China's Industrial Transformation and Growth Drivers

Key Insight

China's industrialization began in the early 1980s, leveraging 'deep' historical advantages such as a large, relatively well-educated population and established traditions of manufacturing and commerce, which had led to its pre-nineteenth-century eminence. These internal strengths were significantly bolstered by 'lucky circumstances'. These included having successful export-driven neighbors like Taiwan, South Korea, and Japan, which provided a development template; Hong Kong served as an immediate world-class port and trading hub, offering access to global trade routes and modern legal/financial infrastructure. Furthermore, China opened to trade precisely when the shipping container, invented in the 1950s, dramatically reduced shipping costs, enabling global production chains. A 'killer app' emerged in the late 1990s as Taiwan's sophisticated electronics industry moved en masse to China, rapidly establishing a world-class manufacturing base.

Chinese policymakers, through deliberate 'good policy', maximized these opportunities. A key orientation was 'reform and opening' (gaige kaifang), recognizing that domestic economic reform required increasing openness to trade and investment. This led to policies like the establishment of Special Economic Zones (SEZs) in the early 1980s and joining the WTO in 2001, all designed to maximize opportunities for exporters. The second major policy focus was robust infrastructure development, including ports, roads, power plants, and telecommunications networks along China's coastline. This confluence of factors resulted in a unique, and probably unrepeatable, combination by the early 2000s: low, developing-country labor costs paired with good, almost-rich-country infrastructure, creating an irresistible platform for export-oriented manufacturing. A later infrastructure drive in the interior helped integrate the internal market.

The industrial policy evolved through different phases. Deng Xiaoping's initial policy shifted from capital-intensive heavy industry to labor-intensive light industry, focusing on light industrial exports for foreign exchange, establishing SEZs, implementing price reforms, and increasing tolerance for private enterprises. This led to impressive results: between 1978 and 1990, consumer goods with market-set prices rose from zero to 70 percent, industrial output increased sixfold, SOE share fell from 78 percent to 54 percent, and annual exports sextupled from US$10 billion to US$62 billion. The economy grew at an average annual rate of 10 percent from 1979-1988. Under Jiang Zemin and Zhu Rongji in the 1990s, reforms accelerated, emphasizing attracting foreign investment and building export industries; FDI surged to $45 billion in 1997, and exports quadrupled from $62 billion to $266 billion between 1990 and 2001. During Hu Jintao's administration (2003-2012), industrial policy adopted a more statist approach, prioritizing large infrastructure projects, strengthening SOEs, and slowing market reforms, though exports still grew sixfold from $266 billion to $1.4 trillion between 2001 and 2008 due to favorable external conditions like WTO entry and global demand surges.