Tracing China’s Ascent

Contrary to widespread belief, the main attraction of the People’s Republic of China for foreign capital has not been its huge and low-priced reserves of labor as such. There are plenty of such reserves around the world —but nowhere have they attracted capital to the extent that they have in China.

The main attraction has been the high quality of those reserves — in terms of health, education, and capacity for self-management — in combination with the rapid expansion of the supply and demand conditions for the productive mobilization of these reserves within China itself.

Moreover, this combination was not created by foreign capital, but by a process of development based on indigenous traditions — including the revolutionary tradition that gave birth to China. Foreign capital intervened late in the process, sustaining it in some directions, but undermining it in others.

The “matchmaker” that facilitated the encounter of foreign capital and Chinese labor, entrepreneurs and government officials was Chinese diaspora capital.

This role of matchmaker was made possible by the determination with which China under Deng sought the assistance of the overseas Chinese in opening China to foreign trade and investment and in seeking the recovery of Hong Kong, Macau, and — eventually — Taiwan in accordance with the “One Nation, Two Systems” model.

This alliance proved far more fruitful for the Chinese government than its open-door policy towards U.S., European and Japanese corporations. Bothered by the regulations that restricted their freedom to hire and fire labor, to buy and sell commodities as well as to remit profits out of China, these corporations tended to keep their investments to the bare minimum needed to keep a foothold in China.

The overseas Chinese, in contrast, could bypass most regulations, thanks to familiarity with local customs, habits and language, to the manipulation of kinship and community ties — which they strengthened through generous donations to local institutions — and to the preferential treatment that they received from Chinese Communist Party officials.

Thus, while foreign corporations kept complaining about the “investment climate,” Chinese entrepreneurs began moving from Hong Kong into Guangdong almost as fast as (and far more massively than) they had moved from Shanghai to Hong Kong 40 years earlier.

Encouraged by the success, in 1988, the Chinese government redoubled its efforts to win the confidence and assistance of overseas Chinese capital by extending to Taiwan’s residents many of the privileges previously granted to Hong Kong’s residents.

Well before the Tiananmen crackdown, a political alliance was thus established between the CCP and overseas Chinese business. The cooling of U.S.-Chinese relations after Tiananmen dampened further Western enthusiasm for investment in China.

Although the Chinese share of Japan’s total direct investment in East Asia increased rapidly — from 5% in 1990, to 24% in 1993 — the increase did not re-establish the position of leadership in the process of regional economic integration and expansion that Japan held in the 1970s and 1980s.

Rather, it reflected the attempt of Japanese business to catch up with the overseas Chinese in reaping the profitable opportunities opened up by economic reforms in the PRC.

By 1990, when Japanese investment took off, the combined investments of $12 billion from Hong Kong and Taiwan accounted for 75% of all foreign investment in China, almost 35 times the Japanese share.

No matter how fast Japanese investment grew thereafter, it followed rather than led the boom of foreign investment in China. As the Chinese ascent gained momentum under its own steam in the 1990s, Japanese, U.S. and European capital flocked ever more massively to China.

Foreign direct investment, which had totaled only $20 billion for the whole decade of the 1980s, soared to $200 billion by 2000 — and then more than doubled to $450 billion in the next three years. “But if the foreigners were investing,” comments Clyde Prestowitz, “it was only because the Chinese were investing more.”

Foreign capital, in other words, jumped on the bandwagon of an economic expansion which it neither started nor led. Foreign direct investment did play a major role in boosting Chinese exports. But the boom in Chinese exports was a late episode of the Chinese ascent. In any event, even then foreign (especially U.S.) capital needed China far more than China needed foreign capital.

U.S. companies from Intel to General Motors, face a simple imperative: invest in China to take advantage of the country’s cheap labor and its fast-growing economy or lose out to rivals. Once just a manufacturing center, China has become the place to develop and sell high-tech goods.

The capacity of the Chinese government to dictate to (rather than being dictated by) foreign capital the terms of access to Chinese labor, entrepreneurship and markets was not the only ingredient of the success of Chinese economic reforms. But it certainly was as essential an ingredient as any other.

Editor’s Note: This feature is adapted from Adam Smith in Beijjing, by Giovanni Arrighi. Copyright 2007 Giovanni Arrighi. Reprinted with permission of the author.