Wider Opening Up for Stronger Chinese Industry

From: English Edition of Qiushi Journal Updated: 2013-11-07 15:42
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The expansion of opening up represents an important driving force in China’s efforts to raise the quality and efficiency of its industrial development. Following a period of unremitting efforts, Chinese industry has begun to boast its own core competitiveness, fueling China’s transition from a major industrial nation to a leading industrial nation. In order to achieve our goal of becoming a leading industrial nation, we must resolutely promote development, reform, and innovation through opening up, thoroughly transform and upgrade our industry, and improve the quality and efficiency of our industrial development.

I. A new starting point for the open development of China’s industry

Since the launch of the reform and opening up drive 35 years ago, China’s commitment to opening up as a basic state policy has brought about a historic leap forward in its industrial development. Today, China boasts an independent and fully comprehensive modern industrial system which includes all industrial sectors listed in the United Nations International Standard Industrial Classification (ISIC). This industrial framework is essentially able to meet the needs for China’s economic and social development.

China’s manufacturing industry is the largest in the world. The country is the number one producer of over 220 of the 500 major industrial products, while its output of crude steel, cement, computers, air conditioners, and color TV sets accounts for about half of the world total. Figures show that China’s manufacturing output accounted for 19.8% of the global manufacturing output in the year 2010. Moreover, the combination of relatively low labor costs, a complete set of industries, and excellent infrastructure has endowed China with unique advantages in the development of industry, allowing for constant increases in the competitiveness of its manufacturing sector. According to a report issued by the United Nations Industrial Development Organization (UNIDO), China’s Competitive Industrial Performance (CIP) index has risen from 31st place globally in 2000 to 5th place in 2010.

With the rapid development of industry, China’s economy has succeeded in integrating itself into the world economy. In 2012, China’s commodity exports accounted for 11.2% of the global total, making it the world’s largest exporter of commodities, with industrial products accounting for 95% of its exports. China’s commodity imports in the same year stood at 9.8% of the global total, making it the world’s second largest importer of commodities. China has attracted more foreign investment than any other developing country for 21 consecutive years, with the country’s share of global foreign investment having now risen to 7%. Moreover, with the accelerated efforts of Chinese enterprises to “go global,” China’s non-financial outward FDI (foreign direct investment) has now reached US$77.2 billion, and a number of multinational corporations have already emerged.

An A320 jetliner under assembly at the Airbus final assembly facility in Tianjin on September 7, 2010./ Photo by Xinhua reporter Liu Haifeng

China’s rapid rise as a major industrial nation has come in the midst of the country’s constantly deepening opening up drive. Despite this, however, scale without strength and a lack of core competitiveness are increasingly becoming a problem for China’s industry. The main advantages of China’s manufacturing sector include a vast market and relatively low-cost factors of production. However, such low-cost advantages are mainly associated with low to mid-level industries, products, and production processes. Currently, China’s open economy is still characterized by an extensive mode of development: processing trade accounts for 42.1% of China’s exports, and the majority of enterprises lack core technologies and independent brands, meaning that their products are low value-added and bring in very slight returns. For a long time, China has relied on its low-cost advantage to occupy international markets. However, this has given China very little say in international trade, especially with regard to prices, and as a result the majority of profits have gone to foreign enterprises. In addition, the relatively inadequate capacity of Chinese enterprises to operate in an international environment and to protect their legitimate rights and interests by using common international rules has increased the risk of their efforts to go global.

Therefore, China needs to find an opportune time to rebalance its opening up strategies and priorities. Given the lack of capital and technology that China had in the early years of the reform and opening up drive, it made sense for China to lay the emphasis of opening up on expanding exports and utilizing foreign capital at that time. But the situation now is different: China has become the world’s largest holder of foreign exchange reserves; 73 Chinese enterprises have been listed in the Fortune 500 rankings; and a structural surplus has emerged in the country’s manufacturing sector. This means that China has entered a new stage in which equal emphasis must be placed on “bringing in” and “going global.” Therefore, in addition to optimizing its trade structure and making more effective use of foreign capital, China must accelerate its “going global” strategy and participate actively in global economic governance.

II. New conditions in the open development of China’s industry

In essence, the process of promoting economic and social modernization is a process of promoting industrialization. Therefore, it is essential that we gain an accurate grasp of the new opportunities and new challenges facing China’s industrial development. On the basis of that understanding, we must expand, broaden, and deepen our efforts to promote the opening up of our industries to the outside world, and strive to make new advances with regard to the overall strength and core competitiveness of China’s industry.

From an international perspective, the deepening of economic globalization is causing profound changes in the global industrial chain. First, profound adjustments have taken place in the international industrial division of labor. Many developed countries have launched strategies to re-industrialize and bring manufacturing back. Making use of their financial and technical advantages, these countries have moved quickly to control the higher end of the industrial value chain, while the emerging economies have increased their input in industries where they enjoy comparative advantages. Under such circumstances, China’s industry faces the predicament of being squeezed by developed countries and emerging economies. But this situation has also given China the opportunity to improve its standing in the international division of labor by making use of global innovation and factors of production. Second, competition for markets is becoming increasingly fierce. The global economy has remained sluggish since the outbreak of the international financial crisis. With noticeable changes in the structure of market demand, the international scramble for markets has become increasingly fierce, and all forms of trade protectionism have reappeared. As a result, China has been confronted with increasing trade friction and a growing number of trade disputes. In the year 2012, China faced 77 trade remedy investigations involving a total sum of US$27.7 billion, representing increases of 11.6% and 369.5% over the previous year respectively. Third, scientific and technological innovations and industrial reform are nurturing new breakthroughs. Since the turn of the century, unprecedented levels of innovation have been seen in science and technology, industry, and business modes, demonstrating that a new industrial revolution is on the horizon. To a large extent, China’s position in the world economy will be determined by whether or not it can seize on a new round of development, which will be characterized by the integration of information and network technologies and advanced manufacturing technologies, and thereby establish a leading edge in scientific, technological, and industrial competition.

Domestically speaking, profound changes in the external and internal conditions of China’s industrial development have made industrial transformation an extremely pressing task. For a considerable period of time, China’s extensive industrial model has been characterized by the excessive consumption of energy resources and serious environmental pollution. At present, China’s ecological environments and energy resources are no longer able to sustain this extensive expansion, which is characterized by high levels of input, consumption, and pollution. On the other hand, the weakening of China’s traditional advantages has highlighted the urgent need to create new competitive advantages. In recent years, labor costs have increased drastically, and prices of factors of production such as land and fuel have also continued to rise, gradually undermining China’s traditional low-cost advantage. Therefore, the only chance that China has of becoming a leading industrial nation is to adopt a new approach to industrialization. In order to enhance our international competitiveness, we must rapidly implement our strategy of innovation-driven development, attach importance to improving the inherent quality of industrial development, strive to foster and create new competitive advantages, and facilitate the dynamic and orderly transition of our competitive advantages.

Economic globalization and China’s accelerated integration into the world economy are irreversible trends. Against this backdrop, the only way that China can gain new competitive advantages in global competition is by keeping up with the trends in world economic development and participating fully in international competition and the industrial division of labor. History has shown us that a closed-door approach to development will lead to nothing but a dead end. From a long-term perspective, China will need to adopt a more proactive opening up strategy if it is to foster new advantages in industrial competition. To do this, we must work to better integrate our industry into the global economic system, promote the transformation and upgrading of our industries through wider opening up, and strive to enhance the capacity of our industrial enterprises to optimize resource allocation on a global scale, thereby tempering them through fierce international competition.

III. Promoting the transformation and upgrading of industries through a policy of opening up

With a view to promoting China’s transformation from a major industrial nation into a leading industrial nation, we need to continue to open up on a higher level, plan the transformation and upgrading of domestic industries in the context of global industrial changes, and make better use of both domestic and foreign markets and resources.

1. We need to enhance the core competitiveness of industries. By continuing to attract investment, technology, and high-caliber professionals from overseas, we should support multinational corporations in setting up R&D centers and increasing R&D investment in China, actively encourage high-tech personnel to set up enterprises or engage in scientific research in China, and give play to the role of foreign brainpower in promoting the transition from “Made in China” to “Created in China.” In addition, we need to encourage Chinese enterprises to engage in advanced cooperation with multinational corporations on the global value chain, actively learn the advanced concepts and draw from the experiences of foreign enterprises with regard to quality management, brand building, and sales and marketing, and promote innovations in technology, quality, and management in Chinese enterprises, with a view to establishing new advantages that are centered around technology, brands, quality, and services.

2. We need to take the international division of labor into consideration when we are making plans for domestic industry. Seizing on the opportunity presented by profound changes in global economic landscape, we should encourage competitive industries and strategic emerging industries to actively participate in international competition and cooperation, with a view to accelerating their integration into the high-end segments of the global industrial value chain. We should also strive to promote the transformation and upgrading of traditional industries. For example, we should encourage our processing trade to expand from assembly and processing to R&D, design, and core components manufacturing, with a view to increasing the value added of China’s manufacturing industry. In addition to promoting the participation of eastern coastal regions in international competition at a more advanced level, we also need to attach importance to establishing mechanisms for coordinating industrial relocation between different regions, and encourage industries in eastern coastal regions to relocate to central and western regions in an orderly manner. Moreover, we should take reasonable measures to guide foreign investment towards central and western regions. By enhancing the capacity of these regions to use foreign investment, we can allow them to benefit more from the fruits of open development.

3. We need to step up the pace of our “go global” strategy. We need to encourage enterprises to invest and set up factories in foreign regions where markets and resources are available, and guide technically mature industries such as light, textile and home appliance industries, the preliminary processing segments of steel, non-ferrous metals, and petrochemical industries, and industries with surplus production capacity to relocate overseas in an orderly manner. At the same time, we should also encourage large enterprises with a strong financial standing to set up R&D institutions, production bases, and distribution networks in foreign countries through transnational mergers and acquisitions or green field investment. Through the integration of resources and value chains, these companies will be able to facilitate the relevant upstream and downstream enterprises in going global as part of the same industrial chain.

4. We need to strengthen diversified international cooperation. Working to provide a sound foundation on which Chinese companies can expand their markets, we need to actively participate in global economic governance, give play to the role of government and trade associations, actively participate in the design and formulation of international economic and trade rules, and work to establish and safeguard a multilateral trade mechanism that is balanced, mutually beneficial, and development-focused. We also need to firmly establish the notion of mutual benefit. To do this, we should promote bilateral and multilateral cooperation between governments, strive to strengthen bilateral and multilateral industrial exchanges and cooperation under cooperation mechanisms such as the China-ASEAN Free Trade Area, the Shanghai Cooperation Organization (SCO), APEC, and the Forum on China-Africa Cooperation (FOCAC), and expand markets for our industrial products and enterprises to “go global.” Moreover, we need to strengthen cooperation with neighboring countries in infrastructure development, promote the development of border and cross-border economic cooperation zones, and expand our industrial cooperation and economic and trade ties with neighboring countries.

5. We need to create a sound environment for open development. On the basis of long-term strategies for open development, we need to strengthen coordination between relevant departments and better coordinate trade and industrial policies. We also need to urge Chinese enterprises operating abroad to comply with local laws and regulations, attach importance to environmental and resource protection in host countries, and actively fulfill their social responsibilities. Moreover, we need to improve mechanisms for the facilitation of multilateral and bilateral investment and cooperation, support the development of intermediary organizations such as investment banks, law firms, accounting firms, and appraisal agencies, and enhance our efforts to collect, evaluate, and release country-specific political, economic, and security information, so as to provide all-round services for the efforts of Chinese enterprises to go global. By making improvements to security review mechanisms for mergers and acquisitions involving foreign investors, trade remedies with regard to imports, and early warning mechanisms to prevent industrial damage, we need to enhance our capacity to respond to trade friction and implement trade remedies. This will allow us to safeguard China’s national interests and its rights and interests in industrial development more effectively.

(Originally appeared in Qiushi Journal, Chinese edition, No.12, 2013)

Author: Vice-Minister of Industry and Information Technology of the People’s Republic of China

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