CHINA’S DEVELOPMENT TRAJECTORY:

A STRATEGIC OPENING FOR INDUSTRIAL

POLICY IN THE SOUTH

No. 218
December 2014
 China’s Development Trajectory: A Strategic
Opening for Industrial Policy in the South

Daniel Poon

No. 218
December 2014

Acknowledgement: The author is grateful to Richard Kozul-Wright, Dic Lo, Jörg Mayer, Nimrod Zalk, Alice
Sindzingre, Manfred Bienefeld, Ricardo Gottschalk, Janvier Nkurunziza, Mussie Delelegn, Junior Roy Davis,
Zhang Yan, Kris Terauds, Shaun Ferguson, Ngoc Nguyen, and an anonymous referee, for comments and suggestions
on draft versions of this paper. A special thanks to Zhang Moxi for editing assistance. All remaining errors and
omissions are the author’s sole responsibility. Email: [email protected].

UNCTAD/OSG/DP/2014/4
ii

The opinions expressed in this paper are those of the author and are not to be taken as the official views
of the UNCTAD secretariat or its member States. The designations and terminology employed are also
those of the author.

UNCTAD Discussion Papers are read anonymously by at least one referee, whose comments are taken
into account before publication.

Comments on this paper are invited and may be addressed to the author, c/o the Publications Assistant,
Macroeconomic and Development Policies Branch (MDPB), Division on Globalization and Development
Strategies (DGDS), United Nations Conference on Trade and Development (UNCTAD), Palais des Nations,
CH-1211 Geneva 10, Switzerland; e-mail: [email protected].

UNCTAD Discussion Papers are available on the UNCTAD website at http://unctad.org.

JEL classification: O2, L52, L60

 iii

Contents

Page

Abstract ........................................................................................................................................................ 1

I. Introduction................................................................................................................................ 1
II. A tale of two Chinas................................................................................................................. 5
III. Investment-led growth through dual-track reforms................................. 9
IV. Lewis’ self-sustaining growth? Sino-redux........................................................... 14
Country case – China and oil refining in Nigeria................................................................................. 21
V. State capitalism meets monopoly capitalism...................................................... 22
VI. Anti-monopoly policy with Chinese Characteristics...................................... 27
VII. Concluding Remarks: Can China be Leveraged?................................................. 28
Annex ..................................................................................................................................................... 31
References............................................................................................................................................ 32

List of figures

1 BRICS exports of goods to Africa, 2001–2012...............................................................................................3

2 Trends in China’s conventional and processing trade, exports and imports, 1990–2011....................... 6
3 Share of Chinese exports to OECD countries, various motor vehicles, parts and
accessories, 2001–2012.......................................................................................................................... 8
4 Share of Chinese exports to OECD countries, Lewis’ four key sectors, 2001–2012........................... 15
5 Changing structure of China’s machinery exports (HS-84), 2001–2012.............................................. 17
6 China domestic excavator market share trends, by quarter, 2010–2012.............................................. 18

List of tables
1 Breakdown of financial sectors and markets as a share of GDP, 1999–2010....................................... 11
2 China excavator exports, by weight class, 2011–2012......................................................................... 19
3 Global exports shares of HS-8429 self-propelled bulldozer, angledozer, grader,
excavator, etc., 2001–2012................................................................................................................... 20
4 China’s industrial policy toolbox: Overview........................................................................................ 24
 China’s Development Trajectory: A Strategic
Opening for Industrial Policy in the South
Daniel Poon
United Nations Conference on Trade and Development (UNCTAD)

Abstract

A revival in South-South economic relations has raised the possibility of a shift in global power with
profound implications for economic progress and poverty reduction in the developing world. This
discussion paper delves behind the headline numbers to examine the underlying factors driving South-
South relations and areas of strategic developmental cooperation. For now, South-South economic
flows are being driven by China and its ability to deploy an unorthodox growth model that tilts the
economy in favour of investment, which is crucial to its ambitious climb up the industrial value chain.
Five key sectors (food, fertilizer, cement, steel and machinery) outlined by Arthur Lewis are used to
assess China’s economic trajectory, which clearly remains a work in progress, but shows signs of
indigenous technological capabilities taking root – particularly in medium technology capital goods
industries.

The gap between China’s industrial ambitions and its current capabilities provides a strategic opening
for other developing countries to bargain for enhanced opportunities for domestic investment, learning,
technical change and structural transformation. At the same time, China’s “real-time” formulation
and practice of industrial policy processes are a source of inspiration for other developing countries
searching for an alternative growth path. In a post-crisis setting, such demonstrations act as a useful
template for re-thinking development priorities and to gradually begin re-casting economic policies
within a national framework more conducive to catch-up and self-sustaining growth.

I. Introduction

The recent revival of “South-South” (i.e. between developing countries) economic relations and
cooperation has been touted as part of a seismic shift in international relations as global economic power
shifts away from advanced industrialized countries (the “North”) towards the countries of the developing
world (the “South”). The implications of this global power shift for economic development and poverty
reduction in the world’s poorest and most vulnerable countries and regions could be profound.

Rapid economic growth performances in some large developing countries have given new impetus to
South-South economic relations as witnessed in trade, investment, development assistance, and other
financial flows. For instance, in trade, the South’s share in total world exports rose from 19.7 per cent in
1990 to 42.0 per cent in 2010; for imports, the South’s share grew from 18.9 in 1990 per cent to 38.9 per
cent to 2010 (Nayyar, 2013: 6). In terms of merchandise trade, the share of South-South exports in total
Southern exports increased from 45.0 per cent in 1996 to 53.2 per cent in 2010; similarly for imports, the
share of South-South in total Southern imports grew from 32.8 per cent to 51.4 per cent over the same
period (Athukorala and Nasir, 2012: 181).
2

To understand the drivers of burgeoning South-South economic interactions, however, it is imperative

to go beyond the aggregate headline numbers in order to grasp the underlying dynamics at play and to
better identify the strategic developmental opportunities in South-South relations and cooperation (SSC).

First, optimism surrounding “South-South” ties is not new. Writing at a time of heightened interest in
South–South cooperation, Arthur Lewis, in his 1979 Nobel lecture, presaged much of the recent discussion
around global economic decoupling and catch-up growth. In his lecture, Lewis argued the South could
continue to grow at 6 per cent per annum if the North slowed down sharply. The critical link for Lewis
was trade; sustained rapid growth would require strong export growth, but if demand was shrinking in
Northern markets, where would the demand come from? Lewis suggested that South–South trade could
fill the gap, in the aggregate, but also for potential sectoral bottlenecks in agriculture and capital goods.
In particular, Lewis argued that expanded production in developing countries in five key sectors – food,
fertilizer, cement, steel and machinery – could lessen dependence on advanced industrialized countries
for key industrial inputs and buttress “self-sustaining growth” in a critical number of developing countries
(Lewis, 1979).

Second, neither the “South” nor the “BRICS” (Brazil, the Russian Federation, India, China, and South
Africa) are homogenous entities. Differences in country growth strategies and domestic economic
conditions among leading countries of the South determine to a large degree their pattern and extent of
economic relations with other developing countries (not to mention advanced industrialized countries
as well). To be sure, the implication of individual BRICS growth models goes well beyond the neat
labelling of China, Brazil and India as the respective factory, farm, and back office of the world economy
(Milberg et al., 2014). For now at least, convergence among leading emerging markets is led by China,
which accounts for 67 per cent of total BRICS trade with the world, and whose economy accounts for
56 per cent of total BRICS gross domestic product (GDP) (in current US$) in 2012 (Freemantle and
Stevens, 2013a). Even among the BRICS, China acts as the bilateral trading partner in 85 per cent of
intra-BRICS trade flows (Freemantle and Stevens, 2013a). At the regional level, for example, China is
by far the leader among BRICS countries in exports of goods to Africa, accounting for a growing share
of total BRICS exports to Africa, from 37.4 per cent in 2001 to 56.6 per cent in 2012. China’s exports to
Africa surpassed the combined exports to Africa from the other BRICS countries as of 2007 (figure 1).

This state of affairs, it will be argued, is closely linked to China’s ability to wield unorthodox policy tools
– for example, capital controls, stable and competitive exchange rates, low interest rates, State banks and
enterprises – that have been decisive in tilting the economy towards sustaining high rates of domestic
investment over the course of three decades and export growth since the 1990s. This policy framework
has allowed China to mobilize, channel and accumulate capital resources over time to the point where it
can now deploy this capital not only in accessing natural resources and foreign technologies and brands,
but also as a competitive advantage in diversifying its trade and investment patterns, creating beachheads
to previously lightly- or under-served markets as part of its overall “going out” strategy that began in the
early 2000s (Freemantle and Stevens, 2012; Wolf Jr. et al., 2011; Salidjanova, 2011).

A key question in assessing China’s overall economic trajectory, with likely ramifications for SSC, is the
extent it is deepening its industrial capabilities and diversifying into productive sectors and activities up
the industrial value chain, and at what pace. At this point in time a definitive answer is not possible, but
China finds itself at a crucial crossroads where it is at once the preferred low-cost assembly platform of
many global value chains (GVCs) – the low value-added “workshop” of the world – as well as a stronghold
for heterodox economic policymaking, mixing degrees of openness with protection, including through the
use of industrial policy and State ownership that on some accounts threatens to “buy the world”.1 With
industrial policy in the leading economies of the South likely to gain more prominence in a post-crisis

1
  Fortune, 2009, China buys the world, October, see, http://money.cnn.com/galleries/2009/fortune/0910/gallery.china_
shopping_list.fortune/index.html.
 3

Figure 1
BRICS exports of goods to Africa, 2001–2012

160
Total BRICS
140

120

100
US$ billion

China
80
Brazil, India,
60 Russian Federation,
South Africa combined

40
India
20 South Africa
Brazil
Russian Federation
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: International Trade Centre (ITC). See, http://www.trademap.org/.

setting (Salazar-Xirinachs et al., 2014; Gereffi, 2013), whether China is able to work through this stage
of its development process will likely resonate with other developing countries actively seeking their
own viable path to growth and (shared) prosperity.

In many ways, the variety of analytical and empirical interpretations of China’s development experience
(and its consequences for other developing countries) represents a replay of the heated debate in the 1990s
over the lessons from earlier successful East Asian economies, such as Japan, the Republic of Korea and
Taiwan Province of China.2 During that time, the World Bank (1993) published its landmark report of
these experiences, the East Asian Miracle: Economic Growth and Public Policy, which controversially
recognized the significant role of government in guiding growth and fostering strategic sectors, but
ultimately denied the effectiveness of such measures – much to the chagrin of many heterodox economists
and policymakers (Poon, 2009: 6–7).

Analysis of China’s experience was largely left out of the World Bank report, leaving the field open to
the growing number of studies on “policy lessons from China” that have been published in recent years
(OECD-IPRCC, 2011a, 2011b). As in the 1990s with East Asia, there appears a tendency to assess China’s
experience mainly in terms acceptable to conventional neoclassical economic prescriptions and Western
donor government preferences, rather than using China’s experience as an objective “complement to
imperfectly developed theory” (El-Erian and Spence, 2008: 27) to improve decision-makers’ sensitivity
to relevant variables that drive growth and other specific policy outcomes. And it remains just as
pertinent that this time around, “real headway in understanding China’s variety of capitalism will come
by analysing the system on its own terms, rather than principally by reference to something it is not”
(Lin and Milhaupt, 2013: 4).

Unlike the 1990s, however, heterodox economists have generally been hesitant to suggest China’s
experience as a viable and relevant alternative model for other developing countries, as was readily done

2
  A Sheng and X Geng, 2012, The East Asian Miracle Revisited, Project Syndicate, 12 July, see, http://www.project-
syndicate.org/commentary/the-east-asian-miracle-revisited.
4

in reference to the earlier cohort of East Asian economies. There are a number of reasons for this, such as
those relating to country size and history, but also perhaps due to an “implicit but substantial authoritarian
penalty” that colours views of its political regime.3 Still, it is worth noting that current evaluations of
China are taking place at an earlier stage of its development than was the case in the World Bank report,
which evaluated those East Asian economies at a later, more advanced stage of their catch-up development
processes (particularly Japan). In China’s case, successful convergence with living standards in advanced
economies still remains some ways off, which makes crisp conclusions about the impacts of its policy
choices more difficult and risky to make at this point in time.

Through the lens of the five key sectors outlined by Lewis, this discussion paper argues that increasing
signs of independent technology capabilities, particularly in medium technology machinery equipment
sectors, is indicative of the Chinese Government and firms gaining momentum toward a “big push” in
competitive homegrown heavy industry capital goods sectors broadly analogous to the stage of economic
development in the Republic of Korea and Taiwan Province of China in the 1970s/1980s, and Japan’s in
the 1950s/1960s. This stage of China’s development is particularly critical, given cross-country evidence
revealing strong positive relationship linking favourable supply conditions for equipment machinery
investments – the ability to make or acquire industrial capital goods cheaply – with economic growth and
productivity gains, which also turns out to be a key feature distinguishing East Asia from other post-war
development experiences (DeLong and Summers, 1991 and 1993).

The structure of the discussion paper is as follows. The next section sets the context for discussion by
juxtaposing the evolution of broad export and import trends of China’s conventional and processing
trade regimes, highlighting the main trend where processing trade imports have not kept up with that of
processing trade exports since the mid-2000s. Setting the stage for the later application of the Lewis five
sector framework, developments in the Chinese motor vehicle industry are used to illustrate some of the
sectoral dynamics underpinning the changing trends in trade flows.

Section III interprets these trends through China’s so-called “dual track” economic reform strategy that
blended ongoing support for import-substitution in selected sectors with an evolving array of export
processing activities. China’s export processing prowess is quite widely documented, but the strategic
policy regime of import-substitution in selected strategic sectors is often less appreciated despite its
close connection to the heart of China’s bank-centric investment-led growth model. This model is now
said to have outlived its usefulness, but the shift from investment- to consumption-led growth is not
likely to be a straight-forward linear process, in light of the reasons for which Chinese leaders adopted
an investment-led model in the first place.

Section IV shifts gears by applying Lewis’ five key sectors as a framework to assess China’s development
trajectory and the extent of South-South trading linkages in this regard. The section then focuses on the
machinery sector, identified by Lewis as “more bothersome” in which to gain international competitiveness,
to underscore the growing role of Chinese firms and their enhanced production capacities in this area.
Overall, China does not appear in a position to anchor Lewis’ vision of self-sustaining growth writ large
across the South, but there are indeed persuasive signs that indigenous technological capabilities are
taking root in medium technology capital goods and intermediate input industries on a scale and scope
that carries significant structural implications not only for China, but also for other countries of the South.

With the China story unfolding and the outcome still uncertain, sections V and VI address the reality that
if Chinese firms are gradually moving up the value chain, ultimately the high degree of global corporate
concentration across a wide range of economic sectors presents an enormous competitive challenge to
China’s industrial ambitions (and any resulting impacts on SSC). Here, the discussion revolves around the
extent that China can be said to have sufficient policy space to use as leverage against globally dominant

3
  M Pei, 2010, Why the west should not demonise China, Financial Times, 26 November.
 5

foreign companies, with a special focus on the current state-of-play in anti-monopoly legislation and
regulatory implementation to provide a litmus test of China’s overall industrial policy orientation and
potential room for manoeuvre.

The last section’s concluding remarks stress that China’s industrial ambitions remain a work in progress, and
although Beijing’s competitive challenge is surely more North-South in nature, calculations of bargaining
power are equally important to developing countries. However, a static assessment of China’s dynamic
economic trajectory will not do – whether excessively positive or negative. In either case, policymakers
would take-for-granted or dismiss the fine-grain details that would allow for better identification of specific
bilateral opportunities (or threats), which could over time be leveraged (or mitigated) in accordance
with domestic development priorities. At the same time, China’s “real-time” formulation, sequencing
and implementation of industrial policy processes provides other policymakers with a powerful learning
example of a viable and durable alternative growth path. In a post-crisis setting, such demonstrations act
as a useful template for re-thinking development priorities and to gradually begin re-casting economic
policies within a national framework more conducive to catch-up and self-sustaining growth.

II. A tale of two Chinas

China’s spectacular export performance is a prominent feature of the country’s economic post-1980s reform
process that saw China’s share of global merchandise exports increase from 1.8 per cent in 1990, to 3.9
per cent in 2000, to 11.2 per cent in 2012. Some observers forecasted that by 2030, China will account
for 15 per cent of global merchandise exports, roughly double the share forecasted for the United States
(Subramanian and Kessler, 2013). By the early 1990s, structural changes in China’s export basket from
lower value-added manufactures such as apparel and clothing accessories, towards higher value-added
manufactures such as electrical, computers, and telecommunications equipment, has led some to argue
that China’s export bundle resembled the sophistication of a country with an income-per-capita level
three times higher (Rodrik, 2006).

Critics point out, however, that China’s apparent export sophistication is misleading given elevated
degrees of imported high-value parts and components that are assembled in factories based in China and
subsequently re-exported. This is known as China’s “triangular” trade or “processing” trade whereby
China acts merely as the preferred low-cost assembly platform, the last stage in GVCs whose design
and architecture are ultimately orchestrated by multinational corporations (MNCs) based in advanced
economies (Hanson, 2004; Gilboy, 2004; Amiti and Freund, 2007; Moran, 2011). As a share of China’s
total exports, processing trade rose rapidly as of the mid-1990s from about 46 per cent to 55 per cent
in 2003, a level roughly maintained with the onset of financial crisis in 2008. An examination of the
production chain for an Apple iPod, for example, revealed that only about US$5 out of the total value
of US$180 can be attributed to assembly and testing activities of (mostly from the Taiwan Province of
China) producers located in China while most of the value accrues to lead firms based in the United
States, Japan and the Republic of Korea (Dedrick et al., 2008: 30).

For these reasons, some observers generally contend that China has integrated with the global economy
on terms that only reinforce its dependence on foreign technology and investment, thus restricting the
country’s potential to become an industrial and technological challenger to advanced economies. By
extension, China’s difficulty in moving up the industrial value chain implies that its economic production
structure could remain competitive only in low-value labour-intensive goods, which could be detrimental
to industrial growth of other developing countries since light manufacturing sectors often act as a first
step to wider processes of industrialization (Renard, 2011; Kaplinsky, 2008).

Figure 2 below tracks China’s export and import trends for conventional and processing trade over
the period 1990–2011. “Conventional trade” is understood as goods not reliant on the use of duty-free
imported parts and components that are re-exported (in the case of exports), and as goods that reach
6

Figure 2 the domestic market either for investment or final

Trends in China’s conventional and consumption (in the case of imports). In contrast,
processing trade, exports and imports, “processing trade” involves imports of goods to be
1990–2011
assembled or transformed in China and re-exported.
12
In this type of trade, customs tariffs on imported
inputs (raw materials, semi-finished goods, parts and
10 components) are waived and neither these imported
inputs nor the output normally enter China’s domestic
US$ hundred billion

8
market (Gaulier et al., 2005: 15–16).
6
As shown in figure 2, processing exports overtook
4 (by nominal value) conventional exports for the
first time in 1993 and remained higher until 2011.
2
Processing trade imports surpassed conventional
0 trade imports for the first time in 1994, but this lasted
199 0 199 5 200 0 200 5 201 1 only until 2000 when conventional imports overtook
Conventional trade exports
processing imports. By the mid-2000s, conventional
Conventional trade imports imports experience a pronounced surge relative to
Pro cessing tra de exports
Pro cessing tra de imp orts
processing imports, largely due to the rapid rise of
primary commodity prices which tripled (at constant
2005 prices) during the period 2003 to 2008 (Akyüz,
Source: China Trade and External Economic Statistical
Yearbook, 2012: 520–521. 2013: 28). Raw materials and fuels, by comparison,
generally only account for a very small proportion
of processing trade exports and imports (Gaulier et al., 2005: 21), which make processing trade trends
less affected to changes in primary commodity prices.

Most striking in figure 2 are the two trend changes observed in conventional and processing exports and
imports. First, in processing trade, thin surpluses are maintained up until 2002, after which the surpluses
begin to grow with a widening divergence between processing trade exports and imports, suggesting
greater use of domestically-sourced inputs. Second, conventional exports generally stay above conventional
imports for most of the period, but by 2009 conventional imports surpassed exports and the deficit in
conventional trade appears to gradually widen up to the current period – helped by economic stimulus
and the recovery in primary commodity prices from the beginning of 2009 (Akyüz, 2013: 28). Though
conventional trade is in deficit, by 2011, conventional exports exceed processing exports for the first
time since 1994, which is significant given that domestic value added is estimated to be much higher
for conventional exports (on average 65 per cent) than for processing exports (on average 36 per cent)
(Hanson, 2012: 46).

What explains this apparent divergence in export and import processing trade and the rise of conventional
over processing exports after 2008? If China’s processing trade is assumed to remain dependent on
imports of key parts and components, processing trade imports should be expected to roughly track
trends in processing trade exports. But this is clearly not the case, as processing exports have continued
to grow at a faster rate compared to processing imports. Domestic production capacity in a number of key
intermediate products from chemical fibres, to steel, to plastics, to industrial boilers and semiconductors,
has grown by several multiples since 2000. Within the ambit of processing operations, FDI has played an
important role in these trends, as China’s processing trade moved away from simple assembly operations
to other stages of production with greater scope for using domestic inputs. By 2006 assembly operations
accounted for about 10 per cent of processing trade balance, compared to more than 30 per cent in the
late 1990s (Cui and Syed, 2007: 6–7).

The declining import content of exports can also be seen in examining more specific trends of China’s
exports and imports of computers, computer parts, and computer peripheral devices: in 1994 exports
were 1.6 times imports in the sector; by 2008, they were 4.2 times imports. As Hanson (2012) explains:
 7

“While it is unclear how much one can generalize from China’s experience, growth in trade involving
middle-income manufacturers does not necessarily go hand in hand with greater back and forth flows of
intermediate inputs” (Hanson, 2012: 47). While some of this increased domestic sourcing was a result of
foreign companies bringing more production stages to China in a process of offshoring, there are other
dynamics at play related to the style of Chinese reforms and different treatment of FDI depending on the
type of sector and investor motivations. This is often referred to as China’s “dual-track” reform strategy
and is further explained in the next section.

For now, a brief example using the motor vehicle industry, a quintessential “pillar” sector, will help
illustrate some of the emerging sectoral drivers underpinning trends observed in figure 2. A typical
automobile consists of greater than 15,000 parts and represents one of the most difficult manufacturing
products in which to gain competency (Canis and Morrison, 2013: 11). The motor vehicle sector was
not included in Lewis’ five sector framework, and in this regard acts as a higher benchmark with which
to assess China’s development trajectory. Thus, while Chinese domestic auto-makers have yet to attain
international competitiveness, the sector broadly reflects the enhanced production and indigenous
technological capabilities taking root across a range of medium-technology capital goods, including
key intermediate inputs for export and/or domestic markets (Naughton, 2007; Brandt and Thun, 2010;
Bouffault et al., 2011; EIU, 2011).

The output from FDI in the manufacture of complete motor vehicles was entirely destined for the domestic
Chinese market, particularly prior to WTO accession in the late 1980s and 1990s, which was protected
using high tariff duties (80–100 per cent) and import quotas on vehicles and parts. The government has
also enforced a number of stipulations such as a 50–50 joint venture (JV) ownership structure with a
local partner and other requirements such as technology transfer and local content targets.4 On this latter
score, for example, the local content for the Santana model from the SAIC-Volkswagen JV was only
2.7 per cent (by unit) in 1987, namely: the tires, radio, and antennae, but this grew rapidly to 80 per cent
in 1993, and to 92.9 in 1997, as Shanghai municipality strove to build a strong auto supply base (Thun,
2006: 105; Harwit, 2001: 663).

By the late 1990s and early 2000s, however, the government expanded the number of auto joint ventures
and more aggressively negotiated for foreign partners to bring their latest technologies to further upgrade
Chinese production capabilities. To this end, by 2004, the government removed similar JV requirements
for foreign parts companies, effectively encouraging more and more suppliers to follow their original
equipment manufacturers (OEMs) to China. Also in 2004, the government waived the JV requirement for
motor vehicle manufacturers based in export processing zones, with other rules such as minimum project
values, capital investment levels, and technical requirements for automobile and engine producers also
waived. For instance, Honda was permitted a 65 per cent ownership stake in its auto assembly plant in
Guangzhou, as the factory’s output was solely for export (Stewart et al., 2012: 55–56; Haley, 2012: 8;
Tang, 2012).

Boosted by these policy changes, by the mid-2000s, China started raising exports of complete motor
vehicles and in motor vehicle parts. Automotive parts exports have grown rapidly from $10bn in 2004
to $48bn in 2010, with many of the “Tier 1” auto suppliers (supplying entire assemblies like braking
systems and steering systems) such as Delphi, Visteon, Johnson Controls, Lear, Arvin Meritor, TRW,
Bosch, Denso, Magna, among others, all with manufacturing bases in China (Canis and Morrison, 2013:
7–8). The United States market accounts for nearly one quarter of China’s auto parts exports (by value),

4
  The 2011 version of China’s Foreign Investment Industrial Guidance Catalogue removed automobile manufacturing
from the “encouraged” category, while still keeping an emphasis, for example, on manufacturing of automobile engines
and engine R&D, key automobile parts and components and R&D of key technologies. Encouragement of certain foreign
investments in the manufacture and R&D in automobile electronic devices, and the manufacture key parts and components
of “new energy vehicles”, such as high energy power batteries, include ownership ceilings of 50 per cent (Dezan Shira
& Associates, 2011: 8–9; Tang, 2012: 19–20).
8

Figure 3 and while it was long believed that Chinese auto parts
Share of Chinese exports to OECD exports served the United States aftermarket, there is
countries, various motor vehicles, also evidence that United States-based automakers
parts and accessories, 2001–2012 are relying on parts provided by their traditional auto
parts companies, but supplied from their operations
0.9
in China instead of the United States. One study
Proportion of export item to OECD countries

0.8 found that in 2010 and 2011, Chrysler, Ford and GM

0.7 imported not only relatively simple parts from China,
0.6 such as knobs, lights, rearview mirrors, and exhaust
0.5
manifolds, but also more sophisticated products such
as transmission electro-hydraulic control modules
0.4
and control resistors (Stewart et al., 2012: 72–81).
0.3

0.2 Nonetheless, some of these auto parts exports are

0.1
likely also linked to exports of domestic Chinese
branded vehicles: in 2011, China exported nearly
0.0
2001 2003 2005 2007 2009 2011 2012 850,000 units of which 70 per cent were manufactured
by homegrown upstart firms such as Geely and Chery,
Cars (HS-8703)
Motor vehicle parts and acces (HS-8708) with the remainder by foreign-Chinese JVs.5 The
Trucks and commercial vehicles (HS-8704)
Public-transport passenger motor vehicles
main destinations of these exports are developing
(HS-8702) markets in South America, Africa, and the Middle
East, though overall auto exports still only account
Source: ITC. for a very small proportion of total auto output (Canis
and Morrison, 2013: 3–4). Previewing section IV’s
application of Lewis’ five sector framework to assess China’s development trajectory, figure 3 provides
a glimpse of Chinese export shares to OECD markets of different motor vehicles and motor vehicle
parts and accessories for 2001–2012. Keeping in mind the current stage of China’s development, if the
share of exports to OECD markets is relatively high, then the share of that same item to the South is
low, implying that China’s involvement is likely part of an offshoring process, the governance of which
constrains the extent that trade patterns can diversify to the South – a rough proxy for the outgrowth of
improved Chinese indigenous technological capabilities6 (and vice-versa if the export share to OECD
markets is low and to the South is high).

In light of the discussion above, it is not surprising that exports in motor vehicle parts and accessories
show the highest reliance on OECD markets, though this appears to be declining, from 83.7 per cent
in 2001 to 68.7 per cent in 2012 of total Chinese exports in this category. By comparison, the share of
exports of cars to OECD markets grew rapidly in the mid-2000s to 65.4 per cent in 2005, before falling
back to 27.3 per cent in 2012 – though the export value was only $4.6bn in 2012, compared to $25.5bn
in exports of parts and accessories.7 In other motor vehicles such as trucks and commercial vehicles and
public transport passenger vehicles, Chinese export shares to OECD markets are very low, although rising
in 2012 to 5.5 per cent in the case of trucks and commercial vehicles, and to 11.3 per cent for public

5
  Of course, roughly the reverse is true in the domestic market, where the market share (by sales) of Chinese-branded
automobiles peaked at 31 per cent in 2010, and has since declined to 27 per cent by February 2014. [T Mitchell, 2014,
Chinese carmakers yet to make their marque, Financial Times, 4 February.]
6
  This is particularly the case, as further elaborated in the section III, given the careful attention to domestic ownership
levels and degrees of effective control in what are considered “strategic” or “pillar” sectors of the domestic economy.
7
  Note that these figures are different and much lower than those reported in Stewart et al. (2012: 75), largely because
the ITC statistics in figure 3 do not include auto parts and accessories outside of the HS-8708 category, whereas the trade
statistics from Stewart et al. (2012) also include parts from other categories used for automobile motor vehicle production,
such as laminated safety glass (HS-7007), furniture parts (HS-9403), hinges of base metal (HS-8307), among a wide
range of other HS-categories (Stewart et al., 2012: see exhibit 1).
 9

transport passenger vehicles. As in cars, the export volume is also relatively low – in 2012, $4.0bn for
trucks and commercial vehicles, $2.1bn for public transport passenger vehicles.

From these broad trends, it appears that indigenous Chinese technological capabilities in the manufacture
of complete automobiles and auto parts are gradually being established but face significant challenges
– although this is less the case in manufacturing of other motor vehicles like commercial vehicles and
passenger transport vehicles where foreign brands are largely confined to premium niches in the domestic
market (Lang et al., 2012: 18–20; Chu, 2011: 1244).

The picture presented above is a messy one that does not lend itself to clear-cut conclusions, but this is
perhaps to be expected for a country in the process of upgrading its productive and indigenous technological
capabilities rather than one that is on the cusp of the technology frontier. Nonetheless, this more detailed
analysis of sectoral level dynamics reveal emerging trends of a different kind of manufacturing competition
across a range of capital goods sectors in China and are further pursued in section IV, with a focus on
machinery. The next section first delves into the broad contours of China’s “dual-track” reform strategy
and its close connection to China’s investment-led growth strategy, to better understand the catch-up
policy framework China used to get where it is today.

III. Investment-led growth through dual-track reforms

Broadly speaking, the difficulty in assessing China’s development trajectory stems from the “dual-track”
nature of its economic reforms (McMillan and Rodrik, 2011; Lin and Wang, 2008; Qian, 2003; Potter,
2003; Green, 2003; Lin et al., 1996). In economic development and trade policy, in particular, the reform
package combined ongoing support for import-substitution in selected sectors, while simultaneously
conducting export processing activities considered as “new” for the domestic economy. The strategy
itself is hardly novel, and is most closely associated with the past successes of Japan and first-tier Asian
newly industrialized economies (NICs), the Republic of Korea and Taiwan Province of China, that also
placed significant emphasis on building strong productive capacities in medium-technology capital goods
sectors, referred to as the “secondary import substitution” phase that was key to the upgrading process
in the domestic economy and for raising the contribution of domestic value-added in exports (Studwell,
2013: 84–136; Perkins, 2013; 66–121; Weiss, 2005a: 17–24).

Though it is commonly held that it is now in China’s interest to shift from an investment-led growth
strategy to one that is more driven by domestic consumption, often such statements are made with little
consideration to the sequencing or pacing of this transition, which relate to the underlying policy objectives
that led Chinese leaders to adopt an investment-led model in the first place. Given the close relationship
between the ability to invest, economic diversification, and technology upgrading, this section ultimately
argues that Chinese policymakers are likely to be very attentive to the link between the pace of economic
rebalancing, on the one hand, and informed assessments that domestic firms are indeed progressing up
the industrial value chain, on the other.

The defining feature of this dual-track approach was to effectively cordon-off strategic parts of the
domestic economy from the processing trade regime’s outputs and imported inputs. This is the essential
difference in policy regime toward incoming FDI to China that is “market-seeking” (to gain access to the
domestic market), and FDI that is “efficiency-seeking” (to utilize China as a low-cost assembly platform)
(Dullien, 2005: 130–131; Lardy, 2004: 128). In the former, which in Chinese parlance are portrayed as
sectors forming the “lifeline” of the domestic economy, the policy regime adopted more familiar industrial
policy instruments such as foreign ownership limits (i.e. joint ventures), technology transfer and local
content requirements, research and development (R&D) expenditure targets, government procurement
and other financial incentives, industry restructuring and merger incentives, and demand-side consumer
subsidies, among other supportive policies.
10

The policy regime for efficiency-seeking FDI was not without its own set of incentives generally related
to special economic zones, such as selective value-added tax rebates, corporate tax holidays, infrastructure
provision (not to mention stable and competitive exchange rates), but was relatively more permissive in
terms of limitations on economic activities (Zhang, 2013; Zeng, 2011; Evenett et al., 2012).

The concepts of “strategic”, “key”, “backbone” and “pillar” sectors have a long history in China, but it
was only in 2006, and after the establishment of the State-owned Assets Supervision and Administration
Commission (SASAC) in 2003, that the Chinese Government more clearly delineated the role of the State
in these categories of industries. SASAC was mandated to own and manage State assets at the central
level, while giving guidelines for SASAC bureaus in local governments. Initially, SASAC was bestowed
196 of the country’s largest enterprises, with the plan to reduce the number of firms to 80–100 by 2010.
As of year-end 2013, 113 enterprises remain under SASAC’s ownership.8 Including firms overseen by
provincial- and municipal-level SASACs, the total number of State owned enterprises (SOEs) are estimated
to exceed 100,000 (Szamosszegi and Kyle, 2011).

Most of the firms overseen by SASAC are found in natural monopoly sectors, but it also maintains assets
in competitive downstream manufacturing and service sectors as well. For instance, defence, electrical
power and grid, petroleum and petrochemical, telecommunications, coal, civil aviation, and shipping are
categorized as “strategic” sectors where the State will maintain sole ownership or absolute control. Other
sectors, such as equipment manufacturing (machinery), automobiles, information technology, construction,
iron and steel, non-ferrous metals, chemicals, land surveying, and R&D and design, are categorized as
“pillar” industries where the State will maintain strong control and influence (Szamosszegi and Kyle
2011; Mattlin 2007, 2009; SASAC 2006). For these reasons, it is commonly observed that Chinese State
firms still retain control over the “commanding heights” of the economy (Chatham House, 2012: 4; Lo
and Wu, 2014).

An important contributing factor to the confusion surrounding China’s development trajectory, particularly
in pillar sectors where FDI has been market-seeking, is often due to the difficulty in accurately assessing
the role of the State in the economy following the complicated process of transactions involving SOE
(partial) privatizations, restructuring, joint ventures, and mergers and acquisitions over the past three
decades. As Szamosszegi and Kyle (2011: 7) further explain,
State-owned enterprises are business entities established by central and local governments, and whose
supervisory officials are from the government. In official statistics, this category of firms includes only
wholly state-funded firms. This definition excludes share-holding cooperative enterprises, joint-operation
enterprises, limited liability corporations, or shareholding corporations whose majority shares are owned
by the government, public organizations, or the SOEs themselves. A more encompassing category is,
“state-owned and state-holding enterprises”. This category includes state-owned enterprises plus those
firms whose majority shares belong to the government or other SOE. This latter category, also referred to
as state-controlled enterprises (SCEs), can also include firms in which the state- or SOE-owned share is
less than 50 percent, as long as the state or SOE has controlling influence over management and operation.

For the most part, it is the large State-owned firms that are the principal beneficiaries of China’s bank-
centric financial system that drive the high investment, rapid expansion of infrastructure inside the
Chinese economy. The core of the State sector, namely the oil, metallurgy, electricity, telecommunications
and military industry sectors, accounting for three-quarters of the capital of SASAC-owned firms, and
producing less than four per cent of China’s total exports (Naughton, 2007). Overall, China’s level of
investment has been strong since at least the beginning of reforms in the late-1970s, but particularly so in
the last decade. During the 1980s, China’s investment rate averaged 36 per cent of GDP, which reflected
the emphasis on labour intensive light industry while capital intensive State firms underwent adjustment
following industrialization efforts in the pre-reform era (1950s–1970s). The investment rate increased

8
  See SASAC’s website: http://www.sasac.gov.cn/n1180/n1226/n2425/index.html.
 11

Table 1
Breakdown of financial sectors and markets as a share of GDP, 1999–2010
(Per cent)

Assets of Assets of Assets of Government Financial Corporate

banking insurance securities bonds bonds bonds Stock market
institutions companies companies outstanding outstanding outstanding capitalization

1999 137.0 2.9 - 11.8 7.2 0.9 29.5

2000 138.5 3.4 - 13.1 7.4 0.9 48.5
2001 145.4 4.2 - 14.2 7.8 0.9 39.7
2002 169.8 5.3 - 14.8 8.2 0.5 31.9
2003 179.7 6.7 3.6 18.0 8.7 0.7 31.3
2004 175.0 7.5 2.1 22.4 9.1 0.8 23.2
2005 175.2 8.3 - 27.3 10.8 1.7 17.5
2006 204.0 9.1 - 28.9 12.1 2.6 41.3
2007 179.6 10.9 6.5 32.4 12.7 3.0 123.1
2008 204.3 10.6 3.8 31.3 13.4 4.1 38.6
2009 237.8 11.9 6.0 29.3 15.1 7.1 71.6
2010 241.6 12.7 4.9 28.1 15.0 8.6 66.7

Source: World Bank and DRC, 2012: 144.

further, exceeding 40 per cent of GDP in 1993 and again in 2005, before reaching just under 50 per cent
of GDP in 2008 (Lo and Wu, 2014; Hofman and Wu, 2009; Lardy, 2006; Kuijs, 2005).

With the continued State control and ownership of the Chinese banking system9 and the practice by
China’s central bank, the People’s Bank of China (PBoC), to set bank lending and deposit rates while
also limiting other investment channels for depositors, Chinese policymakers have mobilized resources
mainly by engaging in so-called “financial repression” in making low-cost pools of savings/capital
available to the banking system. This was a conscious policy decision to rely on domestic bank credit,
rather than turning and tapping into international capital markets and the benefits/risks such an option
entails. Although the role of bank credit has been reduced through reform measures that have led to
developments of other capital sources (bond and stock markets), as shown in table 1, China’s financial
system remains predominantly bank-centric (WB and DRC, 2012: 116; Kruger, 2013).

This feature can also be highlighted through international comparisons in the structure of financial
systems. According to one estimate, in 2012, bank credit to the private sector totalled 128 per cent of
GDP in China, compared to 48 per cent in the United States. The bond market in China, by comparison,
provided credit equivalent to about 41 per cent of China’s GDP, while in the United States, this figure
was 243 per cent. Chinese stock markets had an aggregate market capitalization of 44 per cent, which
contrasts with advanced economies where capital provided by the stock market is typically lower than
that of the bond market (Elliott and Yan, 2013: 8; JEC, 2006: 17).

9
  China’s five large commercial banks – the Agricultural Bank of China (ABC), Bank of China (BOC), Bank of
Communications, China Construction Bank (CCB), and Industrial and Commercial Bank of China (ICBC) – account for
about half of the total assets in China’s banking sector in 2010. Through reforms, these banks have become joint stock
companies, but for four of these five banks, the majority of shares are held by the People’s Bank of China (PBoC), the
Ministry of Finance (MoF), or other government entities. Foreign banks, by comparison, accounted for just 1.8 per cent
of total assets in the Chinese banking sector (Martin, 2012).
12

In turn, the banking system channels household savings and other domestic resources disproportionately
toward enterprises, especially State-owned enterprises, instead of households. A major turning point also
came in 1998–1999, when the major banks were given a sizeable capital injection and their non-performing
loans transferred (at book value) to four newly-created asset management companies (Okazaki, 2007;
Ma and Fung, 2002). A breakdown of total loans from the banking system to the resident and corporate
sectors for 2007–2010 reveal the share of loans to the corporate sector remained at roughly 80 per cent,
which is supported by large-scale deposits in the banking system, equalling 186 per cent of GDP in 2010.
This level of deposits-to-GDP is far higher than that of most other major reserve currency economies and
also other major emerging countries (Prasad and Ye, 2012: 17–18).

Banking sector reforms took place alongside industrial sector reform in the 1990s, as government sought
to raise the efficiency of SOEs by closing some and merging others, reducing government ownership
by selling shares on domestic and international stockmarkets, and allowing SOEs to shed redundant
labour. In 1997, for instance, there was an explicit drive to return a great majority of SOEs to a healthy
profit within three years. From 1997 to 2006, profits as a share of GDP in State-owned and State-holding
enterprises rose from 0.5 to 4 per cent. Improved management practices, a leaner State sector, WTO
accession and a return to fast growth all contributed to bringing the State sector back to profitability. The
establishment of SASAC in 2003 further enhanced management and oversight of State assets, and as
the Chinese market structure stabilized, and State sector profits grew rapidly (Poon, 2009; Yusuf et al.,
2006; Nolan and Wang, 1999).

Continued State ownership occurred in the context of increasing degrees of market competition. In all
sectors in which State ownership is dominant, Chinese policymakers have built in some competitive
forces in what has been called “limited and managed” competition rather than full on market competition.
In sectors designated as “strategic”, the government typically structures these sectors with two or three
large State enterprises often competing with each other as well as with a fringe of smaller firms generally
supported by local governments. The practice is similar in “pillar” sectors, albeit often with a lesser degree
of concentration. Thus, while incumbent firms are partially protected against competition by new entrants,
whether private or domestic Chinese firms or foreign firms, Chinese policymakers have consciously built
some competitive forces in all sectors, even when the government is the only real customer, as a way of
keeping managers of State firms on their toes (Naughton, 2007 and 2010; Pearson, 2005).

China’s 2009 stimulus plan for the auto sector, for example, organized the industry into a “top 10” group
split into two distinct tiers: Tier 1 firms have an annual capacity of 2 million units and are encouraged to
acquire smaller firms throughout China, Tier 2 firms have an annual capacity of 1 million units and are
encouraged to drive regional consolidation. The plan also specifically identifies four domestic companies
for each tier, with two companies unnamed to ensure a degree of flexibility (Tse et al., 2009b: 3–4). In
the steel industry, by the end of 2009, eight of the ten largest steel groups are 100 per cent owned and
controlled either by central or local government. Of the top ten steel groups, the top three produced between
30–40 million metric tonnes (MT), the next three produced 20–29 million MT, and the remaining three
produced 10–19 million MT (Price et al., 2010: 6–8). Moreover, China’s 12th five-year plan includes
consolidation targets for China’s top 10 producers to represent 60 per cent of total steel output by 2015,
and 70 per cent by 2020 (Ko, 2011).

A key factor that makes China’s growth model different than other emerging countries is that increasing
State sector profitability, in turn, led to higher levels of State enterprise retained earnings (i.e. enterprise
savings), which was subsequently re-invested in the domestic economy. During the period 1990–2003,
investment by the enterprise sector distinguished China from other countries, and accounted for most of
the cyclical variation in investment. During the cyclical upturn in the early 2000s, the share of enterprise
savings were roughly as large as household savings in 2000 and surpassed household savings levels
in 2002 (Kuijs, 2005). Critically, it appears China’s State sector was embedded with what Hirschman
(1958) referred to as decision-making “inducement mechanisms” or “pacing devices” that compensate
for organizational deficiencies by compelling investment decisions “because there is some extra pressure
 13

behind them as a result of pacing, routine responses, threatened penalties, certain and high profitability,
or other forces” (Hirschman, 1958: 27, 39–41).10 As Naughton (2010: 449) helpfully illustrates:
One of the most striking ways the Chinese Government has encouraged investment is through the simple
expedient of allowing Chinese SOEs to retain their after-tax profits. This policy, adopted quietly in
1994 in the context of overall fiscal reform, gives state firms strong incentives to increase profits, and
few alternate uses of the profits created. Paying out too much of the profits in bonuses or managerial
compensation can get a state-run firm in trouble; expanding the business through re-investment is the
best, if not the only, alternative. ... Flush with retained funds, China’s state firms poured money into
expansion and new investment projects.

In this way, China’s growth framework is highly reminiscent of animating an “profit-investment nexus” that
was also the main distinguishing feature of the major growth phases of Japan and first-tier NIEs (Akyüz
and Gore, 1996; Singh, 1996). The nexus is particularly crucial in accelerating capital accumulation and
growth, due to the dynamic feedback interactions between profits and investment that result because profits
are simultaneously an incentive for investment, a source of investment and an outcome of investment. As
in other East Asian cases: first, high rates of investment were crucial to rapid catch-up growth and this
investment was sustained by domestic savings; second, savings and capital accumulation were increasingly
derived from corporate profits; third, government interventions accelerated capital accumulation through
policy-induced economic rents, which elevated rates of profit over and above those that could be achieved
under free market conditions (Akyüz and Gore, 1996: 461–462).11

The workings of this nexus are at the heart of current debates surrounding the rebalancing of China’s
economy towards greater final domestic consumption and away from fixed asset investment (Akyüz, 2011;
Kroeber, 2011).12 While there is much consternation that China’s high investment rates have contributed
to global imbalances, led to wasteful excess industrial capacity, environmental degradation and income
inequality, an accumulation of non-performing loans and economic overheating, high investment rates
are also associated with higher rates of learning, technical progress and structural change (Ocampo, 2005:
16). From this perspective, while China’s pace of growth is very likely to slow, the pace of domestic
economic rebalancing from investment-led to consumption-led growth is not likely to be a linear process,
nor should it be.

For example, the debate surrounding drawing dividends from State firms in order to fund a more
comprehensive social security system could indeed boost consumption by reducing one of the main drivers
behind high levels of household savings. However, the proposal is controversial at this mid-stage of
China’s development process precisely because it has clear financial and competitiveness implications for
the firms involved and the overall economy (Mattlin, 2011). Given China’s current stage of development,
a decision to rigidly implement the dividend policy solely for rebalancing purposes would in turn limit
the simpler policy options for boosting investment levels, if not potentially preclude the ability to reverse
those decisions, should such an objective be considered desirable at a later date.

10
  Ocampo (2005: 4) refers to these features as “accelerator mechanisms”.
11
  Animating the investment-profit nexus appears to address the dilemma confronting policymakers seeking degrees of
political control in the direction and overall development of the economy, or as Galbraith (1967) put it: “The choice being
between success without social control and social control without success” (Galbraith, 1967: 104). In this way, Chinese
policy makers seem to implicitly realize that there is more “to the case for the autonomous public corporation than the
modern socialist now sees” (Galbraith, 1967: 104).
12
  J Anderlini, 2014, China’s rebalancing requires more investment of the right kind, Financial Times, 23 January. J Zhang,
2014, Making sense of China’s growth model, Project Syndicate, 20  January, see, http://www.project-syndicate.org/
commentary/jun-zhang-argues-that-the-dichotomy-of-extensive-and-intensive-growth-is-a-red-herring-when-it-comes-
to-china-and-other-asian-economies. Y Huang, 2013, Understanding China’s unbalanced growth, Financial Times,
4 September, see, http://carnegieendowment.org/2013/09/04/understanding-china-s-unbalanced-growth/glgx.
14

A decision to, say, promote modern corporate governance practices and market-determined dividends could
be envisioned by abolishing government programmes, such as the Qualified Foreign Institutional Investor
(QFII) programme, that limit the participation of foreign investors to influence Chinese stock market
valuations.13 Combined with a rash of other wholesale reforms, such as fully commercializing domestic
financial institutions (WB and DRC, 2012: 118), a preference may develop for lending to sectors with
“easier” profits within a shorter timeframe, seeing less reason to provide riskier longer-term financing in
reaching higher rungs on the value chain. Once entrenched, it is relatively easy to see how such kinds of
reforms would be very difficult to reverse (as is the case in many other developing countries), especially
if China’s macroeconomic fundamentals were to weaken, making the economy more reliant on foreign
finance. Indeed, it is these kinds of features to China’s model that set it aside from so-called “fragile five”
emerging countries (Brazil, India, Indonesia, South Africa, Turkey) whose economies are structurally
more reliant on foreign capital inflows.

Perhaps it is no coincidence that some analysts point to the link between a developing country having
a “balanced” economy – with shares of investment and consumption roughly constant over time – and
falling into the “middle-income trap”, as is the case in some major Latin American countries. As argued
by Huang and Lynch (2013), only a handful of developing economies have escaped the middle-income
trap in the post-war era – notably Japan, the Republic of Korea and Taiwan Province of China – “[t]he
common thread linking all these successful East Asian countries is that widening imbalances are associated
with sustained high growth [and investment] rates that propelled these economies from middle-to high-
income status, and eventually more balanced outcomes as their economies matured”.

Indeed, the two different growth models (investment- or consumption-led) entail separate approaches to
the underlying drivers of growth and the policy instruments that can be marshalled for developmental
objectives. In this way, Chinese policymakers are well aware of the limitations and drawbacks in the
current growth pattern,14 but given their “invest first, consume later” approach and the availability of
policy instruments under an investment-led growth model, they are likely to be very attentive to the
connection between the pace of rebalancing, on the one hand, and assessments that Chinese firms are
effectively progressing up the industrial value chain, on the other. On the latter score, while the evidence
is not yet incontrovertible, there are increasing signs that such trends have built momentum and are
making headway, notably in medium-technology capital goods sectors.

IV. Lewis’ self-sustaining growth? Sino-redux

The implications for South-South self-sustaining growth stem from understanding the key competitive
features and dynamics of China’s investment-driven development stage, which lies in-between the more
rudimentary stage driven by factor accumulation (land, labour, capital) and the more advanced stage
driven by innovation. The investment-driven stage has been aptly described as a stage when competitive
advantage is “based on the willingness and ability of a nation and its firms to invest aggressively” (Porter,
1990), effectively using access to affordable capital as a source of competitive advantage in domestic,
but also foreign markets.

China’s annual FDI outflows have grown rapidly over the course of a decade commensurate with the
government’s “going out” strategy, rising from about $2bn in the late 1990s, to $5.5bn in 2004, to $21.2bn

13
  J Noble, 2014, Hong Kong and Shanghai unveil plan to link bourses, Financial Times, 10 April.
14
  J Anderlini, 2013, China premier Li Keqiang commits to financial reform, Financial Times, 11 September. M Wolf,
2014, China’s struggle for a new economy, Financial Times, 25 March.
 15

in 2006, to $56.5bn in 2009, and to $84.2bn in 2012.15 While these FDI outflows are still small in relative
context, accounting for only 6 per cent of total global FDI outflows in 2012, China’s outflows are often
in the form of financing packages related to tied-aid and overseas projects involving natural resource
extraction and/or infrastructure-building with project loans often used to procure a majority of equipment,
materials, technology and services from China. The level of tied-procurement can vary, but these features
of China’s “going out” strategy have been a major catalyst in diversifying China’s trade and investment
patterns and to bolstering SSC (Gallagher et al., 2012; Mlachila and Takebe, 2011; Brautigam, 2011a).

The key SSC question remains: has China sufficiently expanded production capacities in the five key
sectors identified by Lewis – food, fertilizer, cement, steel and machinery – that could potentially lessen
dependence on advanced industrialized countries for industrial inputs and support “self-sustaining growth”
in a broad number of developing countries? Figure 4 provides an analysis of China’s export flows in
four (minus food)16 of Lewis’ five key sectors for 2001–2012. As done in figure 3 with motor vehicles
and parts, figure 4 compares China’s respective exports to OECD countries in the four Lewis sectors.
Thus, if the share of a given export good to OECD markets is high (or low), then the implication is that
the share of that same good going to the South is low (or high), suggesting China’s production capacity

Figure 4
Share of Chinese exports to OECD countries, Lewis’ four key sectors, 2001–2012

0.8

0.7

0.6
Proportion of export item
to OECD countries

0.5

0.4

0.3

0.2

0.1

0.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Fertilizer (HS-31) Cement (HS-6810) Articles of Iron and Steel (HS-73)

Iron and Steel (HS-72) Machinery (HS-84)

Source: ITC.

15
  There are reasons to believe that China’s official outward FDI statistics are possibly overestimated and/or underestimated.
To the extent that outward FDI is channelled through foreign jurisdiction to re-invest these funds back in China to take
advantage of policy incentives – the process of “round-tripping” – official statistics may overestimate outward FDI,
although round-tripping should logically be reduced given that domestic and foreign enterprise tax rates were unified at
the beginning of 2008. Possible underestimation of China outward FDI stems from the fact that official figures mainly
show outward FDI from SOEs, which is likely to underestimate private sector outward FDI (Davies, 2012: 3–4).
16
  China is also a major producer and exporter of a wide range of agricultural commodities, for example, in fruit, vegetable,
and livestock products, including apples, garlic, aquaculture products, poultry and pork. Meanwhile, agricultural imports
have also grown sharply since China joined the WTO in 2001, particularly for commodities like soybeans and cotton,
making China one of the world’s top agricultural importers. Although China has generally remained self-sufficient in its
own traditional measure of ‘grains’ (including cereals, soybeans, and potatoes), this policy objective is becoming harder
to attain as China’s consumption expands and domestic production faces resource constraints. In 2012, China’s traditional
measure of self-sufficiency in grain fell just below 90 per cent (Gale, 2013; Lohmar et al., 2009). In February 2014, China
announced the abandonment of its grain self-sufficiency policy. For these reasons, ‘food’ is not included in the analysis
of China’s production capacities in Lewis’ five key sectors.
16

is part of an offshoring process that generally limits the ability to diversify trade flows to the South – a
rough proxy to assess current status of Chinese indigenous technological capabilities.

While China is a major global producer in all four of these broad categories (which are all considered
“pillar” industries), the pattern of trade flows to the South reveals mixed results. Three of the four sectors
show declining Chinese export reliance on OECD markets, with exports of fertilizers exhibiting the lowest
share going to those markets, leaving cement as the only item among the four showing an increasing
reliance on OECD markets. Given the sector’s close links with the processing trade, machinery exports
are given closer scrutiny to highlight the growing role of Chinese firms and their enhanced production
capacities. Importantly, parts of this sector have grown on the back of domestic (rather than foreign)
demand and thus represent a more domestically-integrated kind of manufacturing competition emerging
from China.

Fertilizer exports, of which China exported $7.2bn in 2012 (ranked third globally, by value), have shown a
declining dependence on OECD markets, representing only 16.4 per cent of total Chinese fertilizer exports
in 2012, and where the large majority of export destinations are other developing countries. Cement, by
contrast, where China exported $983.5m in 2012 (ranked first), revealed an increasing proportion going
to OECD markets, accounting for 50.9 per cent of total Chinese cement exports in 2012, where many
of the export destinations are not other developing countries but developed or high-income countries.
Similarly with exports of iron and steel and articles of iron and steel, where China exported $37.1bn
(ranked second) and $56.2bn (ranked first) respectively, the proportion of Chinese exports going OECD
markets has declined over time but still remain relatively high. For China’s iron and steel exports, the
share going to OECD markets declined from 53 per cent to 41.7 per cent from 2001 to 2012, whereas
for China’s articles of iron and steel exports, reliance on OECD markets declined from 68.6 per cent to
50.6 per cent.

Machinery is a special case not only because Lewis considered this sector more difficult to gain
competence due to “economies of scale, continually improving technology, and patented or secret
knowledge”, but also due to its much larger scope compared to other sectors examined above. China
exported $375.9bn in 2012 (ranked first), but like in iron and steel, the share of these exports going to
OECD markets has declined (to a lesser degree) but remains high, from 58.3 per cent in 2001 to 57.6 per
cent in 2012. However, a different picture emerges once two sub-sectors closely linked to the processing
trade are isolated, namely HS-8471 and HS-8473 automatic data processing machines and their parts and
accessories. Crucially, Chinese exports of HS-8471 and HS-8473 show an increasing reliance on OECD
markets from 59.1 per cent in 2001 to 63 per cent in 2012, whereas the rest of the machinery (HS-84)
category reveal a declining trend, going from 56.7 per cent to 51.9 per cent.

Figure 5 provides a further glimpse of the changing structure of China’s machinery exports over the
period 2001 to 2012. In 2012, HS-8471 and HS-8473 combined for a total of $193.9bn in Chinese
exports, representing 51.6 per cent of all machinery (HS-84) exports. This figure remains substantial but
is down significantly from 63.3 per cent in 2001. Over this period, the weight of all other HS-84 four-
digit categories grew from 36.7 per cent to 48.4 per cent of total Chinese machinery exports, to a value
of $182bn in 2012, nearly equalling the combined value of HS-8471 and HS-8473. Some of these other
four-digit HS-84 categories are displayed in the stacked columns of figure 3 to highlight the emergence
of a set of machinery exports that counter the narrative of China’s engagement with the global economy
primarily through investment from MNCs. Domestic Chinese firms are taking an increasingly prominent
role not only in driving the country’s “new wave” of exports, such as in construction machinery and
equipment, but also in diversifying China’s exports markets to other developing countries.

For example, China’s exports of HS-8429 self-propelled bulldozers, excavators, etc. reached $4.9bn in
2012, only 10.8 per cent of which went to OECD markets. This share is down from a level of 31.4 per cent
in 2001 (not shown in figure 5 or in the annex). Similarly, China’s exports of HS-8426 derricks, cranes,
trucks with cranes reached $3bn in 2012, 26.3 per cent of which went to OECD markets. This share is
 17

Figure 5
Changing structure of China’s machinery exports (HS-84), 2001–2012

100 200

90 All other 4-digit 8483 180

machinery categories 8482
(right scale)
80 160
8481
Global value chains
Automatic data
70 processing machines 140
8450
and parts (HS-8471 and
HS-8473) (right scale) 8431
60 120
8430
US$ billions

US$ billions
8429
50 8428 100
8427
8426
Domestic value chains 8421
40 Emergence of selected 80
8419
capital goods (left scale)
8418
30 60

8415
20 40

10 8414 20

8413
0 0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: ITC; Hanson, 2012: 47; EIU, 2011: 5.

Note: See annex for HS four-digit categories in stacked columns.

down from a level of 46.1 per cent in 2001. For China’s exports of HS-8428 lifting/handling/loading
machinery reached $3.5bn in 2012, 28.8 per cent of which went to OECD markets. This share is down
from a level of 50.3 per cent in 2001. To put this into a wider context, these three categories (HS-8429,
HS-8426, HS-8428) alone total $11.4bn, representing only a small proportion of China’s total machinery
(HS-84) exports. Nonetheless, this amount is at roughly the same level of other respective BRICS countries’
total machinery exports in 2012: Brazil – $13.9bn, India – $11.1bn, the Russian Federation – $7.6bn.

These structural changes reflect improvements in domestic firms’ productive capacities, particularly in
precision levels of metal-cutting/shaping facilities, and in metallurgical processes, as well as enhanced
thresholds for strength and durability. In construction machinery, for instance, China’s solid foothold in
the production of cranes, cement trucks, and pumps has evolved to include earth-moving equipment, a
market normally dominated by firms from the United States, the Republic of Korea and Japan. These
trends suggest a different kind of competition emanating from China: unlike the processing trade and
even joint-venture-driven sectors such as the automobile industry, the construction equipment sector
does not rely on FDI to nearly the same extent. Moreover, construction equipment manufacturers grew
rapidly in response to domestic demand, rather than through exports to advanced country markets. For
these reasons, “the growth of the construction equipment industry – and heavy machinery in general –
has been more organic. A relatively comprehensive domestic supply chain has emerged” (EIU, 2011).

A recent study by CLSA, a broker and investment group, tested a range of Chinese-made and Chinese-
branded excavators and found them to be dependable and high-performing, suggesting that leading
Chinese brands such as Sany, Zoomlion, and Liugong, are likely to increase their presence on building
sites across the globe. The onset of the global financial crisis proved to be a turning point for Chinese
domestic construction machinery firms. Prior to the crisis, it is estimated that roughly 90 per cent of
18

Figure 6
China domestic excavator market share trends, by quarter, 2010–2012

60

50 Chinese companies
Market share (per cent, by unit)

40 Japanese companies

30
Rep. of Korea companies
20
American/European
companies
10

0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2010 2011 2012

Source: China Construction Machinery Industry Association, 2013: 33.

Note: American/European companies: Caterpillar, Volvo, Liebherr, Atlas Copco, Xuzhou Zhengling (John Deere).
Chinese companies: Sany, Yuchai, Liugong, Strong, SDLG, Lovol, Xiamen XGMA, Sunward, Zoomlion, Lishide, Shandong
Carter, Rongsheng, Guangxi Kaiyuan, Jonyang Kinetics, Pengpu.
Japanese companies: Komatsu, Hitachi, Kobelco, Sumitomo, Yamaha.
Republic of Korea companies: Doosan, Hyundai-Beijing, Hyundai-Jiangsu.

excavators on Chinese construction sites were foreign-branded, but often made in China. The government’s
massive fiscal stimulus in 2008–2009 (while advanced countries saw sinking equipment sales), however,
led to a construction boom that procured construction machinery from Chinese makers and allowed
them to further expand. According to one account, $250m in government subsidies went to Sany and
$50m went to Zoomlion during 2011–2012. While domestic Chinese firms still lagged foreign firms in
terms of technical know-how, Chinese firms offered buyers such generous financing and discounts that
by 2011 their excavators held a 41.1 per cent share of the domestic market, which grew to over 50 per
cent in 2012 (see figure 6).17

The CLSA study subjected foreign- and domestic-branded made-in-China excavators from six companies
– Sany, Caterpillar, Doosan, Hitachi, Komatsu and Kobelco – to two weeks of robust tests of their
productivity, durability and fuel efficiency. The results indicate that Sany’s performance was not quite
as good as the best, made by Caterpillar, but outperformed their rivals from Japan and the Republic
of Korea. The study concluded that technology gaps, particularly in the medium-sized 20–24.9 tonne
weight class,18 between the best Chinese firms and their foreign rivals are now “almost non-existent”,
and the CLSA expects that Sany and other larger Chinese brands will lead a consolidation drive of the
domestic industry. As shown in table 2, it is the medium-sized 20–24.9 tonne weight class (shaded rows)
that accounts for the greatest share of Chinese excavator exports, adding up to 46.8 per cent and 57.6 per
cent of the total in 2011 and 2012, respectively.

17
  EIU, 2014, China’s best makers of construction gear are now world-class, 21 December, see, http://www.economist.
com/news/business/21591864-chinas-best-makers-construction-gear-are-now-world-class-digging-victory. L Abaffy,
2013, China’s uphill battle, Engineering News-Record, 2 December, see, http://enr.construction.com/products/
equipment/2013/1202-where-east-meets-west-china-hits-a-speed-bump.asp.
18
  H Winn, 2013, CLSA unearths the truth about made-in-China excavators, South China Morning Post, 14 December,
see, http://www.scmp.com/business/article/1380078/clsa-unearths-truth-about-made-china-excavators.
 19

Table 2
China excavator exports, by weight class, 2011–2012

2011 2012
Year-on-year
Weight Quantity Share Quantity Share change Change in share
(Tonnes) (By unit) (Per cent) (By unit) (Per cent) (Per cent) (Percentage points)

<6 853 18.8 787 9.8 -7.7 -9.0

6 to 10 320 7.1 485 6.0 51.6 -1.1
10 to 15 344 7.6 665 8.3 93.3 0.7
20 174 3.8 873 10.9 401.7 7.1
21 1 162 25.7 2 046 25.5 76.1 -0.2
22 785 17.3 1 697 21.2 116.2 3.9
25 95 2.1 256 3.2 169.5 1.1
30 154 3.4 140 1.7 -9.1 -1.7
35 456 10.1 908 11.3 99.1 1.2
40 187 4.1 164 2.0 -12.3 -2.1
Total: 4 530 8 021 77.1

Source: China Construction Machinery Industry Association, 2013: 37.

A spate of acquisitions of foreign companies in recent years, some struggling from the economic
downturn in advanced countries, has provided further upward lift to technology upgrading and export
diversification by Chinese firms in the construction machinery sector. For instance, in April 2012, State-
owned Xuzhou Construction Machinery Group (XCMG) purchased a majority stake in Schwing, one
of Germany’s leading high-end concrete pump makers. In January 2012, Sany Heavy Industry acquired
90 per cent of Germany’s Putzmeister, also an up-market concrete pump maker, based in the Mittelstand.
In February 2012, Guangxi Liugong Machinery also purchased Poland-based Huta Stalowa Wola (HSW),
manufacturer of bulldozers and other crawler machines. In September 2012, Shandong Heavy Industry
acquired a 20 per cent stake in German forklift company Kion Group, and a 70 per cent stake in Kion’s
hydraulics business. In December 2013, Zoomlion Heavy Industry acquired leading German producer of
dry mortar, M-TEC. This deal follows the 2009 purchase of a 60 per cent majority stake in Compagnia
Italiana Forme Acciaio (CIFA), a leading concrete equipment manufacturer. By January 2013, Zoomlion
purchased the remaining shares of CIFA from Goldman Sachs and other investors, reportedly funding
the deal off its balance sheet.19

China’s rise in heavy equipment certainly remains a work in progress, but in terms of SSC, it is important
to note that the higher-value capital goods that most developing countries are already importing, mainly
from OECD countries, are those very same economic sectors in which Chinese manufacturers are
increasingly building capacity. Table 3 provides a sense of these trends, where OECD countries’ global

19
  B Zhang, 2012, Buyouts prime machine maker for global growth, Caixin Online, 23 February, see, http://english.caixin.
com/2012-02-23/100359965.html?p1. Reuters, 2012, China’s XCMG buys majority of Germany’s Schwing, 19 April,
see, http://www.reuters.com/article/2012/04/19/xcmg-schwing-idUSL6E8FJC4720120419. P Marsh, 2012, Chinese
industry faces Mittelstand-off, Financial Times, 12 June. C Bryant, 2012, China’s Sany to acquire Putzmeister, Financial
Times, 29 January. J Du, 2013, No longer poles apart, China Daily, 29 November, see, http://europe.chinadaily.com.
cn/epaper/2013-11/29/content_17140193.htm. Xinhua, 2013, China’s Zoomlion acquires German dry mortar producer,
30  December, see, http://news.xinhuanet.com/english/china/2013-12/25/c_132995948.htm. C Murphy, 2013, China’s
Zoomlion buys Germany’s M-Tec, Dow Jones Newswires, 26 December. Asia Private Equity Review, 2013, Hony &
Mandarin to exit CIFA, 7 January.
20

Table 3
Global exports shares of HS-8429 self-propelled bulldozer, angledozer, grader,
excavator, etc., 2001–2012
(Per cent)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

World ($bn) 13.93 15.03 19.50 25.51 30.66 36.91 47.50 52.19 23.84 36.80 51.83 51.95
OECD 93.54 93.38 90.28 89.74 88.40 87.54 87.02 85.17 81.88 81.56 81.75 80.35
Republic of Korea 4.20 4.74 5.52 5.76 5.96 6.40 6.34 5.95 5.15 7.64 8.93 9.08

China 0.66 0.54 0.46 1.06 1.55 2.74 3.88 5.30 6.40 6.09 7.48 9.40
Brazil 2.26 2.23 2.15 3.36 3.85 3.72 3.06 3.27 2.49 3.67 4.19 4.16
South Africa 0.20 0.17 0.15 0.17 0.20 0.24 0.32 0.40 0.48 0.43 0.41 0.46
Russian Federation 0.56 0.44 0.37 0.34 0.47 0.50 0.53 0.48 0.60 0.36 0.24 0.41
Indonesia 0.08 0.12 0.16 0.19 0.29 0.42 0.30 0.21 0.27 0.32 0.33 0.39
India 0.03 0.01 0.04 0.07 0.06 0.04 0.08 0.14 0.39 0.17 0.31 0.30
Turkey 0.18 0.12 0.11 0.07 0.07 0.11 0.18 0.21 0.31 0.21 0.20 0.25

Source: ITC.

export share in HS-8429 has fallen from 93.54 per cent to 80.35 per cent from 2001 to 2012. Over that
same period, China’s exports in this category have grown rapidly from 0.66 per cent to 9.40 per cent,
roughly equalling the Republic of Korea’s (growing) global export share. (As mentioned above, only
10.8 per cent China’s exports in this category were destined for OECD markets in 2012.) While other
selected emerging countries also saw their global export shares rise quickly (except the Russian Federation),
their global shares remain below half of one per cent. The exception is Brazil, which saw its share almost
double from 2.26 per cent to 4.16 per cent.

Although China’s increased competence in excavators represent only one product category within
construction machinery, not to mention one among a large number of overall machinery20 and other
capital goods categories, these trends provide a glimpse of China’s current technology and economic
development trajectory. Further research is needed to confirm the scope and depth of these trends, but
the findings in this section imply that a wider Chinese “big push” in capital goods is certainly possible,
if not in progress across a range of sectors (Lang et al., 2012; Bouffault et al., 2011; Alberts and Ting,
2010; Alberts et al., 2010; Price et al., 2010). In this vein, the OECD (2010: 77) has already hinted at
some of the possible South-South development implications: “Such a downward shift in the relative price
of capital goods could represent a major growth payoff from the expansion of India and China for the
world economy as a whole, but especially for low-income countries where prices for capital goods have
historically been excessively high”.

Although Chinese technological indigenous capabilities are generally still relegated to lower-end market
segments that appeal to cost-conscious consumers in many of these capital goods (and other) sectors,
the discussion presented above also speaks to mounting momentum of Chinese producers in upgrading
product quality and dependability. As occurred in other East Asian cases, it is not uncommon for new
market entrants to seek to capture entry-level consumers based on price and try to expand from this base
as the brand evolves over time (Tse et al., 2009a). Indeed, it is this upgrading imperative of Chinese
domestic producers that some suggest will lead to a battle for fast-growing “middle-market” segments in

20
  Other broad machinery sectors are: agricultural machinery, machine tools, basic components of machinery, heavy
machinery, power generating machinery, petrochemical general machinery, auto machinery, instruments, office supply
machinery, food and packaging machinery, and others (EU SME Centre, 2011).
 21

emerging countries, where customers demand more sophisticated products than those traditionally offered
by low-cost Chinese producers, yet less sophisticated and costly than those high-end market segments
dominated by foreign companies (Brandt and Thun, 2010; Lang et al., 2012; Tse et al., 2009c: 2–4).

Incidentally, an important component of China’s “going out” strategy has included an apparent openness
to financing and investing in infrastructure, resource processing activities and industrial projects, in Chad,
Ghana, Liberia, Niger, and Nigeria, among others, which are often tied to procurement of equipment,
supplies and services in China (Freemantle and Stevens, 2013b; Brautigam, 2009, 2011b; Downs,
2011, 2012; Rogers, 2008). Gallagher et al. (2012) also note the tendency for Chinese bank loans in
Latin America to focus on infrastructure and heavy industry. The country case below briefly illustrates
how China’s process of industrial upgrading could have potentially dynamic knock-on effects on other
developing countries.

Country case – China and oil refining in Nigeria

The lower pricing points for capital goods (and for industrial financing) could have transformative impacts
for other developing countries in light of China’s apparent willingness to invest in value-added activities,
like processing/refining projects. Viewed as an “un-economic” proposition by traditional investors,
such projects often have a hard time securing long-term financing, but from the Chinese side, are likely
considered from a longer-term investment perspective. China’s offer to build the refineries is linked to
gaining a strategic edge over commercial rivals in winning access to oil reserves,21 but not surprisingly
aspects of the bid play to its strengths: from China’s relative ease of access to capital, to its (over)capacity
in some of these heavy industry projects, both of which stem from China’s current development stage
of investment-led growth.

In May 2010, the China State Construction Engineering Corp. (CSCEC) signed an MOU with the State-
owned Nigerian National Petroleum Corporation (NNPC) agreeing to spend up to $23bn to build three
greenfield oil refineries and a petrochemical plant in Nigeria as part of China’s efforts to secure 6bn
barrels of crude oil reserves. According to the United States Energy Information Administration (EIA),
Nigeria is Africa’s largest oil producer at 2.5m barrels per day (bpd) in 2012, 89 per cent of which was
exported. In contrast, consumption of petroleum products amounts to an equivalent of 0.27m bpd, but
with refineries running at an average capacity utilization of only 20 per cent in the last few years, Nigeria
imported roughly 76 per cent of petroleum products in 2011, including premium motor spirits (petrol),
automotive gas oil (diesel), and dual purpose kerosene (NRSTF, 2012: 7,17). The EIA estimates that
Nigeria imported about 85 per cent of its demand for petroleum products in 2009.22

In light of this high proportion of fuel imports, the cost of providing fuel subsidies in Nigeria has
fluctuated in recent years, but remains at an elevated level. According to some estimates, as international
fuel prices rebounded in 2011, the estimated cost of Nigeria’s fuel subsidy was about $9.30bn, up from
$4.31bn in 2010, $3.01bn in 2009, and $5.17bn in 2008 (Schiere, 2012). According to the Central Bank
of Nigeria, government capital expenditure in 2011 was $5.94bn (or N918.5bn)23 equivalent to 2.6 per
cent of GDP, and which accounted for 19.5 per cent of total government expenditure, and 25.8 per cent
of total federal government revenue. In 2010, the government’s capital expenditure amounted to $5.88bn
(or N884.02bn)24 (CBoN, 2011: 111). Due to limited refining output, the government’s fuel subsidy was

21
  T Burgis, 2010, China’s offer oil Nigerian relations, Financial Times, 18 May; T Burgis, 2010, China in 423bn Nigeria
oil deal, Financial Times, 15 May.
22
  EIA, 2012, Nigeria, Analysis Brief, 16 October, see, http://www.eia.gov/countries/analysisbriefs/Nigeria/nigeria.pdf.
23
  Using the average exchange rate for 2011 of $1: N154.75.
24
  Using the average exchange rate for 2010 of $1: N150.30.
22

about 1.6 times the amount of its capital expenditure in 2011, and in 2010, the government’s fuel subsidy
bill was equivalent to 73 per cent of its capital expenditure.

Domestic improvements in the production of petroleum products – gaining a degree of self-sufficiency

– would presumably provide a fair degree of “policy space” for the Nigerian authorities by freeing up
financial resources that could be re-allocated from fuel subsidies to other development objectives such as
infrastructure and social services. Ultimately, however, the deal was sidelined by the 2013 announcement
that the Nigerian-owned Dangote Group will invest $9bn in a new refinery. The conglomerate already
operates in sectors from concrete and construction, to sugar, salt, and other consumer staples, and it has
been argued that with close political connections, the company is far better placed than Chinese companies
to navigate the complex web of entrenched political-economic interests and to absorb associated political
risks.25 Nonetheless, with cement production being one of the industrial sector’s most energy-intensive,26
the project carries strategic significance for the company, especially given its ambitions to become a
global cement brand.27

Doyin Okupe, senior assistant to Nigerian President Goodluck Jonathan, believes the Dangote deal will
“change the economic and industrial landscape of Nigeria”.28 From a South-South perspective, although
the CSCEC-NNPC deal now appears sidelined, the case reveals perhaps three key points: (i) a sense of
the potentially transformative opportunities for host economies of strategic bilateral Chinese trade and
investment flows; (ii) that despite the benefits such agreements are not assured and still require hard-nosed
negotiation; and more controversially, (iii) the possible reaction to competitive pressures placed on local
(and foreign) companies and investors from these (potential) arrangements.

V. State capitalism meets monopoly capitalism

Any advances made by Chinese firms in climbing up the industrial value chain (and the resulting impacts
on SSC), must be seen in the context of the clear trend toward greater industry consolidation, through
mergers, acquisitions and FDI, of a limited number of globally dominant businesses that are primarily based
in developed countries. In a paper assessing the pros and cons of the “Beijing consensus”, Williamson
(2012: 9) added an important caveat to the “Washington consensus” policy package by critiquing the
concentrated form of capitalism that prevailed in advanced countries in the lead up to the financial crisis,
One should surely distinguish monopoly capitalism from free-market capitalism. It is true that the
Washington consensus, as first articulated by this author, endorsed privatization as a policy, and clearly
this stance is as antithetical to state capitalism as to socialism. But privatizing in order to replace a
nationalized industry with a private monopoly is not what I had in mind.29

This process of consolidation has taken place across a wide range of sectors, from high-tech products,
to branded consumer goods and capital goods, to financial services: sectors where a huge increase in
global output was accompanied by a reduction in the number of leading firms in many industrial sectors

25
  B Mezue, 2013, Nigeria’s big gamble on one indigenous entrepreneur, Harvard Business Review Blog Network,
12 September, see, http://blogs.hbr.org/2013/09/nigerias-big-gamble-on-one-ind/.
26
  EIA, 2013, The cement industry is the most energy intensive of all manufacturing industries, 1 July, see, http://www.
eia.gov/todayinenergy/detail.cfm?id=11911.
27
  C Kay, 2014, Africa’s Richest Man Dangote Mulls Buying Nigeria Oil Fields, Bloomberg, 21 January, see, http://www.
bloomberg.com/news/2014-01-20/africa-s-richest-man-dangote-considers-buying-nigeria-oil-fields.html.
28
  D Hinshaw, 2013, Africa’s richest man bets big on oil refinery, Wall Street Journal, 27 December, see, http://online.
wsj.com/news/articles/SB10001424052702304607104579210322347689090.
29
  It is perhaps no coincidence, as Nolan and Zhang (2010: 107) pointed out, that “companies headquartered in the high-
income countries were in prime position to benefit from the liberalization of international economic relations that was at
the heart of the Washington Consensus”.
 23

(Nolan, 2014). Indeed, not only do Chinese (and other emerging economy) firms have to catch-up to lead
firm “system integrators” at the apex of GVCs that possess superior technologies and powerful brands,
but also with other powerful supplier firms “that now dominate almost every segment of global supply
chains” (Nolan and Zhang, 2010: 98).

For instance, using data from 2006–2009, the number of system integrator firms in the manufacture of
large commercial aircraft was two; of mobile telecommunications handsets and infrastructure, three (each);
of pharmaceuticals, ten; and of construction and agricultural equipment, four and three, respectively. In
these cases, these firms held between half and all of global market share, except in the case of the four
construction equipment firms which held 44 per cent of global market share. Similar trends hold across
many industries for major component firms that supply the system integrators, as well as in the expenditure
of corporate research and development (R&D) resources.

This high degree of industry concentration reinforces the enormous competitive challenges faced by
Chinese “national champion” firms in catching-up to the technological frontier and challenging head-on
the world’s leading MNCs. Some might dismiss China’s support for its firms as a throwback to a pre-
globalization mindset, but a post-financial crisis perspective suggests that China’s concerns may not be
misplaced: “Companies still have national attachments that shape how they behave and, in particular,
their role in developing a particular country’s competences”.30 Given the well-known barriers that limit
the possibility of upgrading in GVCs (Park et al., 2013: 84–86), the Chinese government’s ambitious
industrial policy goals would be even harder to achieve, if not utterly impossible, if it was not consciously
(and sometimes creatively) making use of key policy instruments to further its goals. As the Chairman
of the United States Export-Import Bank forcefully argued,
Believe me, China and other countries will not be shy about using any tool – as much as they can and
for as long as they can – to put their people to work. State-owned enterprises, sovereign wealth funds,
state-directed capital – they will leverage every single one in an attempt to outcompete us (Hochberg,
2012: 9).

Table 4 provides a brief overview of the main industrial policy instruments deployed by Chinese
policymakers. Missing from table 4, however, is a key consideration that makes China’s industrial strategy
resonate with that of Japan and the first-tier NICs (and distinctive from that of other developing countries);
China’s unorthodox ability to better align macroeconomic policies as part of a broader development
strategy (i.e. meso- and microeconomic sectoral policies) in contributing directly to long-term growth.
First, fiscal policies have prioritized development spending, particularly investment in infrastructure and
education, along with subsidies to export industries. Second, monetary policy was integrated with banking/
financial sector and industrial policies, including directed credit and favourable interest rates in order to
directly influence investment and savings behaviour. Moreover, the selective use of capital controls to
ensure a competitive exchange rate was considered as indispensable to encouraging exports and export
diversification (Ocampo and Vos, 2008: 41; Yu, 2008; El-Erian and Spence, 2008; Flassbeck, 2005).

While it is not uncommon to find other developing countries with a similar set of industrial policy
instruments and sector-specific strategies, it is the Chinese Government’s relatively strong financial position
combined with strong macroeconomic fundamentals that make its various industrial policy instruments
and sectoral strategies all the more credible and viable. Below, three examples are briefly provided to
illustrate the strategic nature of China’s competitive advantage in its “ability and willingness to invest”
(Porter, 1990) the capital resources it has painstakingly accumulated:

• In September 2007, the Government created the China Investment Corp. (CIC), a sovereign wealth
fund that was initially provided $200bn from the country’s foreign exchange reserves (now $500bn).31

30
  M Wolf, 2013, Why China will not buy the world, Financial Times, 9 July.
31
  R Sullivan, 2013, Desperately seeking Chinese SWF chairman, Financial Times, 3 June.
24

Table 4
China’s industrial policy toolbox: Overview

Policy instrument Explanation

Fiscal Incentives The Chinese Government can use a powerful set of fiscal incentives, including:
tax exemptions, preferential tax rates, tax offsets, value-added tax refunds, R&D
tax deductions (150 per cent deduction, meaning a 50 per cent subsidy for R&D),
special amortization and depreciation rules, and the lowering of import duties for
core technologies, raw materials, and equipment.
Grants The Government runs a number of nationwide R&D programmes that direct grants
and personnel to key areas and research institutions. Research grants can offer
grants to individual companies: Huawei, for instance, was provided $150m from
State R&D grants in 2010.
Financial support Start-up capital, access to cheap land, access to bank loans (often at subsidized
rates), and lines of buyer credit can be provided by the Government. Strong
State control over the banking sector means that credit can be directed towards
strategic economic activities that can prove to be a critical factor behind the failure
of success of an industry or company.
FDI guidelines Through an investment catalogue, FDI can be encouraged or discouraged in
various areas. Where it is encouraged, FDI brings financial and human capital
and technology. The State has used foreign ownership limitations and required
technology transfer in many sectors.
Government procurement Government procurement is a proven way to stimulate innovation. It can help
new technologies achieve scale, help young firms bridge funding gaps, and
direct funding to key areas. China has actively promoted domestic standards,
requiring indigenous ownership of intellectual property rights, fast-tracking patent
applications, and steering purchases to domestic companies.
Standards The State has encouraged the development of indigenous Chinese technology
standards. Not only does it prioritize purchase and usage of the standards, it can
also restrict the usage of competing international standards. It can also erect
entry barriers for foreign products by requiring compliance with complex and
burdensome localization requirements and standards.
Human resources The Government has made great efforts to attract professionals, mostly Chinese,
who have studies and worked abroad. These returnees (known as ‘sea turtles’, in
Chinese) bring with them a good deal of human capital (and tacit knowledge).
Infrastructure projects Government commitment to infrastructure is a critical factor for developing
industries. Whether telecommunications infrastructure or highways and high-
speed train lines, these investments create the environment necessary for the
other factors listed above to bear fruit.

Source: Ahrens, 2013.

Officially, the CIC is to make long-term investments that maximize the risk-adjusted financial returns
to its shareholder, the State Council, by diversifying investment into a wider range of assets including
equities, bonds, and hedge funds. However, it is likely that CIC’s mandate includes strategic aspects
such as: managing China’s investments in its domestic State banks, supporting outward expansion of
Chinese firms, and managing China’s external investment portfolio that will be more diversified than
China’s foreign exchange reserve portfolio. In November 2007, the CIC assumed the responsibility
for the assets and liabilities of Central Huijin Investment Ltd., which is a major stockholder in China’s
State-owned commercial banks, policy banks, and other joint-stock financial institutions (Martin, 2010).

• In February 2008, the combined $13bn effort by Chinalco and Alcoa to buy 9 per cent of Rio Tinto’s
outstanding shares was a bid to thwart the acquisition of Rio Tinto by BHP Billiton that would have
further enhanced BHP’s pricing power over iron ore, a key input for steel-making. The investment
 25

by Chinalco did not draw on financing from CIC, but Chinalco did receive loans from the China
Development Bank (CDB), which was recapitalized with $20bn from the CIC in December 2007. In
return, CIC received a large equity stake and as of end-2009, CIC held a 48.7 per cent equity stake
in CDB (Martin, 2010; Setser, 2008). In a separate deal, in 2010, Chinese automaker Geely acquired
Swedish automaker Volvo for $1.8bn, where the Volvo’s technology and engineering capabilities were
key aspects for Geely. To finance the deal, Geely secured a $2.1bn of loans from Bank of China, China
Construction Bank, Export-Import (Exim) Bank of China, Geely Automobile Holdings (the group’s
listed arm), and the government of Gothenburg (where Volvo is headquartered).32

• The construction machinery sector benefitted from a large government stimulus package and industry-
specific plans (the latest issued in 2009) that included an array of measures from value-added tax,
procurement, and R&D preferences, to financial incentives to promote the restructuring and merging
of domestic firms, among others (Poon, 2012: 46). As a consequence, cash-flush Chinese firms were
well positioned to gain domestic market share from foreign rivals, but also to opportunistically acquire
leading European construction machinery firms, many of which faced financial difficulties with the
advent of the global financial crisis and the subsequent European debt crisis.33

With regards to the XMCG-Schwing deal,34 in support of “going global” projects by Chinese companies,
the Industrial and Commercial Bank of China (ICBC) arranged a €160m international loan syndication
to finance the deal. Both international and Chinese banks joined in the loan syndication, including the
China Development Bank.35 In the case of Zoomlion, its 2012 annual report shows that the Hunan
provincial government’s SASAC is the company’s largest shareholder with a 16.2 per cent stake,
although other small equity stakes are held by Chinese investment groups, such as Hony Capital Fund,
which was involved in both the CIFA and M-Tec deals (Zoomlion, 2012: 12). The Sany-Putzmeister
deal was worth €525, and was reportedly financed straight off of Sany’s balance sheet.36 Sany is a
private company, although the founder and Chairman of the board of directors, Mr. Liang Wengen,
was elected a representative to the 17th CPC National Congress, and was a representative of the 8th, 9th,
and 10th National People’s Congress (NPC).37 Sany President Mr. Xiang Wenbo was also a member
of the 11th NPC.38 The deal’s remaining 10 per cent equity was bought by CITIC PE Advisors (Hong
Kong, China), which is an affiliate of CITIC Group Corp., which is a wholly State-owned company.39

By integrating macroeconomic policies as part of a broader development framework, Chinese policymakers

are attuned to the idea that there is room for manoeuvre within the confines of the multilateral trading
system, such as in areas of industrial tariffs and subsidies (including export credits), intellectual property
rights, State enterprises, and services (Akyüz 2009: 4; Weiss 2005b: 731–732). In addition, China’s

32
  Harvard Business Review, 2010, Geely’s Volvo Gamble, 16 April, see, http://www.businessweek.com/managing/
content/apr2010/ca20100416_353527.htm. Reuters, 2012, Volvo technology transfer a lifeline for Geely, 21 April, see,
http://www.reuters.com/article/2012/04/21/us-volvo-geely-technology-idUSBRE83K05H20120421.
33
  B Zhang, 2012, Buyouts prime machine maker for global growth, Caixin Online, 23 February, see, http://english.
caixin.com/2012-02-23/100359965.html?p1.
34
  It should be noted that the United States private equity firm the Carlyle Group’s attempt to acquire a majority stake in
XCMG in 2005 was ultimately blocked by the Ministry of Commerce (Mofcom) (Poon, 2012).
35
  Credit Agricole, 2012, Credit Agricole CIB in China closed a major syndication facility for Xugong group, August, see,
http: //www.ca-cib.com/news/major-deals/august-2012-credit-agricole-cib-in-china-closed-a-major-syndication-facility-
for-xugong-group.htm. Oreanda News, 2013. ICBC arranges syndicated loans to support economic growth, 29 March.
36
  P Marsh, 2012, Chinese industry faces Mittelstand-off, Financial Times, 12 June; C Bryant, 2012, China’s Sany to
acquire Putzmeister, Financial Times, 29 January.
37
  See Sany Group website: http://www.sanygroup.com/group/en-us/about/zhonggong.htm.
38
  National People’s Congress, 2012, Deputies to 5th Session of 11th NPC talk about promoting real economy, 13 March,
see, http://www.npc.gov.cn/englishnpc/news/Events/2012-03/13/content_1713370.htm.
39
  See, CITIC Group Corp. website: http://www.citicgroup.com.cn/wps/portal.
26

policymakers also appear well aware of significant room for manoeuvre in policy areas outside or not
comprehensively covered by multilateral disciplines, including: in the choice of exchange rate and capital
account regimes, in the so-called “Singapore issues” of investment, competition policy, government
procurement, and in other areas such as labour and environmental standards, among others (USTR, 2014:
59–70; Drake, 2014; Koch-Weser, 2014; Howell, 2007: 86–91; Hersh, 2014).40

China’s multi-faceted “indigenous innovation” initiative is a good example of China’s creative blending
of industrial policy instruments. Formally introduced in 2006, the initiative links government procurement
preferences to products whose intellectual property rights are owned and originally trademarked in China.
Other aspects include active support for Chinese technological standards that are bestowed to State-owned
or State-backed enterprises, increased research and development spending in targeted sectors, and the
trading of domestic market access to foreign firms based on their willingness to share technology. Since
MNCs are often reluctant to physically locate their latest technologies in China for fear of knowledge
leakages to domestic commercial rivals, some critics liken the indigenous innovation initiative as little
more than an elaborate attempt at forced technology transfer (Segal, 2011; Suttmeier and Yao, 2011;
Chai et al., 2011).

With the rise of so-called “covert protectionism” that falls outside the WTO’s narrower definition for
traditional protectionism, there appears to be growing recognition that the main barriers to a borderless
world are no longer tariffs, but a wide range of different behind-the-border policies and regulatory standards
(Evenett, 2013).41 However, from the discussion above, the ability to identify and use these policies and
standards to bolster the State’s strategic bargaining position is precisely the tactic coaxing China’s move
up the industrial value chain over the longer term. As UNIDO (2013: 140) has argued, “As trade policy
is a key component of any industrial policy, the current policy space (such as under WTO rules) may
need to be fully assessed and taken advantage of, or recovered if needed to promote structural change,
particularly in developing countries”.42 Indeed, China’s bold policy strategy has not gone unnoticed and
some other emerging countries have already started adopting their own indigenous policy initiatives,
albeit crafted to their own objectives and circumstances (Garfield, 2012: 8).43

Past research efforts have attempted to catalogue, to varying degrees, China’s extensive use of industrial
and sectoral policies (CSIS, 2013; Lin and Milhaupt, 2013; Zhang, 2013; Dinh et al., 2013; Haley,
2012; Cliff et al., 2011; Ernst, 2011; Price et al., 2010; Howell et al., 2010; Dahlman, 2009; Poon, 2009;
Stewart et al., 2007; Rosen and Houser, 2007; Pearson, 2005). Given the attention of this section on the
challenges to China’s industrial policy ambitions posed by the high degree of global corporate industrial
concentration, a special focus examining China’s evolving competition policy (i.e. anti-monopoly, anti-
trust) regime would seem a fitting litmus test of China’s overall industrial policy orientation and potential
room for manoeuvre.

40
  Inside US-China Trade, 2014, U.S. says China’s newest GPA offer falls short of the finish line, 29 January; Inside US-
China Trade, 2014, USCBC head sees ITA collapse as casting doubt on Chinese reforms, 14 February; Inside US-China
Trade, 2013, U.S. signals greater caution on China’s bid to join services deal than EU, 6 November; Inside US-China
Trade, 2013, Shanghai FTZ has not yet yielded major results, could stall broader reforms, 13 November.
41
  S Donnan, 2013, Former WTO head urges reform of global body, Financial Times, 25 November; Economist, 2013,
Protectionism: the hidden persuaders, 12  October, see, http://www.economist.com/news/special-report/21587381-
protectionism-can-take-many-forms-not-all-them-obvious-hidden-persuaders.
42
  Or put less eloquently, one United States industry lobbyist opined, China “has thoroughly examined all the [loop]holes
in the WTO system and it is working to drive trucks through those holes” [S Otteman, 2010, China defends innovation
policy, but U.S. industry wants overhaul, Inside US-China Trade, 3 March.].
43
  G Chazan, 2012, Indigenisation: Legislation suggests better prospects for local groups, Financial Times, 23 July; Inside
US-China Trade, 2011, U.S. watches India telecom rule for China-like innovation aspects, 6 July.
 27

VI. Anti-monopoly policy with Chinese Characteristics44

Following 13 years of deliberation, China’s first comprehensive anti-monopoly law (AML) came to force
in August 2008. Since then, China has quickly emerged as an important anti-trust jurisdiction both for
domestic companies and for MNCs with activities in China. Since its enactment in 2008, various drafts of
implementing rules have been devised to provide further guidance and clarity on the broad legal framework
established in the AML, covering the main areas of: (i) rules prohibiting restrictive (horizontal, vertical)
agreements and the abuse of a dominant market position; (ii) merger rules to control large M&A activity
and prevent mergers that restrict competition; (iii) rules prohibiting the abuse of administrative power
that leads to restrictions on competition (Norton Rose, 2012; Poon, 2009).

Although the various elements of implementing rules have shown a degree of convergence between
Chinese AML rules and international anti-trust norms, particularly as Chinese antimonopoly agencies
gain more experience, some practitioners worry that factors such as industrial policy, protectionism and
employment effects have unduly influenced aspects of AML implementation (Ohlhausen, 2013; Sokol,
2014; Tucker, 2013).45 Recently the State Administration for Industry and Commerce (SAIC)46 issued
the sixth draft of “Rules on the Prohibition of Abuses of Intellectual Property Rights for the Purposes of
Eliminating or Restricting Competition” (the Draft IP Rules) which still contain a number of controversial
provisions surrounding firms with a dominant market position and which is likely to have a major impact
on intellectual property rights (IPRs) licensing and technology transfer practices in China.

Under the Draft IP Rules, companies with a “dominant market position” are prohibited from certain types
of behaviour in exercise of their IPRs that result in abuse of that market power. A dominant market position
is defined as the ability of a firm to control the price, quantity or other trading conditions in the relevant
market, or to obstruct or affect the entry of another firm into the relevant market. Three key non-exhaustive
types of behaviour are identified that will be considered by the SAIC as an abuse of a dominant market
position: (i) discriminatory refusals to license, or a refusal to license essential IPR; (ii) unjustified tie-in/
bundling clauses; and (iii) attaching unreasonable trading conditions to an IPR agreement.

While the prohibition of “unreasonably high pricing” on IPR licensing has been removed from this draft
after being criticized for effectively introducing price regulation into the market, the Draft IP Rules
maintain that companies with a dominant market position are prohibited to refuse to license IPR in an
unequal and discriminatory manner and without justification. Moreover, the Draft IP Rules appear to
introduce the application of an “essential facilities doctrine” IPR regulation in China. Under the current
daft, the essential facilities doctrine will prohibit a dominant firm’s refusal to license IPR:

• where the IPR is necessary for the licensee to compete in the relevant market and cannot in practice
be avoided;
• where the refusal will render the licensee unable to compete effectively in the relevant market;
• where the refusal will have an adverse impact on competition and innovation, making it impossible
to satisfy consumer demand in the market.

44
  Unless otherwise indicated, this section is based on Han and Bird (2013).
45
  MK Ohlhausen, 2013, Illuminating the story of China’s anti-monopoly law, Antitrust Source, October, see, http://www.
ftc.gov/sites/default/files/documents/public_statements/illuminating-story-chinas-anti-monopoly-law/1310amlstory.pdf.
46
  The SAIC is one among the four main Chinese antimonopoly enforcement institutions. The others are: the Antimonopoly
Commission (reporting to the State Council), the Ministry of Commerce (MOFCOM), and the National Development
and Reform Commission (NDRC). These institutions are mandated with different aspects of antimonopoly enforcement,
with the SAIC responsible for enforcing the rules and the prohibition on the abuse of administrative power in relation to
non price-related matters (Norton Rose, 2012).
28

Importantly, the approach used in these clauses of the Draft IP Rules is significantly broader than in
related provisions found in anti-trust laws in the European Union and the United States. In the EU’s
case, the refusal to license by a dominant firm will only be prohibited in “exceptional circumstances”,
generally limited to a refusal by a dominant firm in an upstream market to license IPR without objective
justification: (i) where it is indispensable to the emergence of a new product in a secondary market; and
(ii) where the refusal excludes competition in that secondary market.

In the United States, judicial courts have been cautious in applying the essential facilities doctrine to
refusals to license IPR and have generally limited its application to market dominant positions of secondary
downstream markets. By comparison, China’s Draft IP Rules focus on the “relevant market”, which could
also include a market at the same level or segment in the supply chain. A policy briefing by the law firm
Freshfields Bruckhaus Deringer contemplates the following possibility:
Equally there is no requirement in the Draft IP Rules that the refusal to license prevents the emergence
of a new product, only that consumer demand is not met. This could include consumer demand for an
existing product. The provision is therefore troubling in that it remains open as to whether companies
in China could force a dominant competitor at the same level to license essential IPR so that it can then
use that IPR to produce the same product as the licensor and compete directly against him. Much will
depend on the definition of the market in any individual case (Han and Bird, 2013: 4).

Ultimately, it remains to be seen how China’s anti-trust regime and implementation will evolve, but
Chinese authorities have shown increasing self-confidence and have intensified their efforts on domestic
firms and MNCs. Beijing’s enforcement activism have recently included handing-out stiff penalties on
manufacturers of infant milk powder, liquid crystal display panel and liquor price-fixing, and a wide
ranging investigation into graft and price-fixing in the pharmaceuticals, auto, and semiconductor industries,
among other actions (Ha et al. 2014).47 Looking forward, these signs bode well from a Chinese policy
space perspective.

VII. Concluding Remarks: Can China be Leveraged?

China clearly has yet to attain sufficient production capacities in all of the five key sectors to anchor
Lewis’ vision of self-sustaining growth in the South, but observable progress is being made in medium
technology capital goods, particularly in machinery equipment sectors. That China is still in the process of
upgrading its productive capacities and carrying out its industrial policy ambitions is of primary strategic
relevance to many developed country governments and firms, and inextricably linked to assessments of
their bargaining power vis-à-vis China’s economy and domestic firms. On this front, Chinese authorities
seem adept at utilizing policy levers to strengthen their power at the bargaining table.

The strategic relevance is perhaps even greater for other developing country governments and firms, in
light of China’s continuing developing country status and the common catch-up development objectives
that entails. Though most developing country firms do not possess the technological, managerial know-
how to leverage against China, most do hold valuable bargaining chips in various guises related to natural
resources, access to markets, geographical location and logistics, and some human capital, not to mention
other areas related to geo-political, diplomatic and military interests that can also be carefully considered.
Some cases have already emerged, for example, in Mongolia and Myanmar, where the smaller country

47
  J Anderlinin, 2014, Multinationals fret as China’s antimonopoly probes intensify, Financial Times, 6 August; W-G
Cheng, 2013, Watchdog intensifies efforts to enforce regulatory conditions, Financial Times, 27 November; T Mitchell,
2013, Foreign companies under heavy scrutiny in China, Financial Times, 9 August; T Mitchell, 2013, Europe urges
China to cede business control, Financial Times, 5 September; D Pilling, 2013, Beijing takes on big beasts of global
drugs industry, Financial Times, 24 July; S Zadek, 2013, China’s corporate crackdown, Project Syndicate, 20 August,
see, http://www.project-syndicate.org/commentary/corporate-responsibility-with-chinese-characteristics-by-simon-zadek.
 29

pressed its demands on China (with varying degrees of efficacy),48 which could also lead to spillover
effects on other foreign investors.

The trick for developing countries, perhaps, will be a shift in the perception of their own bargaining power
on the narrow basis of bilateral relations, to a “triangular” (or “multi-nodal”) concept that deliberately yet
carefully recognizes the heightened competitive nature that exists between a host country’s respective bilateral
partners, say, China and the United States/EU (Magnus, 2013: 2–3; Sutter, 2014). This is already apparent
in some cases, such as when foreign investors compete to gain access to natural resources, or when leaders
pronounce a “look east” foreign economic policy, or over security/political issues. Taking a step further,
some Chinese scholars have even argued that developing countries, “are the strategic support, foundation
and prerequisite for China’s better relationship with great powers and its neighbors” (Sun 2014: 15).

In light of China’s stage of industrialization, however, developing countries may be able to garner more
lasting economic benefits in bilateral negotiations by showing a degree of cognizance of Beijing’s own
strategic industrial policy goals and efforts to gain any edge over advanced country MNCs (and vice versa
for other foreign investors concerned about competition from China and other emerging countries). In
return, developing countries should sharpen their demands to stress enhanced opportunities for learning,
technical progress, investment and ultimately structural change in their own domestic economies. In
short, a “triangular” approach could allow a host country to more effectively build bargaining leverage
vis-à-vis foreign investors in general, which is not dissimilar from China’s own strategic approach to
foreign investment.

It is also important, in the longer term, for developing countries to benefit from trying to make use of
policy spaces that China has carved out for itself and, to some extent, legitimized within the global
economic governance system in light of its newfound economic heft. Concepts such as “industrial
policy”, “indigenous innovation” and “State capitalism” were not invented by China, but have regained
policy cogency mainly because China has convincingly demonstrated how they can effectively contribute
to growth, poverty reduction, and development.49 For instance, it is not unreasonable to suggest that
China would have less of an issue partnering with other SOEs, or conducting “less ambitious” free trade
agreements (Wise, 2012),50 or even contemplating strategic barter trades,51 should other developing
countries decide to more aggressively pursue such alternative options as part of their developmental
strategies. Even some advanced economies have taken advantage of China’s policy flexibility, as witnessed
in a “creative” deal that saw Peugeot Citroen sell equity stakes to China’s Dongfeng Motor and the French
Government without contravening EU rules on State aid for companies.52

In China, precisely because its lofty industrial policy ambitions remain unfulfilled, other developing
countries have an influential ally pursuing an East Asian State-led developmental strategy that was assumed
to be obsolete and irrelevant in the Washington Consensus era of globalization. Even in a so-called post-

48
  H Warrell and T Johnston, 2011, Burmese junta grows wary of China’s ever closer embrace, Financial Times, 7 April;
L Hook, 2011, Burma sends vice-president on China visit in effort to calm dam tensions, Financial Times, 8 October;
L Hook Leslie, 2012, Mongolia plans legislation to curb foreign investment, Financial Times, 3 May; L Hook, 2012,
China drops effort to buy Mongolia mine, Financial Times, 4 September.
49
  In this regard, Sun (2014: 12) contends that, “From Beijing’s perspective, the popularity of the China Model is the
best way to validate the viability of the Chinese system”.
50
  T Etsushi et al., 2013, China asserts self at ASEAN, seeks alternative to TPP, Asahi Shimbun, 10 October, see, http://
ajw.asahi.com/article/asia/china/AJ201310100071; K Brown, 2010, Biggest regional trade deal unveiled, Financial
Times, 1 January.
51
  L Bingyang, 2013, Stock market likes the idea of Thai rice for Chinese rails, Caixin Online, 15 October, see, http://
english.caixin.com/2013-10-15/100592163.html; M Peel, 2014, China ditches deal to buy 1.2m tonnes of Thai rice,
Financial Times, 4 February.
52
  S Gordon, 2014, Peugeot must transform to justify French rule-bending, Financial Times, 26 February; T Mitchell,
2014. Dongfeng reveals ambitions after Peugeot deal, Financial Times, 28 March.
30

Washington Consensus era, with the rules of the global trading system showing no signs of rebalancing in
favour of developing country interests, these kinds of kindred “fellow traveler” development partners are
hard to come by (Lin and Wang, 2014). Far from relying on the kindness of strangers, though, maximizing
dynamic South-South benefits will require an attitudinal change in other developing countries to shed
their passive growth strategies to also increasingly devise their own active industrial policies tailored
to their developmental stages (UNIDO, 2013: 148–150; Chang, 2012; Rodrik, 2010; UNCTAD, 2007;
Lall, 2004). Indeed, some of these South-South dynamics appear to be already in play under the rubric
of “indigenous” innovation/development.

From a two-economy (the United States and China) global imbalances perspective, Jim O’Neill of
Goldman Sachs simply argued, “this decade is all about the United States becoming a bit less like the old
US and a bit more like the old China and China becoming a bit less like the old China and bit more like
the old US” (Chatham House, 2012: 13). Similarly, from a South-South viewpoint, can other developing
countries contemplate being more like the “old China”? In lamenting the inability of Indian Government
institutions to cope with the demands of fast economic growth, Raghuram Rajan noted, “in addition to
more investment, India needs less consumption and higher savings”.53

Here, economists often raise the issue of the “fallacy of composition” or the adding-up problem: if all
developing countries were to suddenly switch to an investment-led growth strategy that boosted production
and exports, which economy would have the wherewithal in demand to absorb all of this production?
Though an important consideration, it should be noted that the “fallacy of composition” is a narrow
construct based on an export-oriented strategy rooted in static comparative advantage, which precludes
wider dynamic considerations of an evolving basket of production and export items and the policy tools
needed to spur this process of diversification and industrial upgrading.54

Moreover, all developing countries are unlikely to forcefully shift to investment-led growth all at the
same time and to the same degree; indeed, it took China’s policymakers some time before the pieces of
this puzzle were in place. This view stems from insights provided by Hirschman (1958: 28; emphasis
added), who argued that the main bottleneck holding back development was not the lack of one or even
of several needed factors or elements (such as capital, education, industrial subsidies or tariff protection,
good governance, rule of law, etc.) that must be combined with other elements to produce development,
“but with the deficiency in the combining process itself”. As Hirschman further explained,
Our diagnosis is simply that countries fail to take advantage of their development potential because, for
reasons largely related to their image of change, they find it difficult to take the decisions needed for
development in the required number and at the required speed. As such, this diagnosis is less meaningful
than others: it does not focus immediately on the factor which, once imported or generated within the
economy in sufficient quantities, will solve the problem. Rather, the shortages in specific factors or
“prerequisites” of production are interpreted as a manifestation of the basic deficiency in organization.

For these reasons, other developing countries that are able to gradually overcome these basic deficiencies
in organization may encounter South-South “first-mover” development benefits in actively understanding
and engaging China’s dynamic development model. Such efforts, especially at China’s current stage of
development, will also allow other countries selective learning opportunities from China’s experience,
which could be part of a strategic longer term objective to re-shape economic policies within a national
framework more conducive to catch-up and self-sustaining growth.

53
  R Rajan, 2013. Why India Slowed, Project Syndicate, 30 April, see, http://www.project-syndicate.org/commentary/
the-democratic-roots-of-india-s-economic-slowdown-by-raghuram-rajan.
54
  In contrast, for example, the broader concept of the “flying geese” pattern of economic development describes a
sequential (but not automatic) ordering of the catching-up process of industrialization of latecomer developing economies.
The “flying geese” concept more explicitly incorporates dynamic temporal production cycle considerations, and policy
responses, in relation to evolving intra-industry, inter-industry, and international division of labour dimensions (Lin, 2011;
Commission on Growth and Development, 2008: 94–96; Akamatsu, 1962).
 31

Annex
HS categories listed in stacked columns in figure 5

China's export share to

HS-4 digit OECD markets, 2012
category Description (Per cent)

8483 Transmission shafts and cranks; bearings housings; gears and 65.5
gearing; flywheels and pulleys
8482 Ball or roller bearings 55.4
8481 Taps, cocks, valves and similar appliances for pipes, boiler shells, 63.7
tanks, vats and the like
8450 Washing machines – household or laundry-type 55.9
8431 Parts suitable for machinery of headings HS-8425 to HS-8430 61.4
8430 Other moving, grading, levelling, excavating, extracting etc. machinery; 23.1
snow ploughs/blowers
8429 Self-propelled bulldozers, scrapers, graders, levellers, shovel loaders, 10.8
taping machines and the like
8428 Lifting, handling, loading or unloading machinery, not elsewhere 28.8
specified
8427 Self-propelled works trucks – powered by an electric motor 43.7
8426 Derricks, cranes, mobile lifting frames and other lifting machinery 26.3
8421 Centrifuges, filtering or purifying machinery and apparatus for liquids 48.9
or gases
8419 Non-domestic dryers and temperature changing apparatus; 41.2
instantaneous water heaters
8418 Refrigerators and freezers; heat pumps other than for air conditioning 59.7
8415 Air conditioning machines (air conditioners) 52.2
8414 Air/vacuum pumps, air/gas compressors and fans; ventilating hoods 51.9
with fans
8413 Pumps for liquids; liquid elevators 49.0
32

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 41

UNCTAD Discussion Papers

No. Date Author(s) Title

217 November 2014 Yılmaz Akyüz Internationalization of finance and changing

vulnerabilities in emerging and developing economies
216 April 2014 Andrew Cornford Macroprudential regulation: Potential implications for
rules for cross-border banking
215 March 2014 Stephany Griffith-Jones A BRICS development bank: A dream coming true?
214 December 2013 Jörg Mayer Towards more balanced growth strategies in developing
countries: Issues related to market size, trade balances
and purchasing power
213 November 2013 Shigehisa Kasahara The Asian developmental State and the Flying Geese
paradigm
212 November 2013 Vladimir Filimonov, Quantification of the high level of endogeneity and of
David Bicchetti, structural regime shifts in commodity markets
Nicolas Maystre and
Didier Sornette
211 October 2013 André Nassif, Structural change and economic development: Is Brazil
Carmem Feijó and catching up or falling behind?
Eliane Araújo
210 December 2012 Giovanni Andrea Cornia Development policies and income inequality in selected
and Bruno Martorano developing regions, 1980–2010
209 November 2012 Alessandro Missale and Multilateral indexed loans and debt sustainability
Emanuele Bacchiocchi
208 October 2012 David Bicchetti and The synchronized and long-lasting structural change on
Nicolas Maystre commodity markets: Evidence from high frequency data
207 July 2012 Amelia U. Santos- Trade, income distribution and poverty in developing
Paulino countries: A survey
206 December 2011 André Nassif, The long-term “optimal” real exchange rate and
Carmem Feijó the currency overvaluation trend in open emerging
and Eliane Araújo economies: The case of Brazil
205 December 2011 Ulrich Hoffmann Some reflections on climate change, green growth
illusions and development space
204 October 2011 Peter Bofinger The scope for foreign exchange market interventions
203 September 2011 Javier Lindenboim, Share of labour compensation and aggregate demand
Damián Kennedy and discussions towards a growth strategy
Juan M. Graña
202 June 2011 Pilar Fajarnes An overview of major sources of data and analyses
relating to physical fundamentals in international
commodity markets
201 February 2011 Ulrich Hoffmann Assuring food security in developing countries under the
challenges of climate change: Key trade and development
issues of a fundamental transformation of agriculture
200 September 2010 Jörg Mayer Global rebalancing: Effects on trade flows and employment
199 June 2010 Ugo Panizza, International government debt
Federico Sturzenegger
and Jeromin Zettelmeyer
198 April 2010 Lee C. Buchheit and Responsible sovereign lending and borrowing
G. Mitu Gulati
197 March 2010 Christopher L. Gilbert Speculative influences on commodity futures prices
2006–2008
196 November 2009 Michael Herrmann Food security and agricultural development in times of
high commodity prices
42

No. Date Author(s) Title

195 October 2009 Jörg Mayer The growing interdependence between financial and
commodity markets
194 June 2009 Andrew Cornford Statistics for international trade in banking services:
Requirements, availability and prospects
193 January 2009 Sebastian Dullien Central banking, financial institutions and credit creation
in developing countries
192 November 2008 Enrique Cosio-Pascal The emerging of a multilateral forum for debt
restructuring: The Paris Club
191 October 2008 Jörg Mayer Policy space: What, for what, and where?
190 October 2008 Martin Knoll Budget support: A reformed approach or old wine in new
skins?
189 September 2008 Martina Metzger Regional cooperation and integration in sub-Saharan Africa
188 March 2008 Ugo Panizza Domestic and external public debt in developing
countries
187 February 2008 Michael Geiger Instruments of monetary policy in China and their
effectiveness: 1994–2006
186 January 2008 Marwan Elkhoury Credit rating agencies and their potential impact on
developing countries
185 July 2007 Robert Howse The concept of odious debt in public international law
184 May 2007 André Nassif National innovation system and macroeconomic policies:
Brazil and India in comparative perspective
183 April 2007 Irfan ul Haque Rethinking industrial policy
182 October 2006 Robert Rowthorn The renaissance of China and India: implications for the
advanced economies
181 October 2005 Michael Sakbani A re-examination of the architecture of the international
economic system in a global setting: Issues and proposals
180 October 2005 Jörg Mayer and Tripling Africa’s Primary Exports: What? How? Where?
Pilar Fajarnes
179 April 2005 S.M. Shafaeddin Trade liberalization and economic reform in developing
countries: structural change or de-industrialization?
178 April 2005 Andrew Cornford Basel II: The revised framework of June 2004
177 April 2005 Benu Schneider Do global standards and codes prevent financial crises?
Some proposals on modifying the standards-based approach
176 December 2004 Jörg Mayer Not totally naked: Textiles and clothing trade in a quota
free environment
175 August 2004 S.M. Shafaeddin Who is the master? Who is the servant? Market or
Government?
174 August 2004 Jörg Mayer Industrialization in developing countries: Some evidence
from a new economic geography perspective
173 June 2004 Irfan ul Haque Globalization, neoliberalism and labour
172 June 2004 Andrew J. Cornford The WTO negotiations on financial services: Current
issues and future directions
171 May 2004 Andrew J. Cornford Variable geometry for the WTO: Concepts and precedents
170 May 2004 Robert Rowthorn and De-industrialization and the balance of payments in
Ken Coutts advanced economies
169 April 2004 Shigehisa Kasahara The flying geese paradigm: A critical study of its
application to East Asian regional development
168 February 2004 Alberto Gabriele Policy alternatives in reforming power utilities in
developing countries: A critical survey
 43

No. Date Author(s) Title

167 January 2004 Richard Kozul-Wright Globalization reloaded: An UNCTAD Perspective

and Paul Rayment
166 February 2003 Jörg Mayer The fallacy of composition: A review of the literature
165 November 2002 Yuefen Li China’s accession to WTO: Exaggerated fears?
164 November 2002 Lucas Assuncao and Domestic climate change policies and the WTO
ZhongXiang Zhang
163 November 2002 A.S. Bhalla and S. Qiu China’s WTO accession. Its impact on Chinese
employment
162 July 2002 Peter Nolan and The challenge of globalization for large Chinese firms
Jin Zhang
161 June 2002 Zheng Zhihai and China’s terms of trade in manufactures, 1993–2000
Zhao Yumin
160 June 2002 S.M. Shafaeddin The impact of China’s accession to WTO on exports of
developing countries
159 May 2002 Jörg Mayer, Dynamic products in world exports
Arunas Butkevicius and
Ali Kadri
158 April 2002 Yılmaz Akyüz and The making of the Turkish financial crisis
Korkut Boratav
157 September 2001 Heiner Flassbeck The exchange rate: Economic policy tool or market price?
156 August 2001 Andrew J. Cornford The Basel Committee’s proposals for revised capital
standards: Mark 2 and the state of play
155 August 2001 Alberto Gabriele Science and technology policies, industrial reform and
technical progress in China: Can socialist property rights
be compatible with technological catching up?
154 June 2001 Jörg Mayer Technology diffusion, human capital and economic
growth in developing countries
153 December 2000 Mehdi Shafaeddin Free trade or fair trade? Fallacies surrounding the theories
of trade liberalization and protection and contradictions in
international trade rules
152 December 2000 Dilip K. Das Asian crisis: Distilling critical lessons
151 October 2000 Bernard Shull Financial modernization legislation in the United States –
Background and implications
150 August 2000 Jörg Mayer Globalization, technology transfer and skill accumulation
in low-income countries
149 July 2000 Mehdi Shafaeddin What did Frederick List actually say? Some clarifications
on the infant industry argument
148 April 2000 Yılmaz Akyüz The debate on the international financial architecture:
Reforming the reformers
147 April 2000 Martin Khor Globalization and the South: Some critical issues
146 February 2000 Manuel R. Agosin and Foreign investment in developing countries: Does it
Ricardo Mayer crowd in domestic investment?
145 January 2000 B. Andersen, Copyrights, competition and development: The case of
Z. Kozul-Wright and the music industry
R. Kozul-Wright

UNCTAD Discussion Papers are accessible on the website at http://unctad.org.