Chinas economic growth through the Open Door Policy and its implications of noninterventionist trade

2
Word Count: 2694

Some political economists have argued that the various types of economic and
political institutions in different countries are deviations from best practice that will
dissolve as nations catch up to a technological or organizational leader.1 Such a notion
certainly applies to Chinas sudden and explosive economic growth after the collapse of the
USSR, which was catalysed by the dilution of ideologically-bound communist institutions
that had evidently constrained the possibility for such growth. In the varieties of capitalism
literature, the firm is identified as the key actor that determines economic adjustment.2 Hence,
Chinas ever-increasing attraction to investors is hugely significant; in a globalised age where
multinational corporations (MNCs) have an immense role in defining countries economic
performance, Chinas transition from an ideologically closed nation toward the adoption of an
Open Door Policy has led to an exponential growth in GDP. Logically, such economic
growth has had a positive correlation with diplomatic and strategic prowess in the global
polity to the concern of the Western nations that label China as a rogue state. However,
several developing nations, including Brazil, South Korea and the Philippines, have followed
Chinas lead on what has been termed the Beijing Consensus, opting to pursue economic
growth through a mixture of coordinated and free market economic principles. Conversely,
the Washington Consensus, which was based on the principles of a liberal market economy
(LME), promoted by the United States in the 1990s, has been almost entirely abandoned.
Thus, Chinas growth has threatened the United States hegemony, but such a rise in
prominence is not intended for an eventual subordination of the West.
The debate within academic international relations pertains to the question of whether
or not Chinas economic growth is a threat to global security. The traditional Western liberal
view adheres to the belief that China has the same foreign outlook and raison d'tre as a state
that was adopted in 1949; that is, China as a Marxist-Maoist-Leninist party-state pursuing a
nationalist agenda of re-asserting Chinas imperial position across Asia; in essence,
unreformed at home; prepared to manipulate Chinese xenophobia as interest dictates; and
prepared to play the game of international interdependence in disguise of its stated objective
to achieve world status on the sly.3 The alternative argument is that Chinas open door policy
1 Soskice, David and Hall Peter, An Introduction to Varieties of Capitalism, in Hall and Soskice (eds),
Varieties of Capitalism, (London, 2001)
2 Ibid.
3 Jonathan Story, China and the global business system: Wrecker or Stakeholder, Asia Paper, Brussels
Institute of Contemporary China Studies, 2
2

has resulted in her integration into an interdependent world economy. Consequently, China
has no reason to be aggressive and no desire to be expansionist, as her nationalism is
confined to a reasoned pursuit of national interest, anda determination among Chinas
collective leadership to promote Chinas status in world affairs.4
In order to accurately analyse this debate and ascertain Chinas present business
system, contextualization is of expedience. In 1978, Deng Xiaoping, the de facto head of state
of China, laid the foundations for future Chinese economic growth when he began a set of
economic reforms promulgated in the 'open door policy'. This policy implied a radical shift
away from an economy strictly shaped by Marxist economic principles towards a socialist
market economy.5 Such a shift involved loosening the Chinese Communist Partys (CCP)
central control of economy and create role for free markets, thereby invoking a twenty year
plan to catch up with the West involving modernisation in "industry, agriculture, technology
and national defence"6. Deng Xiaoping called for rule of law, respect for human rights and
economic developments.7 Subsequently, China bought into the Asia Pacific growth package,
promoted exports, encouraged inward investment, developed special economic zones,
attracted investment, and opened up infrastructure for development.8
Thus, de-collectivisation of farming, the breaking up of Maos communes, and
privatisation ensued. More specifically, private business emerged as the prime engine for
growth.9 In 1979, Deng Xiaoping visited Nissan Motors in Japan, which proved to be highly
representative of Chinas policy trajectory for the next thirty years, as he said, learn from the
great diligent, valiant and intelligent Japanese people.10 Moreover, in allowing
underperforming state-owned enterprises to become insolvent, Deng Xiaoping
simultaneously reinvigorated the performance of some, and encouraged joint ventures with
MNCs with those that failed to do so. Namely pillar industries, such as petroleum, and
automobiles were identified, ministerial controls were reduced, and smaller enterprises were
4 Ibid.
5 Jonathan Story, China and the Multinational Experience, in Grant, Coen and Wilson (eds), The Oxford
Handbook of Business and Government, (London, 2001)
6 China's Capitalist Revolution, (25 July 2009), Rob Coldstream, UK, BBC One. [Documentary]
7 Ibid.
8 Story, China and the global business system: Wrecker or Stakeholder, 4
9 Story, China and the Multinational Experience
10 Barry Naughton, Growing out of the plan: Chinese economic reform: 19781993, (United Kingdom, 1996),
p.509
3

privatised in most facets11. Furthermore, after 1978, the public sector was largely reformed,
involving a gradual separation of the budget from banking, thus resulting in a move away
from the mono-bank system of Mao's time, to a more complex financial system, which is
nonetheless still state-run.12
Inevitably, Chinese economic policy was also influenced by the post-Cold War
transformation of the global polity. That is, the conformity of governments to 'market
democracy', as stimulated by the Washington Consensus, the reconfiguration of the world
market under the guidance of the Western powers and the growth in prominence of MNCs
has significantly influenced Chinese policy decision-making.13 Hence, the end of an
irreconcilable ideological divide in international relations provided China with the ability to
become even more accessible to international business. However, China did not adhere to the
Washington consensus, choosing to open her markets without risking subordination to
Western powers. Thus, Xiaoping imposed an official ambivalence over ideology whilst
maintaining traditional Chinese values, preferring any economic policy that would lead to
stable growth. Accordingly, by 1981, capital began to flow through the veins of the Chinese
economy, and China moved from a socialist command economy to a market economy
under CCP direction.1415 The economic success is exemplified in Appendix 1: Chinas GDP
per capita rose at an annual average of eight percent, 400 million no longer lived below the
poverty line, and China became the second largest economy in the world.16
In 2011, Agriculture employment accounted for 9.6 per cent of GDP, industry
employment for 47.1 per cent and services employment for 43.3 per cent.17. With regards to
industrial relations, Chinas employers are benefitted by a functional rather than
representative trade union in the shape of the All-China Federation of Trade Unions
(ACFTU), which implies that in order to protect themselves, workers have to improvise
through informal networks.18 Moreover, there is much intra-firm cooperation, as manifest
11 Story, China and the Multinational Experience
12 Ibid.
13 Ibid.
14 Ibid.
15 China's Capitalist Revolution, (25 July 2009)
16 Story, China and the global business system: Wrecker or Stakeholder, 4
17 CIA World Factbook,"GDP Composition by Sector
18 Taylor, Bill, Chang Kai, and Li Qi, Industrial Relations in China, (Great Britain, 2003), p.121
4

recently when the 500 members of the Chinese People's Political Consultative Conference
travelled to Europe together to lobby for favourable policies in regard to business opportunities
for Chinese firms during the London 2012 Olympics19. This model does not fit with Gourevitch

and Shinns models of political coalition, but we can say that employers, owners and the state
are victorious over workers. Moreover, investment in higher education, to promote a more
skilled labour force and thereby counteract ageing population and rising wage costs20. Thus,
because only 0.6 people out of 1,000 are recorded as having science and technology
backgrounds, the inward transfer of technology is encouraged and brought in by MNCs.
Underpinning all reform is Confucian ideology, and the autocratic Chinese
Communist Party (CCP) provides stability by prioritizing unity over democracy, harmony of
peoples and collectivism. Through the promotion of these values, which are taught to children
at a very young age, potential for anti-radical ideas is suppressed and conformity is fostered.
The resultant economic dynamic has been labelled the Beijing Consensus, and it compounds
mercantilism, protectionism and dirigisme. Thus, China strives for a stable and growing trade
surplus, and prohibits investment in state-dominated industries such as nuclear power.
Therefore, China has a large state sector that dominates banking and provides national credit
control. Through these mechanisms, China shields the Yuan from external market fluctuations
and determines its value. Accordingly, China is protected from the United States Federal
Reserve's quantitative easing, a form of economic warfare attempting to export depression to
China21. To elaborate, China employs capital controls to prevent in the influx of hot money,
or money that might be moved to China in search for short-term profit from high interest or
exchange rates22. Furthermore, in 2009, the government introduced a stimulus package of 586
billion dollars, which was 10-15 times that of US, and this all went to infrastructure,
including 25,000 miles of rail and 25 nuclear reactors23. Presently, China continues to
emphasize manufacturing for export as its economic strategy, not financial speculation and
financial services, and perseveres as the fastest growing economy in the world. All of this
provides a stable environment for MNCs to thrive. In brief, Chinas one-party state system
19 "Business Alliance Helps in Winning Favorable Policies." China.org.cn. 2 Mar. 2012. Web. 14 Mar. 2012.
20 Story, China and the Multinational Experience
21 "Chinese Economic Model Replacing Washington Consensus." Chinese Economic Model Replacing
Washington Consensus. RT (Russia Today), 22 Oct. 2010. Web. 14 Mar. 2012. <http://rt.com/usa/news/chinausa-economy-recession/>.
22 "Hot Money Noun - Definition in Business English Dictionary." Cambridge Dictionaries Online. Cambridge
University Press. Web. 14 Mar. 2012. <http://dictionary.cambridge.org/dictionary/business-english/hot-money>.
23 "Chinese Economic Model Replacing Washington Consensus." RT (Russia Today)
5

minimizes political risk, because, in its bid to modernize the country, it has created
favourable conditions for international business on a long-term basis. In comparison to the
fluctuations in regulatory policies in the United States, it is understandable that so many
Western corporations are relocating or outsourcing to China.
The global polity is defined as the totality of global political structures and processes
including non-state actors24, and China has successfully integrated itself within it by entering
official institutions like the WTO in 2001. Such a transition signified the comprehensive
adoption of accepted business norms for advanced industrialized states. The implications of
these norms included the reduction in weighted average nominal tariffs from 11.1 per cent
end 2001 to about 6.9 per cent by 2007, and to abolish most non-tariff barriers by 2006.25
Thus, telecommunications, banking, insurance, or films were partially opened.26 Furthermore,
scrutiny on patent infringement was increased, considering its vast occurrence. Such norms
accelerate Beijings effort to establish a solid internal market, whilst also raising the stakes of
for investor multinationals27. Furthermore, China signed up to the Kyoto Protocols, which had
a positive effect on positive relations for corporations choosing to enter the Chinese market.
China also possesses variety in terms of MNC investment, whilst preserving its own domestic
market. That is, Asian MNCs use China as an export platform, while two-thirds of the
production of American and European MNCs is intended for the Chinese market28.
Nonetheless the domestic market is dominated by Chinese corporations, who control 85 per
cent of demand for industrial goods29. The entry into the WTO and the decrease in tax and
other advantages to multinationals, competition from mainland producers has become much
more severe, as they have learnt to drive costs down, and productivity up. 30 Hence, China

24 Ougaard, Morten, 'Approaching the Global Polity', CSGR Working Paper 42/99, (1999), 2
25 Aaditya Mattoo, China's Accession to the World Trade Organization: The Services Dimension, The World
Bank Development Research Group, (2002)
26 Ibid.
27 Story, China and the Multinational Experience
28 Francoise Lemoine 2000. FDI and the Opening Up of China's Economy, Working Papers, CEPII Research
Center. (2000) 11
29 Story, China and the Multinational Experience
30 Ibid.
6

has avoided becoming dependent on MNCs and has become embedded in an independent
world economy31
In 2008, China became the worlds third largest exporter and importer. Throughout
the 1980s, exports grew at tremendous rates with their focus shifting from primary goods to
manufacturing goods, which came to comprise ninety percent of total exports. 32
Consequently, China has become the main production platform for MNCs in the entire Asian
corporate value chain. In fact, sixty percent of total exports and imports are foreign
investors.33 Originally, the impetus for this foreign investment into lower value-added
manufacturing was attaining lower labour costs; representative of the surge in MNC activity
in china is that around sixty-five percent of the growth of exports in the 1990s and early
2000s was attributable to foreign firms investing in China.34 However the focus on
developing a highly competitive domestic market was not lost in order to prevent the
establishment of a dependency relationship on global corporations; thus, China became selfsufficient and productivity in manufacturing saw growth of between 15-20 percent per year.35
Subsequently, wages quickly rose, magnifying and ensuring the attraction of China to foreign
investors.
Furthermore, the success of Chinas economic mechanisms in search for economic
autarky, or at least security, are exemplified when we consider that in 2009, retail sales in
China were still growing at a double-digit rate, despite the global endemic recession.36 In
addition, logically, MNCs are attracted to China because it contains a fifth of the worlds
population, which had previously been an untapped market. Although income inequality has
grown since 1978, several million people in China have significant purchasing power, and
income per capita has been rising exponentially (Appendix 2). In fact, corporations may even
be forming a dependence on China. For instance, Yum! Brands (KFC and Pizza Hut) relies

31Story, China in the global business system: Wrecker or stakeholder?2

32 Franoise Lemoine, Les dlocalisations au coeur de lexpansion du commerce extrieur chinois, in
Economie et Statistique, Economie et Statistique, 6/7, (1999), 326
33 Ibid.
34 Nicolas, Francoise Nicolas, Lirresistible ascension de la Chine en Asie orientale, Politique Erangre, 2,
(France, 2004), 271
35Guy De Jonquieres. "Chinas Exporters Are Striking It Rich." FT: Columnists. Financial Times, 7 Mar. 2007.
Web. 14 Mar. 2012.
36 Shaun Rein. "What Coca-Cola Did Wrong, And Right, In China." Forbes. Forbes Magazine, 24 Mar. 2009.
Web. 14 Mar. 2012.
7

on China for a third of its revenue.37 To emphasize even further the benefit of Chinas open
door policy to MNCs, in 2011, Bloomberg reported that Yum had been opening new
restaurants at the rate of one every eighteen hours38. For the most part, corporations are
presently targeting developed urban areas like Shanghai and Beijing; thus, their general
mission is to expand into less-developed markets containing 800 million people for further
consumer growth39. Moreover, the government persistently consolidates its relationship with
MNCs by sporadically offering favourable policies. For example, in February of 2009, car
sales increased by twenty-five percent after the government issued tax rebates for small
engines40. In the same year, the government boosted consumption in less-developed areas
with a 13 per cent rebate on many home appliances, such as air conditioners, refrigerators
and televisions. 41 Hence, this is a relationship that entails linear mutual gains, albeit the CCP
retains a dominant position. The implications are that China possesses the most powerful tool
for economic growth and stability.
Therefore, China continues to attract MNCs, and many are relocating there from the
United States in search for a more stable and favourable environment. Consequently, the
United States is being hindered from vital elements in the bid to return to economic growth at
a time of recession. Moreover, because of Chinas rapid growth and her refusal to accept the
notion of Dollar Hegemony, the US feels threatened that China will not only become a
military threat, but displace the US as the hegemon within the global polity. Hence, the
United States is employing a rhetoric that accuses China of being aggressively defensive.42
What is certain is that China will continue to transform its human resources into an
increasingly powerful economy, which will drive Chinas super-growth forwards for
decades.43 In terms of national income, high savings rates will tend to fall off as the
population ages, but rising productivity in the use of labour, capital and management is likely
to ensure rapid rises in wages, thereby expanding the growing domestic market. This is likely
37 Ibid.
38 William Mellor. "McDonald's No Match for KFC in China as Colonel Rules Fast Food."Bloomberg News.
Bloomberg, 26 Jan. 2011. Web. 14 Mar. 2012.
39 Rein. "What Coca-Cola Did Wrong, And Right, In China." Forbes. Forbes Magazine
40 Ibid
41 Ibid.
42 RT TIMES
43 Story China in the global business system: Wrecker or stakeholder?4
8

to ensure its continued attractiveness as a venue for foreign investors, especially as the underdeveloped service sector expands.44
Thus the critical academic standpoint identifies China as a threat that has played a
large role in destabilizing the global economy.45 Moreover, Western fears are grounded on
the potential of Chinas ambition being fired by a widely-shared and deep-seated
psychological needcompensate for past humiliations, through the return of Hong Kong
(1997), Macao (1999) and Taiwan to the motherland, and to resist any pressures from abroad
to loosen control over Tibet or Xinxiang province.46 In addition, the Chinese people are
argued not to have forgotten past suffering and thereby justify their belief that other nations
not interfere as their country becomes the global hegemon. The economic adjustment of
China is not the primary concern however; rather, the concern is over its positive correlation
on the metric of growth in Chinas military capabilities[and] her emergence as a hi-tech
superpower 47. Thus, Chinese policy is informed by an eventual conflict with the retreating
world superpower of the US.48 Following this theory, China has taken a fundamental piece
from the Wests armoury in defending its economy, MNCs.
Conversely, should we assume such a pessimistic outlook based on opaque elements
Chinese policy and general motivation? For now, we have no reason to assume that China
strives to subordinate the rest of the world. Since its economic rise, China has upheld a policy
of non-intervention as manifest in her trade with Africa, where the oil and gas China needs is
exchanged for infrastructure, without interfering with domestic government policies. China
justifies economic expansion in this way, whilst criticizing the USs policy of intervention to
secure resources. As Zhou Xiaochuan stated in 2009, Chinese people value thrift, selfdiscipline, a low profile and were against extravagance.49 Thus, the key to confronting the
USs aggressive hegemony was for China to build up its comprehensive strength, especially
its economic capabilities.50 Furthermore, Chinas interest is actually the creation of a
44 Ibid.
45 Ibid. 2
46 Ibid. 7
47 Ibid. 6
48 Ibid. 6
49 Xiaochuan, Zhou (2009), Some observations and analyses on savings ratio, speech at the Bank Negara,
Kuala Lumpur, Malaysia, February 10, The Peoples Bank of China, www.pbcgov.ca
50 Story China in the global business system: Wrecker or stakeholder? 7
9

peaceful international domain, conducive to economic development 51. Hence, China

peacefully seeks to join the lead group of countries in world affairs, on its own terms, while
acting as the champion of developing nations.52
In brief, China may have liberalised its markets and formed a stable allegiance with
MNCs, but what remains closed to the West is her fundamental future intentions. That is,
because China remains heavily censored and autocratic, the underlying end of her policy
trajectory remains uncertain. Nevertheless, we can highlight as a constant the policy of nonintervention of domestic affairs of other states. Furthermore, the allegiance has been utilized
for peaceful economic growth, without the intention to weaken Western mechanisms for
recovery. Rather, China has pursued its national interest without foreign military intervention,
as the US has done so before. As long as MNCs coincide with a growing economy, which
seems to be the case for the foreseeable future, it matters not to business that China is not
completely de-regularized LME. In fact, they stand to benefit from the stability provided by
the overarching CCP, with the only potential threat to their opportunism being allegations of
corruption and exploitation.

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11

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12

Appendix 1

53

Appendix 2

54

53Hitotsubashi 1997. China. Guojia tongjiju., and Hitotsubashi Daigaku. Keizai Kenkyujo.The Historical
National Accounts Of The People's Republic Of China, 1952-1995.
Tokyo: Institute of Economic Research Hitotsubashi University.
54 IMF, World Economic Outlook Database, October 2008
13