How china is reshaping the glob rhys jenkins

How China is Reshapingthe Global Economy Development Impacts in Africa and Latin America Rhys Jenkins... I was also involved in a network of scholars whostudied the impacts of the Asian

How China is Reshaping

the Global Economy

Development Impacts in Africa and Latin America

Rhys Jenkins

United Kingdom

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Tom, Mat, Kit, and Leo

who will experience the consequences of China’sre-emergence as a global economic power

Preface and Acknowledgements

I first became interested in the impact of China’s economic growth on theGlobal South in 2004, when I was commissioned by the UK Department forInternational Development (DFID) to prepare a paper for a conference inBeijing at the launch of the Inter-American Development Bank’s study ofthe opportunities and challenges that the emergence of China presented forLatin America and the Caribbean (Devlin et al., 2006) This was the first timethat I had visited China, and it began a period when my research was mainlyfocussed on questions posed by the rise of China

Much of my previous work had been about the impact of globalization,starting with studies of transnational corporations and trade liberalization

in Latin America and then extending to work on the environmental andsocioeconomic implications of globalization in Latin America, South Africa,Vietnam, and Malaysia

By the mid-2000s, it was already becoming clear that the dramatic growth

of China and its re-incorporation into the global economy was a key feature

of globalization in the twenty-first century The accession of China to theWorld Trade Organization in 2001 sparked a number of studies looking atthe likely impacts that this would have in both the North and the South

My own interest developed through further studies for DFID on the pacts of China on Asia, Africa, and Latin America, carried out with mycolleague Chris Edwards I was also involved in a network of scholars whostudied the impacts of the Asian Drivers (China and India) on the Global

im-South and published special issues of the IDS Bulletin and World Development

on this theme (Kaplinsky, ed., 2006: Kaplinsky and Messner, eds., 2008).Some of my subsequent research on the impact of China on Latin America,

on Brazil, and on South Africa was funded by the UK Economic and Social search Council (ESRC),1and this allowed me to go into greater depth on theimpacts of China on specific countries I worked with a number of colleagues

Re-on these projects and I am particularly grateful for their cRe-ontributiRe-ons Theyinclude Jonathan Barton, Enrique Dussel Peters, Andrés Lopez, Alexandre

1 ESRC grant numbers RES-165-25-005; RES-238-25-0006; and ES/1035125/1.

de Freitas Barbosa, and Lawrence Edwards I was also fortunate to receive aLeverhulme Research Fellowship that enabled me to start work on this book.

As I delved deeper into the impacts of China on Latin America and theCaribbean (LAC) and Sub-Saharan Africa (SSA), I became aware that I needed

to obtain a better understanding of the drivers of Chinese growth and globalprojection Thus, although the book was originally planned as a study of theimpacts of China on the two regions, I realized that it needed to begin withdevelopments in China Although I do not claim to be an expert on Chineseeconomic development, I hope that Part I of the book will provide the readerwith sufficient background to make sense of the impacts on LAC and SSA

I am very conscious that one limitation I faced in writing the book is that

I do not read Chinese This may have led to the underrepresentation of somepoints of view I have tried wherever possible to refer to official Chinese doc-uments that are available in English and to the work of Chinese academicsthat has been translated into or published in English However, this probablydoes not do full justice to the range of Chinese views on LAC and SSA, and itmay mean that Chinese perspectives that are more critical are not fully rep-resented On the other hand, I have drawn on a range of sources from bothLAC and SSA to ensure coverage of views from within both regions

I would like to thank colleagues who have read and commented on parts ofthis book for their invaluable feedback They include Enrique Dussel Peters,Chris Edwards, Raphie Kaplinsky, Bereket Kebede, Diego Sánchez-Ancochea,and John Thoburn Michael Abou-Sleiman provided research assistance inputting together the database and carrying out the econometric analysis that

is reported in the book Finally, Sally Sutton’s editing work on the manuscripthelped put it into a coherent and presentable form I acknowledge all theircontributions, while accepting ultimate responsibility for the contents andany errors that remain

Introduction: China’s Re-emergence as a Global Economic Power 1

3 A Voracious Dragon? China and Global Commodity Markets 54

5 The World’s Wallet? China’s Role in Global Finance 95

6 China’s Economic Expansion in Sub-Saharan Africa 117

8 Social, Political, and Environmental Impacts in Sub-Saharan

9 China’s Economic Expansion in Latin America and the Caribbean 235

11 Social, Political, and Environmental Impacts in Latin America 304

Part IV Comparisons and Conclusions

12 A Comparative Perspective on China’s Involvement in

Sub-Saharan Africa and Latin America and the Caribbean 345

3.1 Index of commodity prices in constant 2010 US$ (2010=100) 59

4.1 Chinese stock and annual flow of outward FDI and turnover of

contracted projects fulfilled, 1982–2019 (US$ billion) 76

4.2 Geographical distribution of value of completed projects, 1998–2000

6.2 Shares of different products in imports from SSA, 2017–19 120

6.3 Chinese outward foreign direct investment (OFDI) stocks and flows in

6.5 Sectoral distribution of the value of Chinese project contracts in SSA,

6.6 Chinese official financial flows to SSA, 2000–19 (US$ million) 128

7.1 Share of Chinese imports in apparent consumption of manufactured

9.1 China’s trade with Latin America, 1995–2019 (US$ billion) 237

9.2 Shares of different products in imports from Latin America, 2017–19 238

9.3 Chinese OFDI in Latin America, 2003–19 (US$ million) 241

9.4 Chinese Contracts in Latin America, 2005–19 (US$ million) 244

9.5 Sectoral distribution of the value of Chinese project contracts in LAC,

9.6 Chinese loans and debt in Latin America, 2005–19 (US$ million) 247

10.1 China’s share in apparent consumption of manufactures in selected

11.1 Coincidence of voting between Latin America, China, and the United

List of Tables

0.1 Examples of possible impacts of China on developing countries 7

3.1 China’s significance in commodity markets, 2000, 2010, 2019 (%) 57

A6.1 Significance of economic relations with China by country in SSA 154

8.1 Percentage of exports of wood products at high risk of illegality, by

A8.1 Effects of voice and accountability on Sino-SSA economic relations 229

A8.2 Effects of control of corruption on Sino-SSA economic relations 229

A8.3 Effect of political stability on Sino-SSA economic relations 230

A8.4 Impact of economic relations with China on governance 231

9.2 Determinants of Sino-LAC economic relations, 2002–15 265

A9.1 Significance of economic relations with China by country in LAC 270

10.1 Industries with the highest level of Chinese import penetration 281

11.1 Estimated reduction in manufacturing employment in Latin America

11.2 Shares of Latin American trade with China and the United States,

List of Boxes

7.1 China’s Impact on SSA exports of Textiles and Garments 169

8.1 Debate on Labour Conditions in Chinese Copper Mining in Zambia 198

List of Acronyms

ABC Agricultural Bank of China

ADB Agricultural Development Bank (China)

AGOA African Growth Opportunities Act

AIIB Asian Infrastructure Investment Bank

ATC Agreement on Textiles and Clothing

BRI Belt and Road Initiative

CADF China-Africa Development Fund

CARI China Africa Research Initiative

CBRC Chinese Banking Regulatory Commission

CCICED China Council for International Cooperation on Environment

and Development

CIC China Investment Corporation

CNMC China Nonferrous Metal Mining Corporation

CNOOC China National Offshore Oil Corporation

CNPC China National Petroleum Company

COFCO China National Cereals, Oils and Foodstuffs Corporation CREC China Railway Engineering Corporation

CSR Corporate social responsibility

DAC Development Assistance Committee

DFA Department of Foreign Assistance

DPP Democratic Progressive Party

DRC Democratic Republic of Congo

EITI Extractive industries Transparency Initiative

EIZ Eastern Industrial Zone

EPRDF Ethiopian People’s Revolutionary Democratic Front

ETDZ Economic Trade and Development Zone

Exim Bank Export-Import Bank of China

FDI Foreign direct investment

FOCAC Forum for China Africa Cooperation

FSC Forest Stewardship Council

GMO Genetically modified organism

IADB Inter American Development Bank

ICBC Industrial & Commercial Bank of China

IEA International Energy Agency

ILO International Labour Organization

IMF International Monetary Fund

ISI Import substituting industrialization

ISIC International Standard Industrial Classification

JSCB Joint-stock commercial bank

LAC Latin America and the Caribbean

M&A Mergers and acquisitions

MEP Ministry of Environmental Protection

MOFA Ministry of Foreign Affairs

MOFCOM Ministry of Foreign Commerce

NDRC National Development and Reform Commission of the People’s

Republic of China

NGO Non-governmental organization

NSSF National Social Security Fund

ODA Official development assistance

OECD Organization for Economic Co-operation and Development

OFDI Outward direct foreign investment

OOF Other Official Finance

OPEC Organization of the Petroleum Exporting Countries

PRC People’s Republic of China

R&D Research and development

REER Real effective exchange rate

RTRS Round Table on Responsible Soy

SAFE State Administration of Foreign Exchange

SASAC State-owned Asset Supervision and Administration Commission SEPA State Environmental Protection Administration

SEZs Special Economic Zones

SINOSURE China Export and Credit Insurance Corporation

SOE State-owned enterprises

SPR Strategic Petroleum Reserve

SSI Sinopec Sonangol International

WGI World Governance indicators

WTO World Trade Organization

China’s Re-emergence as a Global Economic Power

The re-emergence of China as a major economic power has been a central ture of globalization over the past four decades It constitutes a significantshift in the world economy’s centre of gravity to East Asia In terms of grossdomestic product, China is now the world’s second-largest economy after theUSA, which it is predicted to overtake by 2028 (Elliott, 2020) It is the world’sleading exporter, and a significant destination for, and increasingly a source

fea-of, foreign direct investment (FDI) It has become a major centre of globalindustrial accumulation, accounting for almost a quarter of worldwide man-ufacturing output It is the most important consumer of many minerals andindustrial raw materials, and is an increasingly significant user of energy andcontributor to carbon emissions It has the world’s largest foreign exchangereserves and plays a growing role in international financial markets All thishas profound effects on countries around the world

The economic rise of China can be looked at through two lenses The first,looking from the outside in, emphasizes changes in the global capitalist econ-omy that have led to the geographical reconfiguration of the world economy.The second approach, looking from the inside out, emphasizes the internalchanges in China which have led to its economic transformation since theintroduction of economic reforms at the end of the 1970s (Hung, 2008).The ‘outside-in’ approach sees China’s economic growth as primarily ex-ternally driven, reflecting a new phase of globalization In this view, capitalistaccumulation faced increasing barriers in the developed world in the 1970s

as a result of falling profitability, rising wages, and an increasingly lized working class (Hart-Landsberg and Burkett, 2007;Harvey, 2005) Thisled to the abandonment of the Keynesian policies of the post-war consensusand the adoption of neo-liberalism, particularly under Reagan in the USAand Thatcher in the UK One of the strategies used by capital to restore prof-itability was to move labour-intensive production offshore in order to reduce

mobi-How China is Reshaping the Global Economy Second Edition Rhys Jenkins, Oxford University Press.

production costs This had started to happen in the 1960s, but it accelerated

in the 1980s

In East Asia the ‘flying geese’ pattern in which certain Japanese industriesrelocated to the newly industrializing countries, South Korea, Taiwan, HongKong, and Singapore, had, by the 1980s, developed to a point where thoseindustries were now looking to relocate once more in the face of rising wages.China’s economic reforms came at an opportune moment, and companiesrelocated initially to the special economic zones that were created after 1978,and then to other parts of the country

In contrast, the ‘inside-out’ approach takes as its starting point thechanges that occurred in China after the death of Mao Zedong in 1976.The reforms to economic policy started by Deng Xiaoping in 1978/9 un-leashed a dynamic process of growth and increased competitiveness in China

as it moved from a centrally planned to a market economy (see Chapter1).High levels of investment and a rapid increase in exports led to China’srising share of world output and trade Rapid growth in China made it

an attractive destination for foreign investors Its eventual accession to theWorld Trade Organization in 2001 gave a further boost to export growth,which contributed to the accumulation of foreign exchange reserves As Chi-nese firms accumulated technological capabilities, they began to invest andcarry out construction projects abroad China also became a more impor-tant player in global financial markets as a result of lending by Chinesebanks, particularly the policy banks, and investment by its sovereign wealthfunds

Both of these lenses provide important insights into the growing globalsignificance of China The post-1980 phase of globalization set the con-text within which the Chinese economy was able to grow so rapidly Afocus on shifts in global patterns of accumulation and the organization

of global production networks is a reminder that the Chinese economy

is part of a larger whole This underlines the fact that China’s economicgrowth involves a range of Chinese and international actors, and has de-pended crucially on access to foreign markets and foreign inputs, capital, andtechnology

Without radical changes within China, however, it is unlikely that thesechanges in the global economy would have been accompanied by such spec-tacular economic growth Internal changes also determine the characteristics

of China’s ‘socialist market economy’, which have implications both tically and internationally Globalization set the context within which Chinawas able to grow, but the drivers of economic growth were internal to China

domes-It is, therefore, imperative to analyse at some length the key changes andstages of economic reform and development (see Chapter1)

0.1 China, Sub-Saharan Africa, and Latin America

and the Caribbean

Both Sub-Saharan Africa (SSA) and Latin America and the Caribbean (LAC)have seen the influence of China increase significantly since the turn of thecentury China is now SSA’s most important trading partner, accounting foralmost a fifth of the region’s total trade Chinese construction companiesare building roads, railways, dams, and stadiums, and other public buildingsacross the region China has also become an increasingly important source ofFDI, loans, and official development assistance (ODA) to SSA The Forum onChina-Africa Cooperation, at which major announcements are made con-cerning China’s plans for increased trade with and finance to Africa, meetsevery three years

China is LAC’s second-largest trading partner after the USA, and in severalcountries, including Brazil, Chile, and Peru, it has overtaken the USA Chinahas lent more than $140 billion to countries in the region since 2007 andhas made significant investments in oil and mining It is also involved inmajor infrastructure projects in the region, building roads, railways, damsand power stations In 2015 it formalized its relations with the region withthe establishment of the Forum of China and Community of Latin American

and Caribbean States.

China’s growing involvement in SSA has been a source of intense debate(Mhandara et al., 2013;Alden, 2019) Critics of China’s relations with the re-gion have portrayed it as a new colonial power extracting natural resourceswith little regard for the local population or the environment while sup-porting authoritarian regimes and intensifying corruption As LamidoSanusi(2013), former governor of the Nigerian Central Bank, wrote in the Financial Times:

China takes our primary goods and sells us manufactured ones This was also the essence of colonialism The British went to Africa and India to secure raw materials and markets Africa is now willingly opening itself up to a new form of imperialism.

These critics have been accused by their opponents of ‘China-bashing’ and

of following a Western agenda which sees China as a threat to its interests

in Africa (Hirono and Suzuki, 2014) They argue that on the contrary, theSino-SSA relationship is quite different from the colonial and neo-colonialrelations that existed with the West China is seen as providing SSA withcapital and technology, as well as with a booming market for its exports,leading to the revival of economic growth in the region in the twenty-firstcentury Zambian economist DambisaMoyo (2012a)writes:

China’s rush for resources has spawned much-needed trade and investment and created a large market for African exports—a huge benefit for a continent seeking rapid economic growth.

China’s commitment to non-intervention in the internal affairs of othercountries and its provision of aid without any strings attached, in contrast tothe use of economic and political conditionality by Western donors and theinternational financial institutions, is also emphasized (Wang and Ozanne,

2010)

In the case of LAC, while the debate has been less heated it is, nevertheless,possible to discern significantly divergent views (Jenkins, 2010a; Stallings,

2020) A common criticism is that China’s economic involvement has led

to the recommodification of the region’s exports and deindustrialization,thus reproducing the centre-periphery relations that historically character-ized trade with North America and Europe (Gallagher and Porzecanski, 2010;Rosales and Kuwayama, 2012, Ch II) There are also concerns, particularly

on the political right in the USA, that China’s growing presence is ening US influence and encouraging left-wing governments in the region(Grudgings and Gardner, 2011) As in SSA, critics of China’s involvementhave been accused of Sinophobia and of propagating myths about Sino-LACrelations (Harris and Arias, 2016)

threat-The alternative view of Sino-LAC relations emphasizes South-South eration, economic complementarity, and mutual benefits This characterizesofficial pronouncements such as the Chinese government’s policy papers onthe region (PRC, 2008;2016).Harris (2015) describes China in its relationswith LAC countries as ‘a peaceful panda bear’, which he contrasts with thecritics’ view of ‘a roaring dragon’ More specifically, China is seen as hav-ing made an important contribution to the region’s rapid recovery from the

coop-2008 global financial crisis by coming to the rescue of LAC exports (ECLAC,

2010, p 10)

In practice much of the academic literature on the impacts of China onSSA and LAC recognizes that the reality is more complex and varied thaneither of these extremes There are both positive and negative impacts of thegrowing Chinese involvement in the two regions In Latin America, partic-ularly, some countries are identified as ‘winners’, and others as ‘losers’, as

a result of China’s growth (Funakushi and Loser, 2005;González, 2008) InSSA, too, there has been some recognition that different countries have beenaffected differently (Sindzingre, 2011; Zafar, 2007) However, much of theliterature shares certain basic assumptions characteristic of both the criticsand the defenders of China’s role

Although this debate is highly polarized, both sides are state centric intheir focus on the actions of the Chinese state.1They see China as a mono-lithic actor which pursues its interests globally These interests are seen aseither benign, as portrayed in Chinese discourse on ‘peaceful development’and the ‘harmonious world’, or as a challenge to the existing world order and

an effort to expand China’s global power, as seen by those who emphasize the

‘China Threat’ Both sides also focus on the direct bilateral relations betweenChina and SSA or LAC countries, neglecting the indirect impacts of China’sincreased significance in the global economy There is also a tendency inmuch of the debate on China’s impact to focus exclusively on Chinese in-terests and actions, and to see SSA and LAC as simply the beneficiaries orvictims of China’s international expansion, ignoring the role of local actorswithin the two regions

Inevitably, given the politicized nature of the media coverage of China’simpacts on SSA and LAC, there is a tendency to present things in polarizedterms, emphasizing either the negative side or win-win scenarios There isalso often a tendency on both sides of the debate to exaggerate the extent

of China’s influence in the two regions The challenge in analysing China’sgrowing significance for SSA and LAC is to provide an accurate picture of theextent of its influence and to develop a critical account of its impact whileavoiding the ‘China-bashing’ that often characterizes media reports.This book tries to achieve this by avoiding a state-centric approach toChina’s relations with SSA and LAC It rejects the monolithic view of China

as a unitary actor pursuing a clearly defined coherent strategy in its proach to the two regions Although the Chinese government has issued twopolicy papers on its relations with each region these are very broad state-ments rather than coherent plans which the state implements (PRC, 2006,

ap-2008, 2015, 2016) Chinese involvement is driven by the interests of anumber of actors including different ministries, provincial and municipalgovernments, state-owned enterprises (SOEs), policy and commercial banks,and private companies

In analysing the significance of China for SSA and LAC, this study nizes that China’s growth has both direct impacts as a result of the countries’bilateral relations, and indirect ones arising from China’s effects on globalmarkets and prices This implies that even those countries whose bilateral re-lations with China are limited can, nevertheless, be affected either positively

recog-1 As Alison Ayers (2013) notes in her analysis of the ‘new scramble for Africa’, ‘[t]he privileging

of nation-states as the fundamental units of analysis is characteristic not only of realist and liberal perspectives in IR/IPE [international relations/international political economy] but also various critical perspectives that have sought to understand the rise of the BRICs [Brazil, Russia, India, China and South Africa], especially China’ (p 236).

or negatively by the global economic impacts of China.2While detailing thebilateral economic relations between China and SSA and China and LAC,this study goes further to consider not only the direct impacts of China butalso its indirect impacts on both regions.

There is, perhaps inevitably, a tendency to focus more on Chinese actorsand interests in a book which looks at the impact of China However, it isimportant to recognize the role played by SSA and LAC actors in terms ofboth explaining the increased Chinese presence in the region and the im-pact of this.3 While it is true that states in SSA and LAC have been largelyreactive in response to China’s growing involvement, it is also the case thatthe outcomes for host countries and different groups within them depend

on the responses of local state and non-state actors

Finally, this book emphasizes the heterogeneous impacts of China’sgrowth on the two regions Some of the policy-oriented literature discussesthese impacts in terms of ‘threats/challenges and opportunities’4 or ‘com-petitive and complementary effects’ (Kaplinsky and Messner, 2008) Thisapproach opens up the possibility of a more differentiated perspective onChina’s impact which recognizes that it creates winners and losers both be-tween and within countries The framework used in this book recognizesboth positive and negative impacts of China on SSA and LAC, and includesboth direct and indirect impacts

Table0.1 illustrates some of the potential impacts The first three rowscover those related to the economic impacts of China’s growing involve-ment in trade, FDI, construction and engineering projects, and finance Thelast three rows include possible social, political, and environmental impacts.The first two columns include the effects associated with China’s bilateralrelations with SSA and LAC, while the last two columns describe indirectimpacts arising from China’s effect on the global economy, governance,and environment These are all discussed in detail inParts IIandIIIof thebook

0.2 Outline of the Book

This book sets out to answer a number of questions regarding the growinginvolvement of China in SSA and LAC First, is the hype regarding China’s

2 A similar point could be made in relation to China’s environmental impact on other tries, which can arise both directly from, for example, the polluting activities of Chinese firms

coun-in a host country, but also coun-indirectly as a result of the contribution of Chcoun-inese greenhouse gas (GHG) emissions to global warming.

3 On the importance of recognizing the agency of local actors, see Mohan and Lampert (2013)

and Corkin, 2013 , Chapter 2 ) on SSA, and Levy (2015) on Latin America.

4 See Devlin et al (2006) and Lederman et al (2009) on Latin America, and Ajakaiye (2006)

and Knorringa (2009) on SSA.

Table 0.1 Examples of possible impacts of China on developing countries

Direct Effects Indirect Effects

Positive Negative Positive Negative

Trade Growth of

exports to

China

Displacement of local produc- ers by imports from China

Increased world commodity prices

Competition from Chinese goods in third markets FDI &

Integration into global production networks with Chinese firms

Diversion of OECD FDI from develop- ing countries

to China Finance Additional re-

sources for

investment in

infrastructure

Unsustainable increases in indebtedness

New modes of international finance

Global effects

of Chinese financial instability Social Employment

creation by

Chinese firms

Displacement of communities

by Chinese mines & dams

Increased ernment revenues for social expenditure

gov-Downward pressure

on tional labour standards Political Increased policy

interna-space for SSA

& LAC states

Support for authoritarian regimes

Chinese port for developing countries’

sup-positions in international organizations

Less national protection of human rights

inter-Environment Transfer of

tech-nologies for

renewables

Chinese firms operating in ecologically fragile areas

Reduced cost of technologies for renewable energy

Chinese house gas emissions contribut- ing to global warming

green-Source: Own elaboration based onKaplinsky and Messner (2008 , Figure 6).

role really justified? How much impact has China’s re-emergence as a globaleconomic power had on the two regions? Next, what are the main chan-nels through which China is affecting SSA and LAC? What is the relativesignificance of trade, FDI, engineering and construction projects, loans, andODA within the relationships? Then, what are the key drivers behind China’sgrowing economic relations with SSA and LAC? Are the growing relations

a result of the strategic diplomatic or strategic economic interests of theChinese state or of the commercial motives of Chinese companies, and howare these linked? Finally, the book considers the economic, social, political,and environmental implications for SSA and LAC of China’s growing sig-nificance It discusses how these impacts vary both between countries andbetween different groups within countries

The next chapter sets the scene by examining the transformation of theChinese economy since the start of the reforms in the late 1970s that led toChina’s integration into the global economy It is not a comprehensive ac-count of China’s economic development, but rather it concentrates on thosefeatures that are essential to understanding the impacts that are discussedlater in the book These include the growth of trade and FDI, the develop-ment of the financial system, the changing nature of SOEs and the growth

of the private sector, the increases in productivity and wages, and the effects

of growth on natural resources and the environment

The remainder of PartIconsists of four chapters which discuss the mostimportant characteristics of China’s global economic integration China isbest known as a manufacturing powerhouse, and Chapter 2 analyses theway in which it became a global centre for industrial production, payingparticular attention to the factors that underlie its global competitiveness

It describes some of the key characteristics of its manufacturing sector,including its integration into regional and global production networks,the role played by inward investment, and the increasing technologicalsophistication of its production

The growth of industrial production and rising incomes in China led to arapid increase in demand for natural resources and industrial raw materials,which was increasingly supplied by imports China went from a marginalplayer in global commodity markets to a key consumer with a significantimpact on their prices and organization Chapter3documents its role in dif-ferent markets and its contribution to the commodity boom between 2002and 2012 It discusses the strategies used to ensure a secure supply of key com-modities, and the specific characteristics of the Chinese market that make itdifferent from the developed-country markets to which SSA and LAC havetraditionally exported

Not only is China a significant destination for FDI, but it has also emerged

as a source of outward FDI, and of non-equity forms of international sion, such as engineering and construction contracts Chapter4documentsthis growth and analyses state and firm actors’ motives for investing abroad

expan-A key debate, the extent to which the internationalization of Chinese firms

is primarily state or market driven, is discussed

The last chapter of PartIconsiders China’s growing role in internationalfinance There is some confusion in the literature on China over the dis-tinction between Chinese ‘aid’ and other forms of official finances provided

by Chinese banks This has led to exaggerated accounts of the significance

of China’s financial contribution to the Global South The chapter clarifiessome of these issues

Part II of the book analyses China’s impact on SSA Chapter 6 sets thescene, documenting the growth of bilateral relations between China and

the region, focussing on trade, FDI, Chinese construction and ing projects, and financial flows, and it identifies the main actors involved

engineer-in these relationships The chapter discusses the role of Chengineer-ina’s strategicdiplomatic, strategic economic, and commercial interests in its growinginvolvement in SSA, as well as African interests, before presenting an econo-metric analysis of the key determinants of the different types of Chineseinvolvement in the region

Chapter7focuses on the key economic impacts of the growth of China,considering both direct and indirect impacts on SSA Particular attention

is paid to China’s direct and indirect impact on commodity exports, thedirect involvement of Chinese firms in infrastructure, and the direct and in-direct impacts on the manufacturing sector These overviews are followed

by case studies of China’s economic impacts on Angola, Ethiopia, andSouth Africa

PartIIconcludes with a chapter discussing China’s social, political, andenvironmental effects on SSA These effects have been a particular target forcritics of China’s increasing influence in the region On the social side, it hasbeen claimed that Chinese firms have preferred to employ Chinese ratherthan African workers, and that wages and working conditions are poor andlabour rights frequently violated China is also often criticized for its in-volvement with undemocratic and corrupt regimes in SSA Finally, China’sdemand for resources and the operations of Chinese firms in the regionare criticized for causing environmental degradation The chapter consid-ers these claims and shows that the impacts are not universally negative, assome critics suggest, and that local agency and context have an importanteffect on the outcomes in different countries

PartIIIis structured along the same lines as PartIIto analyse Sino-LAC lations Chapter9 provides background information on China’s economicinvolvement in the region, the main actors involved, and the drivers ofthe relationship Chapter10 considers the economic impacts of these re-lations, with particular attention to the impact on commodity exports andprices and the effects on the manufacturing sector It concludes with casestudies of Brazil, Mexico, and Chile Chapter11provides an analysis of thesocial, political, and environmental impacts In terms of social impacts, par-ticular attention is paid to that on local communities, while the section

re-on China’s political influence includes case studies of Brazil and Venezuela.Latin America’s booming soybean industry is used to illustrate some of theenvironmental problems created by China’s growing demand

PartIVcontains two chapters by way of conclusion Chapter12provides

an explicit discussion of the similarities and differences between China’s lations with and impacts on SSA and LAC, drawing on the two precedingparts It reinforces the conclusion that these impacts are heterogeneous, and

re-that specific local situations play an important part in determining the costsand benefits The final chapter looks at recent developments which are likely

to affect China’s relations with SSA and LAC in the future These include thechanges in globalization including the increasing trade conflict between theUSA and China, the impacts of the COVID-19 pandemic, and the shift to

a slower rate of growth in China with greater emphasis on household sumption and the quality of growth It also considers the likely effects of theBelt and Road Initiative (BRI) which has been closely associated with Presi-dent Xi Jinping Finally, it considers the prospects for resolving some of theproblems which have characterized China’s relations with SSA and LAC inrecent years

con-Several previous monographs and edited collections on China’s impact

on SSA and on LAC have addressed some or all of these questions Althoughthere are many parallels between the two regions, no previous study hasbrought the two cases together in a systematic way, as here By highlightingboth the similarities and the differences between the two regions, this bookbrings out the importance of specific local contexts and agency in explainingthe ways in which changing global patterns play out

Part I

China and the Global Economy

The Transformation of the Chinese Economy

The growth of the Chinese economy since the late 1970s has been lar Gross domestic product (GDP) increased at an average of over 10 per centper annum until 2011, when the growth rate began to slow down, althoughstill achieving significant increases At market exchange rates, China’s totalGDP overtook that of Germany, in 2007, and of Japan, in 2009, and it is nowthe second-largest economy in the world Various sources predict that it willovertake the USA in terms of total GDP in the late 2020s or early 2030s Inpurchasing power parity terms, the Chinese economy is already larger thanthat of the USA.1

spectacu-Gross national income per capita in China increased twenty-five times inthe four decades between 1979 and 2019, taking it from a low- to an upper-middle-income country in terms of the World Bank’s classification This hasled to a massive reduction in poverty The proportion of the population livingbelow the international poverty line fell from 88 per cent in 1981 to 0.5 percent in 2016, and the absolute number of people living in poverty has beenreduced by over 850 million according to the World Bank.2

Economic growth has been driven by high levels of investment and rapidexport growth, which have led to significant structural change and pro-ductivity increases Investment levels were high and increasing over theperiod, reaching over 40 per cent of GDP in the mid-2000s (Naughton, 2007,

p 144) Exports grew at almost 17 per cent per annum between 1980 and

2010 (UNCTADStat) The share of industry in total output increased, ticularly after 1990, to around 45 per cent of GDP (Naughton, 2007, Figure6.4) Estimates put total factor productivity growth in China in the period ataround 3 per cent a year (Liu et al., 2014, pp 231–3).3

par-1 Purchasing power parity takes into account differences in countries’ price levels in order to compare GDP.

2 https://www.worldbank.org/en/country/china/overview (accessed 12 October 2020).

3 ‘Total factor productivity growth’ refers to that part of the increase in output that is not explained by increases in inputs such as capital and labour.

How China is Reshaping the Global Economy Second Edition Rhys Jenkins, Oxford University Press.

The remarkable performance of the Chinese economy over that periodfollowed major changes in economic policy after the death of Mao in 1976.The period since then can be divided into four main phases The first phasefrom the late 1970s initiated the transition from a centrally planned to amarket economy, creating a ‘dual-track system’.Naughton, (2007, Table 4.1)describes this as a period of ‘reform without losers’ The second phase be-gan in 1992 with the Communist Party declaring its support for a ‘socialistmarket economy’ and endorsing the extension of the market to all the majoreconomic sectors In contrast to the earlier phase, this created losers, particu-larly amongst state-owned enterprise (SOE) workers, as well as winners (ibid.,

pp 106–7) In 2001 China joined the World Trade Organization (WTO) ing the start of a third phase characterized by further integration with theglobal economy Finally, since 2012, China has entered a new phase referred

mark-to as the ‘new normal’, which is characterized by slower growth and greateremphasis on the quality of growth

The initial reforms introduced under Deng Xiaoping at the end of 1978focussed on agriculture and created what became known as the ‘house-hold responsibility system’ There was also an expansion of township andvillage enterprises (TVEs) that played an important role in the Chineseeconomy in the 1980s These were not included within the plan, but theycontributed significantly to rural industrialization by producing inputs foragriculture and basic consumer goods Rural incomes increased rapidly, andthe reforms proved popular with the majority of the population in ruralareas

The success of reform in the rural areas encouraged Chinese policymakers

to extend the process SOEs were also allowed to sell production in cess of that required by the plan through the market, and to transact andcooperate with non-state enterprises, giving them greater flexibility Thismodel of reform in China in the 1980s has been described as a ‘dual-tracksystem’ (Naughton, 2007, pp 91–2) It preserved the traditional system ofcentral planning, which guaranteed stability, and allowed the government

ex-to achieve key targets, while at the same time allowing a market ex-to developfor the allocation of particular goods This led to a two-tier pricing system,with many goods having a low state-set planned price and a higher marketprice.4The creation of Special Economic Zones (SEZs) in 1979 was a furtherexample of the dual-track approach, which allowed foreign firms to enterChina without affecting the industrial activities of SOEs

Several factors including rising inflation, anger at corruption, and growingexpectations of political reform led to increasing urban discontent during1988–9 that culminated in government repression at Tiananmen Square in

4 The pricing system created incentives for rent seeking and corruption, with SOEs sometimes able to buy inputs cheaply via the plan and then sell them at higher market prices.

1989 In the aftermath, conservatives attempted to reverse the reforms butwere unsuccessful In 1992 Deng Xiaoping’s Southern Tour launched a newphase of reform In October 1992 the Communist Party supported a ‘socialistmarket economy’, endorsing the extension of the market to all the majoreconomic sectors The growing significance of market relations in the 1980shad rendered the system of central planning obsolete, and by the end of

1993, material balance planning had been abolished altogether, and the dualsystem disappeared with a reunification of prices

The second phase of reform saw China extending market relations mestically and negotiating to join the WTO internationally The process ofreforming state enterprises began with a new Company Law passed at the end

do-of 1993 The state sector was also downsized to focus on strategic industriesand large firms with the policy of ‘grasping the big and letting go the small’.Privatization, often through management buyouts, became common fromthe mid-1990s, and the significance of the private sector in the economy in-creased The 1990s also saw significant changes in the banking and financialsystem with the creation of the Shanghai and Shenzhen stock exchanges in

1992 There were also major reforms related to the external sector as Chinaprepared the way to join the WTO In 1993 the foreign exchange regime wasunified, and current account convertibility was established Trade was fur-ther liberalized with significant tariff cuts and a reduction in the proportion

of imports subject to quotas

A third phase of reform and development began in 2001 after China came a member of the WTO The rate of economic growth accelerated, as didthe growth of exports, until the global financial crisis in 2008 The boom inexports, coupled with continuing inflows of foreign direct investment (FDI),generated large balance of payments surpluses so that China accumulatedforeign exchange reserves and the government began to relax some of theconstraints on capital flows Domestically, the period saw further growth

be-in the private sector and changes be-in the way that SOEs were managed toincrease their focus on profit and productivity The position of SOEs in in-dustries, which the government considered strategic, was consolidated, and

a group of firms were identified as ‘national champions’ During this period,the government also began to encourage Chinese firms to ‘go global’ throughoutward foreign direct investment (OFDI)

The global financial crisis of 2008 interrupted the spectacular growth ofthe Chinese economy, and exports fell in 2009 Growth resumed with a ma-jor stimulus package introduced by the government in 2008, and since thiswas targeted particularly at investment in infrastructure, it gave a boost toSOEs

With the growth of world trade slowing down, the Chinese governmentstarted to give greater emphasis to the expansion of the domestic market and

consumption rather than investment and exports.5This led to new phase ofdevelopment referred to as the ‘New Normal’, with growth between 2012and 2019 of around 6 or 7 per cent a year as opposed to 10 per cent, and

a rebalancing of the economy in favour of domestic consumption There ismore emphasis given to the quality of economic growth, particularly in terms

of its environmental impacts, which had been largely ignored in previousperiods

Partly as a response to the problems caused by slower economic growth,President Xi Jinping launched the Belt and Road Initiative (BRI) in 2013(Chen, S., 2020).6The BRI involved ambitious plans to build new infrastruc-ture such as railways and roads, port facilities, and energy pipelines Withexcess capacity growing in a number of industries within China, the large-scale infrastructure projects planned under the BRI provided new markets forChinese producers of steel, cement, aluminium, railway equipment, as well

as projects for Chinese construction companies The Silk Road Economic Beltwould also help to rebalance the Chinese economy towards the West andaway from the coastal areas where growth had been concentrated since thereform process began in 1979

Some 60 countries were originally identified as part of the BRI In 2015,the Chinese government launched its Action Plan on the Belt and RoadInitiative.7 It became a centrepiece of Chinese foreign policy under XiJinping and the Communist Party of China amended its constitution, in

2017, to include a pledge to pursue the initiative, thus cementing itssignificance

This chapter does not attempt a comprehensive review of Chinese nomic development and economic policy The focus is on those aspectswhich are particularly relevant to understanding China’s impact on theglobal economy As such it begins with reforms that have affected tradeand FDI, before discussing the changes in the financial sector, enterprisereform, and developments in the Chinese labour market The final sectionconsiders the impact of rapid growth on the environment and the demandfor resources in China

eco-5 The share of exports in GDP peaked at around 35 per cent in 2006–8 while the share of investment peaked at 48 per cent in 2011 ( Naughton, 2019 , p 22 & p 30).

6 This had its origins in two speeches made by President Xi Jinping in Kazakhstan and sia, proposing the development of a new Silk Road Economic Belt linking China, Central Asia, South Asia, Russia and Europe by land and a twenty-first-Century Maritime Silk Road, linking China with South-East Asia, South Asia, the South Pacific, the Middle East and East Africa by sea.

Indone-It was originally referred to as the ‘One Belt, One Road’ (OBOR) initiative The official English translation from the Chinese was changed to the Belt and Road Initiative (BRI) in 2016.

7 Available at: http://english.www.gov.cn/archive/publications/2015/03/30/content_ 281475080249035.htm (accessed 23 June 2020).

1.1 Growing Integration with the Global Economy

One of the most striking features of China’s economic transformation hasbeen the increased integration with the global economy and its emergence asthe world’s largest exporter, a major destination for inward FDI and a growingsource of OFDI

During the Maoist period, China emphasized self-reliance, particularly ter the break with the Soviet Union in the early 1960s In the 1960s and1970s, China was one of the most closed economies in the world, with totaltrade (exports plus imports) never exceeding 10 per cent of GDP (Naughton,

af-2007, p 377) The system of state control of foreign trade meant that the StatePlanning Commission’s import plan covered over 90 per cent of all imports,and that exports were also comprehensively planned (Branstetter and Lardy,

2008, p 634) Both inward and outward FDI were virtually non-existent ing the Maoist period In 1978 twelve state trading companies controlled bythe Ministry of Foreign Trade were the only firms allowed to engage in in-ternational trade or invest outside China (ibid., Table 16.1) There were alsosevere restrictions on FDI in China during the 1970s

dur-This started to change during the first phase of economic reform with apush to expand exports and attract foreign investment One of the first stepstaken was the creation of four SEZs in Shenzhen (next to Hong Kong), Zhubai(next to Macao), Shantou (on the coast facing Taiwan), and Xiamen (acrossthe Taiwan straits from Taiwan) These zones were open to foreign investorswho wanted to establish plants in order to export goods from China withoutbeing subjected to the restrictions on FDI and the bureaucracy and taxes thatapplied to investments elsewhere in the country These experiments wereextended from the mid-1980s with a second wave of liberalization whichdeclared fourteen new Open Port Cities, all of which set up Economic Tradeand Development Zones (ETDZs) that offered the same kind of incentives

as the SEZs (Naughton, 2007, pp 406–10) In 1986 significant liberalization

of FDI regulation was applied throughout China These ‘22 Regulations’ duced corporate tax rates for foreign firms and lifted restrictions on profitremittances Export-oriented projects and those using advanced technologywere eligible for further benefits

re-The result was a dual system, with a distinction drawn between ‘processingtrade’ and ‘ordinary trade’ The latter applied to products for sale on theChinese market or used as inputs for production for the domestic marketwhich, after the removal of the state monopoly of foreign trade, were subject

to a complex system of tariffs, quotas, and import licences which remainedquite restrictive during the 1980s (Branstetter and Lardy, 2008, pp 634–5)

‘Processing trade’ which applied to exporters was largely free of restrictions

on imports

Despite these measures, FDI inflows remained modest during the 1980s.Most FDI was in joint ventures, and wholly foreign-owned firms were onlyallowed in the SEZs During the first phase of the reforms, FDI was largelyconfined to export manufacturing, and foreign firms had little access tothe domestic market Inflows were largely dominated by Hong Kong andTaiwanese firms relocating labour-intensive activities to the SEZs and to thesouthern provinces of Guangdong and Fujian, which received a number ofconcessions from the central government in the early 1980s to pursue theirown, more market-oriented, policies (Thoburn et al., 1991)

During the second phase of reform in the 1990s, steps were taken to open

up the economy further in preparation for membership of the WTO Thisinvolved significant reductions in the protection given to production for thedomestic market Average tariffs fell from 43 to 15 per cent, and the propor-tion of imports covered by quotas and licences from nearly half to less than

10 per cent between the late 1980s and 2001 (Branstetter and Lardy, 2008,

p 635)

The government also began to selectively open the domestic market toforeign investors in this period Urban real estate was opened up to foreigninvestment There was also a third wave of new ETDZs, with eighteen ap-proved in 1992–3 (Naughton, 2007, p 409) In 1995, the dualistic system,which encouraged FDI in some sectors while protecting Chinese firms in oth-ers, was formalized with the publication of The Catalogue Guiding ForeignInvestment in Industry, which listed those sectors where foreign investmentwas encouraged, restricted, or prohibited (Breslin, 2009, p 87) This led to asurge in inward investment in the 1990s with US, Japanese, and Europeanfirms now beginning to invest in China on a significant scale Total inflows

of FDI increased more than tenfold in current dollars, from $4.4 billion in

1991 to $44.9 billion a decade later, although a substantial part of this FDIconsisted of ‘round-tripping’, which involved Chinese firms taking moneyout of the country to Hong Kong, Macao, and offshore financial centres, andbringing it back as FDI.8

China became a member of the WTO in 2001, and committed itself tofurther tariff reductions in subsequent years Further liberalization of theChinese FDI regime was also required in order to meet WTO membershiprequirements Before joining the WTO, China had required foreign investors

to meet certain local content requirement or balance their trade by offsetting

8 Estimates of the scale of round-tripping vary from around a quarter to more than a half of total FDI flows to China in the 1990s and early 2000s ( Xiao, 2004 ).

their imports with exports Approval of FDI projects was also often gent on conditions regarding technology transfer or the establishment of

contin-a resecontin-arch centre in Chincontin-a The WTO’s Trcontin-ade Relcontin-ated Investment Mecontin-asuresAgreement outlawed many of these practices, and China agreed to abide bythese rules when it became a WTO member (Branstetter and Lardy, 2008,

pp 651–2) Despite this, China’s FDI policy remained restrictive compared

to that of other countries.9

The decade that followed China’s accession to the WTO saw a substantialincrease in its integration with the global economy Exports grew rapidly be-cause Chinese exporters could now access foreign markets under the sameconditions as other WTO members The average growth of exports dou-bled from less than 15 per cent per annum in the 1980s and 1990s to over

30 per cent in the mid-2000s (UNCTADStat) Although imports also grewrapidly, reflecting the growing demand for raw materials and the significantimported content of many of the manufactured goods that China exported,imports lagged behind exports and China’s trade surplus grew from around

$30 billion a year in 2002–4 to $300 billion by 2008 prior to the globalfinancial crisis

Despite the comparatively restrictive FDI regime, the size and growth ofthe Chinese economy has made it an attractive destination for foreign in-vestment Since joining the WTO, the stock of inward FDI in China hasincreased more than eightfold in current dollars, from $203 billion in 2001

to $1,769 billion in 2019 In 2014 China was the largest recipient of FDI inthe world, ahead of the USA, although the latter regained the top position

As a result of persistent trade surpluses and inflows of capital, China’sforeign exchange reserves grew more than tenfold in less than a decade(World Bank, World Development Indicators, n.d.) The bulk of the reserveswere held in US Treasury bills, but with low interest rates, this was not aproductive use of reserves, and the Chinese authorities have tried to di-versify their holdings and find alternative ways of utilizing these surpluses(seesection 1.2)

9 According to the Organization for Economic Co-operation and Development (OECD) FDI Restrictiveness Index, which covers a number of OECD and non-OECD countries, despite a sub- stantial reduction in the index for China since 1997, it remained the second most restrictive country after the Philippines in 2015 (OECDStat).

One of these ways was through encouraging OFDI During the first period

of economic reform, foreign exchange shortages and the priority given todomestic accumulation meant that OFDI policy was highly restrictive Inthe 1990s the approval procedures were gradually eased, and it became easierfor firms to obtain foreign exchange However, in the aftermath of the 1997Asian financial crisis, regulation was tightened once more, and it becamemore difficult to obtain foreign exchange for overseas investment

The Tenth Five Year Plan (2001–5) and the adoption of a series of crees between 2000 and 2002 to regulate and promote OFDI (Shambaugh,

de-2013, pp 174–6) marked the start of the ‘Go Out’ or ‘Go Global’ policy ofencouraging Chinese firms to expand abroad Over the past two decades, gov-ernment policy towards OFDI has evolved in a number of ways (Rosen andHanemann, 2009, pp 11–12;Sauvant and Chen, 2014;Wong et al., 2020).The state, although it can and still does intervene in high-profile invest-ments, plays less of a directive role and acts more as a regulator, allowingfirms to make decisions on commercial grounds The approval procedureswere gradually eased, and some of the decision-making decentralized to lo-cal agencies Access to foreign exchange for firms wanting to invest abroadhas been eased by the State Administration of Foreign Exchange (SAFE).The government has also increased incentives and support to firms ex-panding abroad, including finance from the China Development Bank (CDB)and the Export-Import Bank of China (Exim Bank); subsidies through afund managed by the Ministry of Finance (MOF) and the Ministry ofCommerce; tax deductions and exemptions; investment insurance from theChina Export and Credit Insurance Corporation (SINOSURE); and the pro-vision of information on investment opportunities to Chinese companies.The Chinese government has also been extremely active in signing bilateralinvestment treaties, and in June 2013, it had agreements with 125 countries,second only to Germany (Sauvant and Chen, 2014, pp 153–4)

The BRI promoted further international integration through its sis on reducing barriers to trade and investment; facilities coordination bybuilding roads, railways, ports, oil and gas pipelines, power grids, opticalcables and other communication networks; and the internationalization

empha-of the Renminbi through currency swap arrangements with other tries The geographic scope of the BRI was widened so that at the latestcount there were 145 countries signed up to the initiative.10 Substantialamounts of funding were made available to finance BRI projects: $100 billionwas provided by the Asian Infrastructure Investment Bank, and $40 billion bythe Silk Road Fund (Yu, 2017, p 2) It has also been reported that the ChinaDevelopment Bank and Exim Bank have between them provided $110 billion

coun-10 Figure reported for December 2021 See initiative-bri/ (accessed 7 March 2022)

https://greenfdc.org/countries-of-the-belt-and-road-in loans for projects https://greenfdc.org/countries-of-the-belt-and-road-in BRI countries shttps://greenfdc.org/countries-of-the-belt-and-road-ince 2013, and that the four Chhttps://greenfdc.org/countries-of-the-belt-and-road-inesecommercial banks have provided a further $150 billion over the same period(Stevens, 2017, p 3).

These changes, together with the growing capabilities of Chinese panies, led to the rapid growth of OFDI since the early 2000s This hasconsiderably narrowed the gap between inward and outward FDI in Chinawith outward flows exceeding inflows in some years Despite the relaxation

com-of some com-of the approval procedures for OFDI, the state continues to have

a considerable influence on the scale and type of investment carried out

by Chinese firms.11 The incentives and other state support also provide animportant means of influencing outward investment

1.2 The Financial Sector

During the pre-reform era, the People’s Bank of China was the only bank

in the country, referred to as the ‘monobank’ The first phase of reform sawthe break-up of the monobank in the early 1980s, to create four state-ownedcommercial banks: the Industrial and Commercial Bank of China, which wasresponsible for lending and deposit taking in urban areas; the AgriculturalBank of China, which did the same in rural areas; the China ConstructionBank, focussing on project finance; and the Bank of China, which dealt withforeign trade and foreign exchange transactions The People’s Bank of China,which had previously been both a central bank and a commercial bank un-der the MOF, became a separate entity, transferring its commercial bankingoperations to the ‘Big Four’ (Allen et al., 2008;Naughton, 2007, pp 454–6).The second phase of reform in the 1990s saw a new round of banking re-forms beginning in 1994, to allow the commercial banks more independencefrom the government so that they could operate on a more commercial ba-sis At the same time, three ‘policy banks’, the CDB, the Exim Bank, and theAgricultural Development Bank, were created to carry out lending that wasspecifically related to government policy objectives and which would notnecessarily generate a commercial rate of return The CDB and the Exim Banklater expanded their international operations becoming the major channelsfor Chinese loans to Africa and Latin America

A number of new joint-stock commercial banks (JSCBs) were also created

in the late 1980s and 1990s, many linked to local rather than central ment and with the participation of both SOEs and non-SOEs Eleven JSCBswere created between 1986 and 2001, which increased competition in the

govern-11 Concerns over ‘irrational’ investments in sectors such as real estate, sports clubs, gambling and entertainment that provided little benefit to the Chinese economy led to restrictions being imposed on such investments in 2017 ( Wong et al., 2020 , pp 20–1).

banking system (Naughton, 2007, p 456) In 1998 the PBC was also tured, and shortly afterwards, steps were taken to deal with problems arisingfrom the weakness of financial supervision and build-up of non-performingloans in the state banking system (Naughton, 2007, pp 103–4).

restruc-Further reforms to the domestic financial system took place after Chinajoined the WTO In 2003 the regulatory functions of the PBC were trans-ferred to a newly created China Bank Regulatory Commission As a result

of its accession to the WTO, China agreed to allow foreign banks to operate

in China from 2006 However, other restrictions have meant that the share

of total banking assets controlled by foreign banks in China has remainedminimal

The Chinese government attempted to insulate the domestic financialmarket from international capital markets, maintaining tight capital con-trols during the early years of economic reform up until the mid-1990s Therewas a dual exchange rate with a high official rate and a much lower market-oriented rate that was available only to licensed foreign trade organizations

In 1994 these two rates were unified, and two years later, the government eralized the current account, signing up to Article VIII of the InternationalMonetary Fund and announcing its intention to fully liberalize the capitalaccount by 2000.12However, the East Asian Financial Crisis which broke out

lib-in 1997 led to a renewed strengthenlib-ing of capital controls to clamp down

on capital flight

A new round of liberalization of capital flows began late in 2002, lowing China’s entry into the WTO China’s Balance of Payments currentand financial account surpluses surged as both exports and inward FDI grewrapidly As a result China accumulated massive foreign exchange reserveswhich came to US$3.9 trillion by 2014, the largest total of any country(World Bank, World Development Indicators, n.d.) Initially much of this washeld in US Treasury securities, of which China has been the largest holder inrecent years However, the return on these was very low, and the depreci-ation of the dollar meant that the government was effectively suffering aloss through holding them.13In recent years, therefore, it has sought to di-versify its overseas holdings and encourage investment in assets which cangenerate higher returns This partly explains the liberalization of outwardinvestment discussed in the previous section, but it has also involved the re-laxation of controls on other forms of capital outflows Two sovereign wealth

fol-12 Article VIII of the International Monetary Fund requires currency convertibility for current account transactions, i.e primarily those involving transactions in goods and services.

13 Hanemann and Rosen (2013) , Figure 8, shows that the implied return on Chinese foreign assets in the late 1990s and early 2000s was only around 2 per cent Santiso, ed (2013) estimates that in real terms, China was incurring large losses on its foreign exchange reserves, which came

to $125 billion in 2009 as a result of the depreciation of the dollar against the RMB.

funds, the China Investment Corporation and the SAFE Investment pany, were set up to invest a portion of the country’s reserves China’s policybanks and commercial banks also became increasingly involved in lendingabroad through medium- and long-term loans and export credits.

Com-Despite the steps taken to liberalize foreign transactions, capital controlsremain pervasive in comparison with other emerging markets, and mosttypes of capital outflows either require approval or are subject to quotarestrictions (Bayoumi and Ohnsorge, 2013, p 4) According to various in-dicators of financial openness, China still has the least open financial sector

of any major economy (Kroeber, 2016, p 148)

1.3 SOEs and Enterprise Reform

Prior to the start of the reforms, virtually all industrial production in Chinawas in the hands of the state, either through SOEs directly controlled by therelevant government ministry or in ‘collective enterprises’ nominally owned

by the employees but in practice controlled by local government or otherstate organizations A key feature of the transformation of the Chinese econ-omy has been the change in the role played by SOEs and privately ownedfirms It is clear that the private sector has become a much more significanteconomic actor since 1978 (Lardy, 2014)

However, it is difficult to analyse this simply in terms of changes in theshares of SOEs and private firms in output, employment or assets sincethe boundary between them is blurred (Milhaupt and Zheng, 2015) First,Chinese statistics are often contradictory, and the distinctions between dif-ferent forms of ownership are not always clear, with definitions changingover time.14Second, changes in governance and managerial incentives may

be as or even more important as changes in formal ownership in ing the roles played by state and private firms, so that focussing merely onthe shares of different types of firms may at best only give a partial picture.Third, firms which are formally privately owned may be highly dependent

understand-on their links with the state: ‘private but not independent’ (Breslin, 2010,

pp 23–5) Fourth, state-owned firms may vary considerably in terms of thedegree to which they are effectively controlled by the state

In contrast to the ‘Big Bang’ approach used in the former Soviet Unionand Eastern Europe to transfer SOEs to the private sector, the Chinese govern-ment adopted a gradualist approach, concentrating initially on changing the

14 See Lardy (2014 , Chapter 3 ) for a detailed account of the problems of estimating the share

of Chinese production according to type of ownership.