Integration Important in the Past, Key to the Future

China needs to build on what has gone before but policies also need to incorporate new initiatives

Peter Williamson

Peter Williamson is professor of Judge Business School, University of Cambridge. And he is fellow and director of Studies in Management, Jesus College.

One of the things that makes China unique in the annals of economic history is the fact that it opened up to the world right from the beginning of its current wave of economic development. This is in sharp contrast to other Asian countries, such as Japan and South Korea, that largely shielded their domestic markets from the outside world until after they were well on the path to becoming developed economies.

Deng Xiaoping famously observed in December 1978 that “Engels never flew in an aeroplane; Stalin never wore Dacron”. His thinking recognised that China's economic development would need to be based on access to new technologies. An important source of those new technologies and ideas was Deng's decision to allow multinational companies to come and invest in China and to import technology from overseas. This opening up proved to be one of the most decisive factors in driving China's modern economic rise.

Opening up started gradually. In the 1980s and 1990s, China began experimenting with opening up to foreign investment in selected coastal cities and in special economic zones. The focus was on attracting export-oriented manufacturing which laid the foundations for China becoming a manufacturing powerhouse. In 1978 when the country began to reform and open up, it accounted for less than 1 percent of global exports of goods. For the next 40 years, China's share grew continuously, accelerating around the time of its entry into the World Trade Organization in 2001. Today, China accounts for almost a quarter of all global manufacturing output by value. As its capabilities have developed, China has also become a much more important contributor to global supply chains. Initially most of the manufacturing activities involved the assembly of low-value products such as garments and toys. Even 15 years ago, only about half of the value-added in China's exports was created in China; half of the value was embedded in parts and components that China had imported and assembled. Today the percentage of value that is added in China is estimated to be above two-thirds.

The foreign companies that have come to China have made an important contribution to this transformation in China's capability to add value to the products and services it makes in huge volumes. According to the State Administration for Industry and Commerce, almost 500,000 foreign-funded firms have been established in China with their cumulative investment stock reaching nearly $5 trillion. These foreign firms brought new technologies and new skills, they trained Chinese staff in new techniques, and they helped develop a huge ecosystem of capable sub-contractors and suppliers spanning every Province in China. The Chinese economy, its consumers, and its workers have gained enormously from the policy of opening up started by Deng and continued by his successors. With many new ideas and technologies flowing in from abroad, the Chinese embraced them, mastered them, and then started to add their own ideas and innovations to further improve what they had learned from other countries. Without the opening-up that stimulated this positive cycle of learning and innovation among the Chinese, China would never have been able to achieve so much so quickly.

Of course, multinational companies and consumers overseas have also greatly benefited. Plenty of multinationals are doing well in China. One of the great examples has been that of Volkswagen AG, which is the largest and earliest international partner in China's automotive industry. It entered China as early as in 1978 and has retained the leading position in the Chinese automotive market over the past three decades. China is Volkswagen's largest market. Rapidly growing sales in China allowed Volkswagen to overtake Toyota to become the world's best-selling automaker for the first time. In 2017, it sold over 3 million vehicles in China, accounting for almost half of its global unit sales. And the pattern is repeated for many other foreign car makers: Ford typically generates one-third of its global profits in China, for General Motors and BMW the figure is around a quarter. China has also contributed to multinational companies’ success in many other industries from machinery and equipment right through to fast-food. Before its recent demerger, Yum Brands, for example, which owns fast-food outlets such as Kentucky Fried Chicken and Pizza Hut, earned more than half its global profits in China.

Foreign consumers have also benefited from rising Chinese capabilities and improved productivity that have enabled them to buy goods at lower prices and enjoy better value for money. In fact, academic research suggests that China's affordable exports have enabled consumers in the US and Europe to improve their real purchasing power by hundreds, and in some cases thousands, of dollars every year.

Today, however, these decades of positive development and the benefits they have delivered both for China and the global economy are coming under threat from forces of unilateralism and mounting protectionism. So what policies might China best pursue going forward into the future?

President Xi Jinping has recently referred to China entering a“new era”. While this is correct, it doesn't mean the policies should be reversed. Instead, they need to build on what has gone before. But they will also need to incorporate new initiatives. This will require a consistent strategy, implemented through hard work sustained for many years.

First, China's emphasis will need to shift from simply growth targets to the quality of growth. China's rapid expansion in recent decades has brought enormous benefits. But it has also come with costs: harm to the environment, rising inequalities, a focus on material success rather than quality of life and happiness. Growth needs to become much more environmentally sustainable, more in tune with preserving the natural world. That will require serious efforts and investment to clean up yesterday's environmental damage. It will also mean that new, improved technologies will have to be used to reduce further damage to the environment: renewable energy, using biotechnology to reduce the use of chemicals and improve recycling, a shift to electric vehicles for moving both people and goods. The emphasis will also need to shift from people simply consuming more “things” toward satisfying other things people need if the quality of their lives is to improve: better schools and healthcare, beautiful designs, cultural experiences and ensuring fairer access to courts and the justice system. China should cooperate even more closely with foreign companies and individuals around the world to complement its home-grown innovations with diverse new ideas, technologies, and aesthetics that arise from the unique and different combinations of resources, history and culture that exist in countries around the world.

Second, China can play a more active, integrated role in the world, commensurate with its size as 20 percent of the world's population and the second-largest economy (soon to be the first). This means playing a bigger role in global governance, actively supporting international cooperation and global economic integration, and helping other countries to develop. President Xi has also foreshadowed this. One part will involve building infrastructure and promoting trade and development along the Belt and Road. But it will also mean combining experience and ideas from many other countries around the world with China's own knowledge and strengths. This will require facilitating international dialogue and interaction to open up many more opportunities for working together on innovations with countries with complementary know-how and experience to come up with novel solutions to the big global issues all of humanity shares ranging from providing for aging populations to climate change.

Third, to avoid the so-call middle-income trap, China will need to find ways of continuing to increase the productivity of its people, its capital, and its resources at a rapid rate. This might prove to be the most difficult challenge of all. Reform of state-owned enterprises, in particular, will need to continue to improve their efficiency. The private sector will need to be encouraged and helped to improve its value-added services and to innovate. New technologies such as AI, manufacturing 4.0, and quantum computing, will have to be harnessed and developed.The capabilities of the financial sector will need to be deepened and enhanced. Inefficiencies will need to be cut away and old policies and procedures that impede the free flow of ideas, money, and resources will need to be streamlined.

China has already taken many important steps forward in these areas. Companies such as Alibaba and Tencent, for example, offer payment portals using super-apps that have 90 and 40 functions respectively, far in advance of anything in the rest of the world. Chinese companies have also become pioneers in the use of so called big data. Alibaba's credit scoring system for businesses and consumers, Sesame Credit, for example, updates the score continuously in real time using data not only on financial measures, but also customer returns, customer satisfaction, stock turn, and discounting, to increase accuracy.

Chinese companies have also used big data analysis for bioinformatics to support, for example, Car-T (Chimeric Antigen Receptor Therapy) that extracts a patient's white blood cells, genetically re-engineers them, and then reinjects them to fight cancers and other diseases. But the development and application of leading-edge science and technology works best when researchers from diverse countries and backgrounds work together as international teams and companies cooperate as an ecosystem of international partners. Despite the growing pressures to roll back globalization among some in the world, this will require China to bravely adopt a new phase of commercial liberalization. This is especially necessary in the areas of research and commercialisation of new technologies and in trade in services.

China is already making some moves in that direction. The Ministry of Commerce and the National Development and Reform Commission have issued a revised Catalogue for the Guidance of Foreign Investment Industries.This opens up foreign investment by adding a number of industries — such as intelligent medical equipment and 3D printing — to the “encouraged section” of the rules. Meanwhile, Premier Li Keqiang has announced that China will further open up its service sector by expanding the pilot program for the innovative development of trade in services, rolling it out in 17 areas, including Beijing, Shanghai and Shenzhen, from July 1, 2018 to June 30, 2020.

Opening up and embracing exchanges with people and countries right across the world has played a very important, and sometimes under appreciated, role in China's impressive economic growth and development over the past 40 years. China can best achieve its ambitious goals for further development and play a full role in the global community commensurate with its size and long history, by embracing a new phase of opening up. This will require policies in three areas. First, policies that stimulate a new round of both inward and outbound foreign direct investment. Second, policies to develop institutions and mechanisms to enable China to play a more active role in the global governance. Third, policies that energetically pursue reform and deregulation of its industry and commerce to stimulate innovation and productivity improvements, combining technology and ideas from around the world with Chinese know-how. Based on its past track record, I am confident China will again rise to this new challenge.