From ‘Made in China’ to ‘Created in China’
The importance of the Chinese economy today is unquestionable. In just thirty years it has established itself as the world’s second largest economy, in a textbook example of expansion and growth. China, however, is still a developing or emerging economy, and this is reflected in its major social imbalances. In addition, China has its own political, social and cultural idiosyncrasies.
China’s so-called socialist market economy is unique and unrepeatable, akin to a regime of State capitalism yet with certain features peculiar to the Asian Giant (often referred to as “socialism with Chinese characteristics”), and still preserves the traits of highly-centralized economic planning. This can be seen in the reforms commenced in 1979, under Deng Xiaoping, which marked the start of this period of rapid growth.
It can be said that since Deng Xiaoping came to power, and even under the leadership of Hu Jintao, the path taken by China in terms of macroeconomic policy has been geared towards implementing economic reform at different levels on a planned basis by sector, in order to consolidate economic growth and reinforce China’s overall might as a nation, maintaining a single growth pattern under the constant supervision and control of the State.
Yet the excessive dependence of this growth on capital-intensive sectors and on exports— the traditional Chinese economic model—has led to major imbalances in the economy that threaten the sustainability of this growth, such as income inequality, sluggish consumer spending, insufficient job creation to satisfy the labor needs of a population of over 1,330 million, an ageing society, and China’s pressing environmental issues.
These major imbalances call for a new economic model better suited to the circumstances of modern-day China, that enables it to face the present challenges and give maximum priority, in terms of economic policy, to the adoption of a development model in which investment, consumer spending and exports together contribute to more balanced growth. Viewed from the perspective of the productive sectors, one of the objectives is the “tertiarization” of the economy, relegating the industrial sector—which has traditionally been the driving force behind economic growth—to a secondary role. This transformation is essential. On the one hand, the labor-intensive services sector, compared to the capital-intensive industrial sector, will create millions of jobs in the medium and long term. On the other hand, the environmental impact of the production of services is much lower than industrial activity, and this will assist the government in its efforts to combat climate change.
China’s economic growth has been based on its ability to attract direct foreign investment, making it the world’s largest factory. This has led to a significant increase in exports, enabling the country to build up the foreign currency reserves it needs to be able to invest abroad and thereby obtain the resources required to maintain its growth.
Consumer spending is currently outpacing exports as a driving force. This model was always viewed as an initial means of attracting inflows of foreign currency and facilitating the transfers of technology and know-how required to support accelerated growth, thus enabling the transition from a manufacturing-intensive or “Made in China” economy to a innovation driven or “Created in China” economy.
For this reason, the announcement that the government of Xi Jinping and Li Keqiang would be implementing reforms as significant as the 1979 reforms in order to maintain sustained growth, thereby moving away from the preservation of the economic status quo, comes as no surprise. The determination to carry out these reforms suggests that China’s economy is strong enough to be able to evolve, while their implementation is an example of resilience and adaptability, aimed at ensuring that China remains on the path of sustained development.
The adjustment that has perhaps had the greatest impact, generating uncertainty with its own side-effects, is the gradual transition from an economic model steered entirely by the State to a hybrid model in which prices are set by the market in much wider and more fundamental areas. The new edition of the 2015 Investment Catalog, the creation of three new Free Trade Zones, or the draft legislation which is to regulate all foreign investment in China in the coming years all form part of this same general thrust.
With a view to analyzing the changes and implications of the new regulatory framework governing foreign investment announced by China and, specifically, the repercussions for Spanish investment, we have organized a symposium to be held in Madrid on 24 June.
Garrigues Corporate/Commercial Law Department
