how china became an economic superpower

Written by Ali Haider Saleem 11:47 am

How China Became an Economic Superpower?

China’s economic transformation in the last 40 years has had a huge impact on the global economy. This unprecedented economic scenario has attracted a lot of interest, particularly from developing countries looking to emulate China’s success. The author considers the infant industry model to explain China’s rapid industrialization and subsequent economic rise and explains how China’s long-term approach and facilitative policies have enabled local industries to become competitive worldwide. It also discusses what countries like Pakistan can learn from the Chinese experience with regards to strengthening their industrial base.

China’s Industrial Growth

The rate of China’s industrial growth is unmatched in history. Within a few decades after initiating widespread economic reforms, China emerged as an economic superpower. The largely agrarian economy transitioned into an advanced economy with the expansion of its manufacturing and services sector. China’s industrial growth strategy paved the way for the country to become the largest manufacturer.

Due to its industrial prowess, it began to be called the ‘‘world’s factory’’. In the early years of the People’s Republic of China, the economy was largely agriculturally based. 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.

In comparison, the United States at that time had a population of 222.6 million but its GDP amounted to $2.35 trillion.1 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.

The opening up of the Chinese economy also attracted huge amounts of foreign inflows with many Western companies shifting their operations to China. This further bolstered industrial activity in China and gradually turned China into an economic power. Chinese industries benefited immensely from the transfer of knowledge and technology from Western countries. They were able to employ them efficiently which contributed to the greater competitiveness of Chinese products in global markets.

The Chinese Growth Model

Following the success of China, many developing countries and their leaders have looked to emulate China. Perhaps the main reason to follow the Chinese model is the fact that China was able to lift millions of people out of poverty and considerably improve the standard of living across the country. The unprecedented growth rate over a period of forty years enabled China to move past many developed countries in terms of GDP.

In the modern globalized era, many countries have struggled to compete with industrialized countries. China, however, was able to mobilize its resources and overcome the challenges traditionally faced by developing countries. The Chinese provided their local industries the right incentives to establish themselves locally and internationally.

This paper will explain China’s industrial growth through the infant industry theory which states that new industries in developing countries need protection against competitive pressures until they mature and develop economies of scale that can rival their competitors. Moreover, it will draw lessons from the Chinese experience for Pakistan.

China’s Industrial Policy

The Chinese policymakers were able to achieve tremendous results with their plans that allowed rapid industrialization over many years. 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.

Along with State-Owned Enterprises (SOEs), private enterprises were also encouraged. The profit-oriented firms improved 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. 

In the earlier stages of the reform era, the Chinese 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 6th Five Year Plan (1981-1985)

The SOEs and state financial institutions supported employment in the urban areas which also bolstered spending capacity. The provision of a business-friendly environment by the state began to generate interest from abroad as well. Chinese Communist Party’s 6th Five Year Plan (1981-1985) was the first of their series of national development agendas prepared in the reform era. Many countries and international organizations were keen to learn about Beijing’s shift in development planning and explore economic cooperation possibilities.

The basic task laid out in the 6th Five Year Plan was “to continue the policy of readjustment, restructuring, consolidation, and improvement, make further efforts to solve the various problems left over from the past that hamper economic growth.”2 The US particularly backed China’s opening up and market-oriented reforms. The Central Investigation Agency’s assessment of the 6th Five Year Plan outlined a range of industrial cooperation opportunities.

For instance, the plan to increase spending on oil and coal industries would increase demand for technical expertise and machinery from the US.3 Overall, the 6th Five Year Plan was considered to be conservative; Beijing was only aiming to achieve moderate targets since it realized that overcoming bottlenecks and inefficiencies in the system would be essential to attain rapid growth in the long run.

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. Over time, the Chinese government took a number of measures to protect their legal rights in order to ensure their 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.4 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.

China’s Objectives and Policy Interventions

China’s development strategy includes the objective of social well-being. The efforts made by Chinese authorities was to ensure their success helped them in achieving the overall social development objectives. A key positive aspect of the infant industry argument is that it supports employment generation. Beijing’s strategy of supporting its small and upcoming industries has been extremely effective in combatting poverty and unemployment in the world’s most populated country.

Limited productive capabilities in developing countries prevent producers to establish themselves. Thus, a deliberate effort is required to overcome these challenges. Public policy interventions are necessary to enhance the capacity of local producers along with investments in infrastructure and improvement of social institutions.

The shortfall in productive capabilities is seen as the main cause of underdevelopment. Hence, economic development depends upon improving the capabilities of local industries. In the following decades, as the world became more 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).

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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. The oversight and support of a particular industry usually have a transformative effect.

Shipbuilding and Apparel Industries

A study conducted on shipbuilding in China highlights how government intervention resulted in raising China’s share in world production from below 10 percent in 2000 to around 50 percent in 2014 thus becoming the largest producer in the world.5 As the Chinese authorities turned their attention towards transforming this infant industry, the number of shipyards began to increase in different regions and their production soon helped China overtake Japan and South Korea.

The 11th Five Year Plan (2006-2010) identified shipbuilding as a strategic industry. Since then, a wide range of supportive policies has been introduced including the provision of inputs at affordable prices, export credits, favorable credit terms, simplified paperwork, and subsidized land prices along with coastal areas. These policies were prepared and implemented through various plans focused on shipbuilding.

Such policies include the Medium and Long Term Development Plan of Shipbuilding Industry (2006-2015), Guideline for Comprehensive Establishment of Modern Shipbuilding (2006-2010), Plan on Accelerating Structural Adjustment and Promoting Transformation and Upgrading of the Shipbuilding Industry (2013-2015) and Shipbuilding Industry Standard and Conditions.6 On the back of economic reforms, China’s clothing sector has also gone through a remarkable transformation.

Chinese apparel production grew at an average of 14 percent from 1978 to 2000. In this sector, the government has also been supporting the technological upgrading of local manufacturers. Along with increasing production, the focus was also placed on growing GVCs. Technological assistance has helped Chinese products become more innovative and competitive while greater integration with global markets has opened opportunities to learn from the outside world.

China’s Economic Diplomacy and Implications for Regional Industrial Growth

Due to the successful implementation of its industrial policies, China is now well-positioned to support the industrial growth of other developing countries. Since 2009, China has been the largest exporter of goods in the world, a position held previously by the US. Under President Xi Jinping, China has extended industrial cooperation opportunities to multiple countries including Pakistan.

Developing countries are eager to replicate China’s success and welcome the support offered by Beijing. China’s economic rise and industrial growth have had a negative impact on industries in other developing countries as they lost their share to the more efficient Chinese manufacturers. Although China enjoys a dominant position in global economic affairs, it encourages other countries to develop their industrial capacity as this will serve Beijing’s objective of maintaining peace and stability in the region.

After achieving tremendous growth figures, the Chinese economy has matured but the rate of growth is gradually falling. With many countries still struggling to establish their industrial base, there is a win-win opportunity for China and its partners. The Chinese can relocate their industries, while countries like Pakistan can benefit from technical expertise, employment generation, increased production, and exports.

Over the last few decades, economic statecraft has delivered fruitful results for Beijing. Center for International Governance Innovation defines China’s economic diplomacy ‘‘as the application of a nation’s favourable economic conditions toward particular foreign policy objectives’’.7 Since the opening up of China’s economy, various approaches have been undertaken to achieve economic and political objectives.

Economic Diplomacy Becomes the Center of China’s Foreign Policy

Based on the time period as well as local and external circumstances, China’s economic diplomacy has been evolving. In the 80s, China started building international linkages and deepened its engagement with other countries before moving towards establishing economic cooperation with multiple countries as an attempt to offset the backlash it faced over the Tiananmen incident.

After that, China became an active member of international institutions. It promoted economic governance and gathered support for free trade. The financial crisis of 2008 and becoming the second-largest economy in the world allowed it to be more assertive in the international arena. Nowadays, China is truly an economic superpower, with Beijing inducing more and more countries to support its initiatives.

China’s footprint is extending across the globe, particularly with south-south cooperation gaining more relevance. To counter opponents and remain competitive, increasing engagement with developing countries is essential, as it opens up future opportunities for domestic firms and ensures access to critical resources. A study revealed that Chinese investment in Africa is mainly determined by the availability of natural resources in the recipient country.8

Certainly, there a number of push and pull factors that lead China to increase its FDI in a particular country. Trade linkages and investment opportunities push Beijing to explore opportunities beyond its borders, while market access and availability of resources are attractive for Chinese commercial interests. The suspicion of Western institutions in developing countries has also helped China to reach out to those countries.

Beijing desires to offer these countries an alternate model which falls under its foreign policy principles of mutual respect for sovereignty and territorial integrity, mutual non-aggression, non-interference in each other’s internal affairs, equality and mutual benefit, and peaceful coexistence. The lack of success under the Western approach is pushing the developing countries towards Beijing’s model.

Winning over States

In the book ‘War by Other Means’, the authors opine that China has successfully achieved many of its geopolitical objectives without military confrontation. They argue that China’s soft strategy, which is largely based on economic factors, has helped it induce a number of countries to support its regional and global rise. For the United States, this approach poses both economic and security threats.

China has been able to strengthen countries that are hostile towards the United States and it is also becoming an increasingly important partner for countries that usually oblige to the desires of the United States. The Chinese approach is more conducive to promoting industrial growth in developing countries. The conditions placed in development programs sponsored by Western institutions often slow down growth and discourage investment.

Recipient countries usually struggle to meet the requirements of such programs and end up with further stress on their local economy. With China aiming to cement its status as a global economic power, there is likely to be a downfall in countries opting for structural adjustment programs in the future.

Industrial Policy and Climate Change

Being the world’s factory for so many years has had negative environmental consequences. China has become the largest polluter in the world, raising alarms at home and abroad. The quality of air has dropped significantly in China’s major cities over the years. A study conducted by researchers from the Chinese University of Hong Kong revealed that air pollution in China causes more than one million premature deaths and costs $38 billion to the economy annually.9

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The severity of the issue stirred Beijing to declare a “war on pollution”. The government introduced new measures and targets along with revising environmental laws to discourage polluters. This campaign to improve air quality was quite successful as PM2.5 levels came down by 27 percent from 2015 to 2019 (the original target was to reduce them by 18 percent in the period 2015- 2020).10  

China is determined to curb its emissions and play an active role in the global efforts to curtail the rise of temperature. Addressing the Paris Climate Summit in 2015, President Xi Jinping stated “In the past few decades, China has seen rapid economic growth and significant improvement in people’s lives. However, this has taken a toll on the environment and resources. Having learned the lesson, China is vigorously making ecological endeavors to promote green, circular and low-carbon growth”.11

The set of reforms put in place by the Chinese authorities over the previous decades reveal consistency and adaptability. Whenever China enters the next phase, it draws on lessons from the past, and incorporates technological advances and changes arising in the global economy. The 2030 Agenda for Sustainable Development sets out 17 goals for advancing human well-being across the world.

The 9th goal of this agenda targets development of sustainable transborder infrastructure with the aim of fostering economic development human well-being, whereas the 7th goal calls for ensuring access to affordable, reliable, sustainable, and modern energy for all.12 Since 2015, China has undertaken a number of measures to promote low-carbon industries and contain the growth of energy-intensive industries.

By doing so, it has brought down the consumption of coal drastically. China has also been supporting technological advancement and innovation to promote green transformation. China is the world’s largest producer and consumer of electric vehicles. The rapid progress of the Chinese solar power industry is another testimony to Beijing’s model. In 2016, China became the world’s largest producer of solar energy in terms of capacity.13

According to a study, China’s installed capacity in 2024 will be twice as much as the second-largest producer at that time.14 The growth of the Chinese solar-electric panel industry led to an 80 percent decline in global prices from 2008 to 2013.15 Financial support and incentives for foreign investors were critical in establishing the industry as well as an increase in the share of clean energy in the country’s energy mix. 

China has historically been excessively reliant on coal to meet its energy needs. In 2017, more than 80 percent of the country’s emissions were generated by coal. In line with the Paris agreement, China aims to generate 20 percent of its energy from non-fossil sources by 2030.16 The 2012 China’s Energy Policy paper outlined the urgency and strategic importance of developing renewable energy.17

China’s impressive progress towards 2030 Sustainable Development Goals shows that Beijing’s long-term planning mechanism is effective and in line with domestic and global challenges. The Chinese development approach has allowed the country to swiftly develop new and green industries that will sustain China’s economic rise. China has been on the forefront to counter threats to multilateralism and globalism. These industries will provide China leverage in extending its economic footprint all over the world.

Belt and Road Initiative and China-Pakistan Economic Corridor

The Belt and Road Initiative (BRI) has helped spur global economic growth significantly in the last six years. Countries across the world are benefitting from Chinese investments and development expertise. The BRI encompasses many aspects of 2030 Sustainable Development Goals and therefore countries have opened their doors to China for unlocking new economic possibilities. Having a range of well-established industries has helped Beijing to invest in diverse sectors in different parts of the world.

The construction of communication networks, seaports, and eco-friendly power plants in partner countries has paved the way for a new era of economic growth. One of the key components of BRI is the establishment of Special Economic Zones (SEZs) in partner countries. The SEZs have been instrumental in driving China’s growth since the 1980s. More flexible policies were introduced in Shenzen in 1980 and within years, it transformed from a fishing village to a manufacturing powerhouse.

Shenzen’s GDP in the year 2018 was recorded at $352 billion which makes it a larger economy than Pakistan.18 Better accessibility and incentives contributed to the robust growth of Chinese industries. Technological expertise was transferred as investors turned towards China to expand their business operations. Better utilization of resources was made possible which ultimately made Chinese products competitive worldwide.

Assistance During Instability

When China-Pakistan Economic Corridor (CPEC) was launched in 2015, Pakistan’s economy was under tremendous stress. Terrorism, political instability, and energy crisis had been causing significant losses to the economy for years. Local industries were finding it hard to remain competitive, while many factories were closed down. Many businessmen opted to invest abroad as the situation was not looking to change anytime soon.

In the period when Asian economies were strengthening and becoming more productive, external and internal challenges were pushing Pakistan’s economy in the opposite direction. Demand for Pakistani products fell sharply and Pakistani exporters kept losing their share in the international markets to their counterparts from other emerging economies. Falling exports and ever-increasing import bills placed an extra burden on the economy which was already struggling to meet its debt obligations.

Moreover, worsening security and political environment were keeping foreign investors at bay. In a short period of time, Chinese investments in Pakistan played a critical role in revitalizing the economy. Chinese-built and sponsored power plants addressed the energy shortfall in the country. This brought huge relief to local industries, as it enabled them to expand their operational capacity.

Fostering Growth in Pakistan

In line with the sustainable development targets, Chinese companies also initiated wind and solar power projects in Pakistan. They have helped Pakistan in tapping its renewable energy potential. Previously, China had also set up nuclear power plants in Pakistan. With domestic natural gas resources depleting and the local economy growing, expanding green and locally generated energy in the energy mix was the need of the hour.

Development and improvement of transport infrastructure have also increased economic opportunities across the country. Better connectivity has made it easier for Pakistani producers to access local and international markets. CPEC also has the potential to serve as a transit corridor for landlocked Central Asian countries. This will serve the interest of both China and Pakistan, as China will be able to advance its objective of regional connectivity, while Pakistan will earn transit revenue.

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Under BRI, China is aiming for mutually beneficial arrangements with partner countries. It will support Beijing in turning China into the next economic superpower. It complements other strategies put in place by the Chinese government to advance its domestic and international interests. The Chinese authorities have already set targets to be achieved by 2049, the year which will mark 100 years of the People’s Republic of China.

President Xi desires to restore China’s historical status by transforming it into a fully developed and prosperous country. In the short run, the ‘Made in China 2025’ plan aims to secure China’s status as the global leader of high-tech industries. Furthermore, Beijing wants to reduce reliance on technology imports while focusing on local innovations.

These measures will allow Chinese industries to move higher in the value-added chain and secure future markets for themselves. Critics of the infant industry model argue that protection offered by the government decreases the incentive to be efficient and competitive. With most Chinese industries, this has not been the case rather they are setting standards for industries in the developed world as well.

Conclusion

The Chinese experience shows that government support plays a crucial role in sustaining economic growth and empowering local industries. However, it was not just government support to specific industries that helped them to become world-leading enterprises in their respective fields. The Chinese authorities also focused on ensuring an enabling environment for local businesses to flourish which included investment in physical and social capital.

Efforts were made to improve the literacy rate of the population and numerous scholarships were offered to Chinese students to seek higher education in the West. To sustain periods of rapid economic growth, Chinese authorities ensured social harmony by uplifting millions of people out of poverty and providing adequate facilities and economic opportunities to the rural population. 

The main factors which contributed to China’s economic transformation were the strategies laid out by Chinese authorities. They recognized their own strengths and the way to mobilize their human and natural resources to attain set targets. The policy plans complemented each other and helped prepare China for future challenges, allowing Chinese industries to be in a stronger position as compared to their counterparts in other countries.

Unlike China, Pakistan has struggled to achieve sustained periods of economic growth. Pakistan’s economy has shown promising signs of growth on a number of occasions, but the progress usually gets halted due to internal and/or external circumstances. The social, geographic, and political differences between China and Pakistan do not make the adoption of the Chinese model a straightforward task, but there are many practices that can be inculcated in Pakistan’s approach towards economic development.

Developing a long-term and target-oriented development strategy would be very important. Similarly, strengthening government institutions and prioritizing economic well-being over political gains is also necessary. Politically motivated development projects have limited benefits and therefore focus should be placed on capacity building. Anti-competitive practices must be tackled and new investors should be facilitated.

Key industries should be identified and government policies must be mindful of future challenges and opportunities. In this way, Pakistan can reduce its future dependency on imports. Furthermore, domestic resource mobilization can strengthen the economy and enhance Pakistan’s own financing capabilities. China benefitted from the experience of developed countries and now Pakistan has the opportunity to learn from Chinese businesses.

CPEC has opened ways for Pakistan to import Chinese technology and practices. By encouraging modern and innovative practices, Pakistani industries will be in a better position to avail the benefits of Chinese-sponsored connectivity projects. Industrial development in Pakistan will help address many social and economic issues faced by the country. Therefore, government and state institutions should take every necessary measure to facilitate industrial activity.


Endnotes

1 World Bank. GDP (current US$) – United States, China https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=US-CN

2 The Sixth Five-Year Plan (1981-85) for the National Economic and Social Development of the People’s Republic of China, Chinese Economic Studies, 1983

3 Central Investigation Authority. China’s Sixth Five-Year Plan (1981-85), June 1983

4 Liu Xianfeng, “SME Development in China: A Policy Perspective on SME Industrial Clustering,” Economic Research Institute for ASEAN and East Asia, March 2008

5 Panle Jia Barwick et al. “China’s Industrial Policy: An Empirical Evaluation,” (working paper 26075, National Bureau of Economic Research, 2019), https://www.nber.org/papers/w26075.

6 Barwick et al. “China’s Industrial Policy,” https://www.nber.org/papers/w26075.

7 “China’s New Economic Diplomacy”, Workshop Report, The Center for International Governance Innovation, 2008

8 Ivar Kolstad and Arne Wiig, “Better the Devil You Know? Chinese Foreign Direct Investment in Africa,” Journal of African Business 12, no. 1 (2011): 31-50, accessed May 27, 2021, https://doi.org/10.1080/1536710X.2011.555259.

9 Ernest Kao, “Air pollution is killing 1 million people and costing Chinese economy 267 billion yuan a year, research from CUHK shows,” South China Morning Post, Oct. 02, 2018, https://www.scmp.com/news/china/science/article/2166542/air-pollution-killing-1-million-people-and-costing-chinese.

10 Lauri Myllyvirta, “Air Pollution in China 2019,” Centre for Research on Energy and Clean Air, January 2020

11 “Full text of President Xi’s speech at opening ceremony of Paris climate summit,” China Daily, Dec. 01, 2015, https://www.chinadaily.com.cn/world/XiattendsParisclimateconference/2015-12/01/content_22592469.htm.

12 United Nations. Sustainable Development Goals. https://sustainabledevelopment.un.org/sdg9

13 “China’s solar power capacity more than doubles in 2016,” Reuters, Feb. 4, 2017, https://www.reuters.com/article/us-china-solar-idUSKBN15J0G7.

14 Charlotte Edmond, “China’s lead in the global solar race – at a glance,” World Economic Forum, June 19, 2019, https://www.weforum.org/agenda/2019/06/chinas-lead-in-the-global-solar-race-at-a-glance/.

15 John Fialka, “Why China Is Dominating the Solar Industry,” Scientific American, December 19, 2016, https://www.scientificamerican.com/article/why-china-is-dominating-the-solar-industry/.

16 “China – Pledges and Targets,” Climate Action Tracker, accessed May 27, 2021, https://climateactiontracker.org/countries/china/2020-09-21/.

17 Information Office of the State Council, “China’s Energy Policy 2012,” October 24, 2012, http://www.china.org.cn/government/whitepaper/node_7170375.htm.

18 “Shenzhen’s economy surpasses Hong Kong for the first time,” Financial Times, Feb. 27, 2019, https://www.ft.com/content/d35f1000-3a3d-11e9-b72b-2c7f526ca5d0.

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About the Author(s)

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Mr Ali Haider Saleem graduated with a BSc in Economics from NUST and an MSc in Public Policy from Queen Mary University of London. He has worked at the National Defence University and Institute of Strategic Studies Islamabad. His research interests include sustainable development, regional integration, and security cooperation.

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