Huang Qifan says China's opening up has indeed grown "wider"
The former Chongqing mayor with a domestic reputation for economic insights says structural change in the export mix is the most significant achievement in China’s 40 years of opening up.
Huang Qifan, former Mayor of the southwestern metropolis of Chongqing until the end of 2016, traced his career to eastern Shanghai’s Pudong New Area, a signature of China's reform and opening up in the 20th Century. His current title is Executive Deputy Director of the Academic Committee of the China Institute for Innovation and Development Strategy (CIIDS), originally as an in-house research arm of the Chinese Academy of Sciences (CAS) and later approved by the State Council, China’s government cabinet, as a national non-profit organization.
Having earned a domestic reputation for economic insights, Huang has remained active in public and is widely followed at home. He gave a speech on May 8, 2024, at the 18th China Venture Investment Conference Annual Summit in Shanghai, organized by the investment research and consulting company China Venture Info (CVINFO).
In front of a large audience of Chinese investors, Huang says in the now circulated speech that China's opening-up in economic development over the past decade has surpassed those of the past 10, 20, and even 30 years.
To Western ears, this claim may be controversial, and these are the three aspects that Huang sums up in his analysis:
Export Transformation: China's export structure has fundamentally changed. In 2010, over 70% of China's $1.5 trillion in exports were labor-intensive products like textiles and toys. By last year, the total trade in goods had risen to $6.3 trillion, with $3.3 trillion in exports. Of these exports, 90% were now electromechanical and electronic products, indicating a shift to high-tech, high-value-added goods. This structural transformation is exemplified by China's dominance in shipbuilding, now producing 50% of the world's ships.
Industrial Production Shift: China's mode of industrial production has evolved significantly. A decade ago, 50% of China's manufactured goods were produced through processing trade. Today, this has decreased to under 20%, with 70% of goods produced entirely within domestic industrial clusters. This shift demonstrates China's expanded, strengthened, and comprehensive industrial chains, moving away from labor-intensive, low-value production to more sophisticated manufacturing processes.
Increased FDI: Despite global trade tensions and geopolitical challenges, China has continued to attract substantial FDI. From 2012 to 2022, China averaged $140 billion annually in FDI, a 20% increase from the previous decade. China attracted $160 billion in FDI annually over the past five years, compared to about $130 billion annually from 2010 to 2016. Notable examples include Tesla's $10 billion investment in Shanghai and Apple's production of 170 million iPhones annually in China. These highlight the continued global confidence in China's manufacturing capabilities and its vast domestic market.
Huang also observes that the share of trade in China’s economy has stabilized at around 38% since 2016, four years before introducing the “dual circulation” strategy. In that sense, China did not “pull back from the world” with the 2020 strategy. Rather, China’s less dependence on trade, which according to him is an aftermath of the 2008 global financial crisis, cushioned the world’s largest trading nation against Donald Trump’s trade war and following geopolitical competition, and the percentage is largely in line with that of the U.S., EU, and Japan.
China’s opening up is indeed “wider,” he says, and there are five key characteristics:
1. Trade Policy: China shifted from an export-focused approach to encouraging both exports and imports. Notable initiatives include the China International Import Expo (CIIE) in Shanghai, offering the world's largest exhibition space dedicated solely to imports. Additionally, import tariffs were drastically reduced from 26-27% in 2010 to around 6% in 2023, promoting the influx of international goods into China.
2. Investment Policy: The focus has broadened from merely attracting foreign investment to also supporting Chinese enterprises in investing abroad. From 2018 to 2023, China averaged $110 billion in annual overseas investments and attracted $160 billion annually in foreign investment, aligning with the Belt and Road Initiative.
3. Opening-Up Policy: Initially, China’s various special zones for opening up concentrated in coastal regions; now, they span the entire country. For example, since 2014, 22 Free Trade Zones (FTZs) with a "triple zero" policy (zero tariffs, barriers, and subsidies) were established, ensuring balanced regional development. Moreover, 70 new bonded zones have been created, mostly in central and western regions.
4. Industrial Policy: Traditionally focused on tangible sectors like industry and real estate, the scope has now expanded to include service trade, finance, education, health, and culture. Foreign capital can now fully invest in the financial sector, marking a significant shift in openness.
5. Institutional Opening-Up: Beyond production factors, China's opening-up now encompasses institutions, rules, regulations, and standards. This fosters a market-oriented and law-based business environment, enhancing international integration and cooperation.
Below is a full translation of his speech, also available on YouTube - but only in Chinese
新格局下中国开放的新特征、新趋势
New Characteristics and Trends of China's Opening Up in the New Development Paradigm
In line with the meeting's theme, I will discuss the new characteristics and trends in China's opening up under the new development paradigm. This theme involves three key points: the new development paradigm, the new characteristics of the opening up, and the new achievements and trends in China's opening up over the past decade.
Firstly, regarding the new development paradigm, it is not merely a descriptive term but a concept with specific meaning, emphasizing a "dual circulation" system in which domestic and overseas markets reinforce each other, with the domestic market as the mainstay. This concept was introduced as a hallmark of the future era in the 19th Communist Party of China (CPC) National Congress report in 2017.
The terms "external circulation" and "internal circulation" refer to the balance between a country's international trade and GDP. If a country's trade (goods and services) exceeds 60% of its GDP, it is considered externally driven. Conversely, if this ratio is below 40%, it is internally driven. For China, from 1950 to 1980, international trade accounted for less than 10% of GDP. For instance, in 1980, China's GDP was over $200 billion, with trade at $20 billion, making China predominantly internally driven at that time.
However, following the reform and opening up initiated by Deng Xiaoping in the 1980s, China began leveraging international resources and capital for domestic economic development. During this period, China's trade surged, with international trade comprising over 60% of GDP. By 2006, five years after joining the WTO, China's trade had reached 71% of GDP, with goods accounting for 64% and services around 7%, marking China as an externally driven economy.
How is China faring now? Last year [2023], China's import and export of goods were around $6 trillion, with service trade at approximately $800 billion to $900 billion. Combined, this totals nearly $7 trillion, which translates to about 40 to 50 trillion yuan. With a GDP of 126 trillion yuan [$17.4 trillion], China's total imports and exports accounted for 38% of GDP in 2023. China is primarily driven by internal circulation, as the trade-to-GDP ratio is below 40%.
Some wonder how this ratio dropped from over 70% before 2010 to 38% now. It is not due to the Trade War initiated by Trump, Biden's "small yard, high fence" strategy, or the withdrawal of foreign investments from China. Nor is it a result of the pandemic and its impact on supply and trade chains. China's imports and exports-to-GDP ratio had already fallen to 38% by 2016. The successful transition to an internally driven economy with dual circulation can be attributed to the 2007 global financial crisis in the U.S., a global economic tsunami that reduced Western capital and financial markets by at least $10 trillion. This crisis significantly decreased demand for Chinese exports in the U.S. and Europe, lowering China's double-digit trade growth to below 5%.
In response, the Chinese government launched a 4 trillion yuan [$586 billion] stimulus package to counteract the global economic downturn. While this amount may seem small compared to today's GDP of over 100 trillion yuan, it was substantial at the time when GDP was around 20 trillion yuan, equating to nearly 20% of GDP. This is equivalent to launching a 20 trillion yuan stimulus package today, a massive undertaking. This strategic initiative by the Chinese government stimulated continuous and stable economic growth.
By 2010, China's GDP growth remained above 10%, with a growth rate of 11.5% that year. The GDP maintained double-digit growth, while import and export growth dropped to 4%-5%. Consequently, the trade-to-GDP ratio fell from 71% to 55%. After the 18th CPC National Congress in 2012, the central government introduced the concept of a "new normal" for the Chinese economy, focusing less on international trade and more on building a large domestic market through internal circulation. This strategic shift led to supply-side structural reforms, moving away from the previous approach of export-, investment-, and consumption-driven growth models. Against this backdrop, China proactively reduced the proportion of external circulation, reaching 38% by 2016, a decrease of 17 percentage points from 2010.
Globally, a fundamental trend is observed: developing countries aiming for rapid growth tend to rely more on external circulation, while major economic powers primarily depend on internal circulation. For instance, the United States, a leading global economy, has maintained its imports and exports at around 25% of GDP over the past 50 years. Last year, the U.S. GDP was slightly over $27 trillion, with the trade of goods at $5 trillion and the exchange of services at $1.9 trillion, totaling nearly $7 trillion, accounting for about 26% of GDP. Similarly, the European Union, another major economic power, had a combined GDP of slightly over $17 trillion last year, with total trade of goods and services slightly over 30%.
Japan's economic history can be divided into two phases. From 1945 to 1975, during its recovery from WWII defeat and the destruction of its national economy, Japan's economy was export-oriented and predominantly externally driven, with trade accounting for over 70% of GDP. Over the past 30 years, as Japan has established itself as a major economic power, its import and export trade has consistently comprised around 35% of GDP.
Consider this: if, in 2016, the Chinese economy still relied on external circulation at over 70%, then Trump's Trade War, Biden's "small yard, high fence" strategy, and actions like divestment and blockades would have significantly impacted China. However, since China had already shifted to a 38% trade-to-GDP ratio by 2016, the economy was already primarily driven by internal circulation. Over the past six to seven years, China's trade-to-GDP ratio has consistently remained around 38%. This demonstrates the robustness and resilience of China's dual circulation strategy, which has withstood various global shocks without compressing further to 28% or 18%.
This brings me to my first point: China has entered a new development paradigm. This paradigm, in which domestic and overseas markets reinforce each other, with the domestic market as the mainstay, is expected to remain China's strategic approach for the coming decades.
My second point is, that in the context of the new development paradigm, domestic circulation is the mainstay. Does this imply that external circulation has lost its significance, or suggest a reduction in China's opening up? Such assumptions are mistaken. Over the past decade, China's characterization of its opening up has been marked by several key phrases.
First, China's door will never be closed; it will open ever wider. What does "open wider" entail? Under the dual circulation strategy, China's opening up is manifested in three dimensions: 更高水平的开放、更深层次的开放、更宽领域的开放 on a higher level, in greater depth, and across more domains. These descriptors show that China's trajectory of opening up is not contracting, but rather expanding, with five key characteristics.
1. Trade policy. One aspect of the first characteristic is, that over the past decade, China's foreign trade policy has undergone a significant transformation from being primarily export-oriented—a trend that lasted for decades—to encouraging both exports and imports, with numerous initiatives to bolster imports. For example, since 2018, Shanghai has been home to the China International Import Expo (CIIE) for five consecutive years. It is unique as it offers the largest exhibition space in the world, covering over 500,000 square meters. Held annually for six years, it is the only large-scale expo in the world dedicated solely to imports, unlike typical fairs that involve both imports and exports, or those specifically focused on exports.
Every October, as the CIIE approaches, tens of thousands of multinational corporations converge to showcase their diverse products in China. The expo transforms into a vibrant carnival, attracting businesses and government agencies from thousands of counties, hundreds of cities and prefectures, and numerous provinces across China.
The other significant aspect is the substantial reduction in import tariffs over the past decade. In 2010, the average import tariff rate in China was between 26% and 27%. By 2015, it had decreased to 15%, a reduction of 10 percentage points. Last year, in 2023, it was further reduced to around 6%. I anticipate that by 2024 or 2025, it will drop to below 5%. This aligns with the average import tariff rates of developed nations worldwide, which are also around 5%. Lower import tariffs encourage the entry of international market goods into China, allowing Chinese citizens to benefit from a variety of high-quality products from around the world.
2. Investment policy. Over the past several decades, China primarily focused on attracting foreign investment. Compared to that, the current policy not only encourages foreign capital inflow but also supports Chinese enterprises in investing abroad. From 2018 to last year, China's annual average overseas investment reached over $110 billion, accumulating nearly $600 billion over five years. It has also attracted an average of $160 billion in foreign investment annually, totaling $800 billion over the five-year period. Notably, the total outward investment from 1980 to 2010 did not exceed $500 billion, yet China reached this volume in the past five years alone, closely aligned with the nation's Belt and Road Initiative and its strategy to integrate with global development.
3. Opening up policy. China's opening up has expanded significantly over the past few decades. Initially concentrated along the coastal regions, it now includes a synchronized opening-up strategy that encompasses coastal areas, inland, and the north, south, east, west, and central regions. For the past 30 years, [initially,] 27 Economic and Technological Development Zones were all coastal; 5 Special Economic Zones were situated along the coast; the first two National-Level New Areas, Shanghai's Pudong New Area and Tianjin's Binhai New Area, were also coastal. Furthermore, by 2010, China had established 67 bonded zones, all located along the coast. Bonded zones are fenced-off areas inside one’s territories that enjoy zero tariffs. Consequently, they are often assumed to be near coastal borders. This has led to the belief that opening up primarily occurs along the coast. However, over time, the experience gained from ten and five-year increments of coastal opening up has been gradually transferred to the central and western regions.
Over the past decade, it is evident that any new opening-up policy adopted by the central government has been implemented synchronously across the eastern, central, and western regions of China. For example, in 2014, the government introduced Free Trade Zones (FTZs), the highest level of openness in the country. Within these FTZs, a "triple zero" policy is enforced: zero tariffs, zero barriers, and zero subsidies, which aligns with international free trade agreements.
Over the past ten years, a total of 22 FTZs have been established: seven in coastal/eastern regions, seven in central provinces, and seven in western provinces, ensuring balanced development across all regions. The one remaining FTZ, Hainan Island, can be considered eastern due to its coastal location, central due to its position on China's midline, or even western, given its economic development comparable to the western regions. Overall, this strategic distribution [of FTZs] ensures coordinated and balanced development across the eastern, central, and western regions.
Initially, all 67 bonded zones were located in coastal areas. However, since 2010, the Chinese government has approved approximately 70 new bonded zones, with more than 60 of these situated in the central and western regions, and only six or seven added in the east. Now, there are over 70 bonded zones in the eastern regions and more than 60 in the central and western regions. Overall, China's opening-up policy has achieved synchronized development in the north, south, east, west, and central regions.
Opening up is a concept, a system, and a method of governance, regardless of geographical location. For example, Germany, located inland in Western Europe, is not perceived as being less open than Spain. In this sense, China has achieved a broader agenda of opening up across more areas and in greater depth.
4. Industrial policy. Past opening-up efforts primarily focused on tangible projects in the corporate sector, including foreign investments in industry, department stores, construction, and real estate. These projects are tangible and visible, representing a higher level of opening up. This approach encompasses all types of enterprises, whether foreign-owned, joint ventures, or those with foreign shares. However, in sectors such as service trade, finance, and public services like education, health, and culture - domains that are less tangible - foreign investment was tightly controlled with restricted market access. Over the past decade, a broader agenda of opening up has been implemented across more areas and in greater depth. This has led to increased openness in service trade, education, health, culture, and finance. Notably, foreign capital is now allowed to hold 100% stakes and make investments in the financial sector.
5. Institutional opening-up. Over the past several decades, China's opening up was primarily characterized by large trade and capital flows, with opening-up efforts mainly focused on the factors of production. Now, China has entered a new phase where opening up extends beyond just the factors of production to include institutions, rules, regulations, systems, mechanisms, and standards. This expansion fosters an international, market-oriented and law-based business environment across different regions
The above five characteristics illustrate China's higher-level, deeper, and broader opening up. The logic is straightforward. This is the second point I wanted to make today.
The third point is, that driven by a dual-circulating national market and a push for higher-level, deeper, and broader opening up, China's opening-up in economic development over the past decade has been remarkable. The achievements and impacts have surpassed those of the past 10, 20, and even 30 years.
Specifically, China's economic achievements can be demonstrated by three key metrics. First, the structure of its exports worldwide. Second, the impact of its mode of production and manufacturing on the global stage. Third, the country's ability to attract global capital investments, particularly Foreign Direct Investment (FDI) from international businesses and manufacturers. These investments bring capital, technology, industry chains, equipment, and markets, going beyond speculative investments in foreign exchange and stocks. Therefore, the economic outcomes of a nation's opening up can be fundamentally assessed through these three elements.
1. The structure of exports. Over the last decade, China's exports have undergone fundamental and structural changes. In 2010, China's total import and export volume reached $3 trillion, with exports accounting for $1.5 trillion. At that time, over 70% of these exports, amounting to more than $1 trillion, were labor-intensive products such as textiles, apparel, bags, toys, and other light industrial goods. In contrast, electromechanical and electronic products accounted for merely over 20%.
By last year, China's total trade in goods soared to $6.3 trillion, including $3.3 trillion in exports and $3 trillion in imports. The export volume has more than doubled since 2010, but the key shift lies in the product mix. Of the $3.3 trillion in exports, 90% were electromechanical and electronic products, meaning nearly $3 trillion consisted of manufactured goods, industrial equipment, high-tech products, and products with high added value. Meanwhile, light industrial goods, textiles, and labor-intensive products, which previously made up more than 70%, have now reduced to just 10%.
On the surface, one might think the light textile industry in China is declining. However, a closer look reveals that the shift away from labor-intensive industries is a global trend. Similar to how Europe shifted these industries to Japan and South Korea in the 1960s and 1970s, and then from Japan and South Korea to China in the 1970s and 1980s, China is now transitioning these industries to Southeast Asia and India. This shift reflects the changes of the times. Labor costs in China have more than doubled compared to a decade ago, naturally leading to a decline in the competitiveness of labor-intensive production. Additionally, about 60% to 70% of foreign investments in Southeast Asia now originate from Chinese private enterprises. This movement is not hindered by the Chinese government, as it is a natural outcome of Asian integration under the Regional Comprehensive Economic Partnership (RCEP).
After this shift, Southeast Asian countries, while assembling finished products locally, have continued to depend on importing raw materials and key components from China. As a result, trade between China and the ten Southeast Asian countries increased from $650 billion in 2019 to over $1 trillion last year, marking a 50% rise—a significant and positive development.
Furthermore, the current structure of China's export products has gone under substantial transformations, for example, in the shipbuilding industry. Thirty years ago, Japan manufactured 50% of the world’s ships; a decade ago, it was South Korea. Now, China produces 50% of the world’s ships. This shift highlights remarkable progress from when China needed to exchange one billion shirts for one Boeing airplane. Today, China exports a vast array of equipment and electronic products in exchange for imports such as grain, pork, underground minerals, and other goods from abroad. This structural change in the export product mix represents the most significant achievement in China’s 40 years of opening up and deserves substantial recognition.
2. The mode of industrial production in international trade. By 2010, China had become the world's largest industrial economy, yet 40% to 50% of this output was attributed to processing trade. Processing trade involves importing components, raw materials, and semi-finished goods, assembling them domestically, and then exporting the finished products. For example, if China has $100 billion in exports and imports $80 billion in components and materials, the total trade volume is $180 billion. However, only a dozen percentages of the volume is China’s GDP, or about a dozen billion USD. Additionally, costs in water, electricity, and other energy have to be deducted. The actual profit - including the company’s profits, employee income, and taxes - might only represent 10% to 15% of the total export value. Thus, while processing trade boosts gross revenue, it doesn't significantly increase net value. This production model is suitable for economies with labor surpluses but should be moved abroad as the economy matures. Currently, Southeast Asia holds a 50% share in processing trade, relying on foreign markets and resources. They import raw materials and components from China, process them, and export the finished goods to Europe and America.
Before 2010, 50% of China’s manufactured goods were produced through processing trade, and about 30% through general trade, which refers to exports of products made entirely within domestic industrial chains. The remaining roughly 10% comprised agricultural products, raw materials, and primary products that require minimal processing.
Last year, with China’s total trade exceeding $6 trillion, the share of processing trade has reduced from 50% to under 20%, while goods manufactured by China’s own industrial clusters now represent 70%, with the remaining 10% being agricultural or mined materials.
Consider the methods of processing and manufacturing in international goods. The reduction in the proportion of processing trade reflects the expansion, strengthening, and supplementation of China’s industrial clusters over the past decade, creating the largest and most comprehensive industrial chain in the world. This is a significant trend in Chinese manufacturing and economic development.
3. Inward direct investment. This is a topic of significant concern. Over the past decade, due to Trump’s initiation of the Trade War and divestment, along with Biden’s clique-forming, geopolitical strategies, and moves toward deglobalization, there is a natural inclination to think that FDI in China might have decreased. However, assumptions are not always accurate and must be assessed through actual data.
In the 1980s, China annually attracted approximately $40 to $50 billion in FDI. In the 1990s, the average annual foreign investment increased to $80 to $90 billion. From the early 2000s until 2016, China attracted an average of $120 billion in foreign direct investment annually. One might assume that FDI has decreased during the past decade, yet from 2012 to 2022, the average annual FDI in China was $140 billion, marking a 20% increase from the previous decade. These figures are not merely anecdotal; one can verify them through sources like China’s Ministry of Commerce (which used to be the Ministry of Foreign Trade) or annual WTO reports.
There has been discussion over whether the FDI in the past five years has declined compared to the five years before, especially considering the recent trade wars and the pandemic. However, actual data shows that, on average, China attracted $160 billion in FDI annually over the past five years, compared to about $130 billion annually from 2010 to 2016. Simple calculations reveal that the average annual FDI in the past decade, roughly $140 billion and $150 billion, has increased compared to earlier years.
What I am trying to say is, that over the last decade, despite the U.S. pushing deglobalization and initiating trade wars, business leaders and entrepreneurs have continued to operate according to the laws of the market economy, a trend that has remained unchanged. For instance, Tesla has invested a total of $10 billion in Shanghai over recent years, in two phases of $5 billion each. Similarly, Apple has invested over $10 billion in China, producing approximately 170 million iPhones here annually, which constitutes the vast majority of its global annual production of 200 million units. In 2017, Trump questioned Tim Cook, CEO of Apple, on why he had such significant production operations in China instead of the U.S., Brazil, or Mexico. In response, Cook explained calmly that despite having a large factory in the U.S. two decades ago, it was not profitable. In China, Apple achieves a 40% gross margin due to low manufacturing costs. With gross profits exceeding $60 billion, Chinese companies receive over $10 billion, while the remaining $50 billion is repatriated, allowing Apple to annually repatriate $50 billion in profits—significantly more than it could from a U.S.-based production facility. The question is whether you prefer an Apple headquartered and producing in the U.S. with minimal profits, or an Apple headquartered in the U.S. with production bases in China, earning $50 billion annually.
Trump, being a real estate developer, did not understand the nuances, so he naively asked Cook, “Why is this happening?” Cook explained to him that China’s vast domestic market is crucial for attracting global capital investment. Secondly, this large market has facilitated fixed asset investments in manufacturing, reducing costs per unit of investment, logistics, research and development, and procurement, while also enhancing labor productivity, thus keeping China’s manufacturing costs low. Despite the increase in labor costs over the past decade and the gradual fading of China’s demographic dividend, the comprehensive manufacturing costs have continued to decrease in six types of costs [cost of procurement, research and development, sales, logistics, and fixed asset investment, and the increase of labor productivity] due to scale effects. This has enabled China to develop a significant concept of “产地销 produce locally, sell globally.”
This concept means that foreign investors manufacture products in China and then distribute them globally, rather than selling them within China. The reason for producing in China is its lower manufacturing costs. This synergy of "produce locally, sell globally" and "销地产 produce globally, sell locally" has made China a compelling destination for global capital investment, enhancing China’s attraction to FDI.
These are the three significant effects of China's opening up on the global economy that I have discussed today. These effects resonate with investors, entrepreneurs, and politicians worldwide, including those who may not be favorable toward China. Those who are friendly tend to collaborate with China, while the unfriendly seek methods to undermine it. Nevertheless, the world must conform to these economic principles. Thank you all for your attention.
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