes and savings of
millions of Chinese involved in the sector, generating
demand for goods which led to the expansion of Town
and Village Enterprises (TVEs).
• Greater savings provided the government the support
needed to execute its market reforms.
 The SOEs and state financial institutions supported
employment in the urban areas which also bolstered
spending capacity.

THE 6TH FIVE The US particularly backed China’s opening up and

market-oriented reforms. The Central Investigation
YEAR PLAN Agency’s assessment of the 6th Five Year Plan
(1981-1985) outlined a range of industrial cooperation
opportunities.

or instance, the plan to increase spending on oil and

coal industries would increase demand for technical
expertise and machinery from the US.
 The market-oriented reforms under Deng Xiaoping raised the value of
private Small and Medium Enterprises (SMEs) and industries in China’s
economic progress. Over the years, their contribution to the economy
increased significantly, employing the majority of the population.

CHINESE Over time, the Chinese government took a number of measures to protect
their legal rights in order to ensure their expansion.

EXPANSION
In terms of financing, the government ensures credit facilities and offers
various tax incentives. The industries generating employment
opportunities in impoverished areas are also backed by the state’s
financial institutions.

The Export Credit Agencies (ECAs) of China have backed exporters from
these industries. The rise in China’s export earnings over the last few
decades is one of the major sources of its economic rise.
 The shortfall in productive capabilities is seen as the main
cause of underdevelopment.

LOCAL In the following decades, as the world became more

MANUFACTURING globalized, Chinese businesses were in a position to attract
investment and expand their markets. Greater
interconnectivity meant that Chinese manufacturers became
integrated into various Global Value Chains (GVCs).

The incentives offered by the Chinese government to local

manufacturers attracted further investment from abroad.
Resultantly, production capabilities expanded even further
with higher value-added manufacturers gaining space in the
Chinese export basket.
 Post-1978 China saw average real growth of more
than 9 percent a year with fewer and less painful
ups and downs.

In several peak years, the economy grew more than

CHINA 13 percent.
GROWTH
Per capita income has nearly quadrupled in the last
15 years.

Few analysts are even predicting that the Chinese

economy will be larger than that of the United
States in about 20 years.
CAUSES OF • Economists generally attribute much of China's rapid economic
growth to two main factors: large-scale capital investment (financed
CHINA'S by large domestic savings and foreign investment) and rapid
ECONOMIC productivity growth.

GROWTH • New machinery, better technology, and more investment in

infrastructure have helped, which boosted output and increased
resources for additional investment in the economy.
• Chinese productivity increased at an annual rate of 3.9 percent during
1979-94, compared with 1.1 percent during 1953-78. By the early
1990s, productivity's share of output growth exceeded 50 percent,
• China's open-door policy has added power to the economic
transformation. Cumulative foreign direct investment, negligible
before 1978, reached nearly US$100 billion in 1994; annual inflows
increased from less than 1 percent of total fixed investment in 1979
to 18 percent in 1994.
PROFITABLE • Although SOEs are generally considered inefficient in operations. China’s economy,
which relies heavily on SOEs, has been highly successful over the last four decades.
STATE-OWNED
ENTERPRISES(SOE) • State-owned enterprises accounted for over 60% of China's market capitalization in
2019 and generated 40% of China's GDP of US$15.97 trillion dollars (101.36 trillion
yuan) in 2020.

• SOEs’ investment has been more stable than private investment in China. This has
played a crucial role in maintaining aggregate demand, preventing recessions, and
reducing uncertainty for all investors. Since 2004.

• First, SOEs maintain and raise investments and thus aggregate demand in economic
downturns when private enterprises reduce their investments. Thus, SOEs stabilize
economic growth and reduce the damage of economic downturns. Second, along
with investments, SOEs carry out major technical innovations that private enterprises
are reluctant to do, which fosters economic growth.

• In addition, SOEs take a high-road approach in their treatment of workers, which is

favorable to maintaining the reproduction of labor power, improving workers’ skills,
promoting innovations in production processes, and increasing consumption
demand.
ONE BELT ONE ROAD(OBOR)
CHINA–PAKISTAN ECONOMIC CORRIDOR(CPEC)
• OBOR initiative is a Chinese economic and strategic • CPEC will not only benefit China and
agenda by which the two ends of Eurasia, as well as
Africa and Oceania, are being more closely tied along
Pakistan but will have positive impact on
two routes–one overland and one maritime. Iran, Afghanistan, Central Asian
• Effort to develop an expanded, interdependent market Republic, and the region.
for China, grow China's economic and political power,
and create the right conditions for China to build a
• The total committed amount under
high technology economy CPEC of $62 billion.
• 2611 projects spans about 78 countries.
• 21 Energy projects under CPEC.
• Estimated cost US$4–8 trillion, $50-100 billion per
year is invested by China.
POPULATION
GDP
(CURRENT
BILLION
US$)
GDP
(CURRENT
TRILLION
US$)
CURRENT
ACCOUNT
(BILLION
US$)
CURRENT
ACCOUNT
(BILLION
US$)
GDP PER
CAPITA(US$)
LABOR FORCE
PARTICIPATION
RATE(% OF
TOTAL
POPULATION 15-
64 AGE)
IMPORTS
EXPORTS
GOVERNMENT BUDGET AS % OF GDP

PAKISTAN CHINA
DEBT SERVICE (PPG
AND IMF ONLY, % OF
EXPORTS OF GOODS,
SERVICES AND
PRIMARY INCOME)
FOREIGN DIRECT
INVESTMENT,
NET INFLOWS (%
OF GDP)
REMITTANCE
S
RECEIVED(%
OF GDP)
ECONOMIC INDICATORS IN 2020

China in 2020 exports up

In 2020, China imported
National debt of China is at
approximately 2.06 trillion
10,231.72 billion US$
U.S$ worth of goods, where as
compared to Pakistan's 204.77
Pakistan imported 45.8 billion
billion U.S$ in 2020.
US$ of goods.
despite coronavirus pandemic;
surplus surges to 535 billion
US$. On the other hand,
Pakistan exported goods with a
value of around 21.96 billion
U.S$.

In 2020, China alone imported

more oil and its products than
As Major Oil importer they
any other region, at roughly 13
asked Saudi Arabia to consider
million barrels per day. Europe
accepting Yuan instead of
followed closely as the second-
Dollars for Chinese oil sales.
largest importer, with 12.6
million daily barrels.
 China attracted a large amount of FDI by switching over from
import-substitution strategy to export-promotion policy. Pakistan
should also give importance to export promotion strategy over
import substitution policy for augmenting the economic growth.

HOW CAN WE Strategic economic planning of Industrial sectors to enhance growth

and Five-Year strategic plans.

FOLLOW
CHINA’S Large-scale capital investment (financed by large domestic savings
MODEL OF and foreign investment) and rapid productivity growth

GROWTH?
Rely less on fixed investment and more on private consumption,
services, and innovation to drive economic growth.
REFERENCES

• https://www.imf.org/EXTERNAL/PUBS/FT/ISSUES8/INDEX.HTM
• https://data.worldbank.org/indicato
• https://www.everycrsreport.com/reports/
• https://tradingeconomics.com/
• https://www.refinitiv.com/content/dam/marketing/en_us/documents/reports/refinitiv-zawya-belt-and-road-initiative-r
eport-2019.pdf
• https://www.brookings.edu/blog/order-from-chaos/2020/10/01/seven-years-into-chinas-belt-and-road
• http://cpec.gov.pk/introduction/
• https://www.statista.com/statistics
• https://www.pbs.gov.pk