By Long Guoqiang, Research Department of Foreign Economic Relations of DRC

Research Report No 6, 2013 (Total 4255)

The world economy has witnessed swift reform and transformation after the outbreak of international financial crisis. Since developed countries suffer prolonged sluggish economy, the world economy growth pattern experiences major changes, as reflected in resurrection of trade protectionism and slowdown of international trade and cross-border investment. As for China, its international economic and trade environment had undergone major changes, which show some new signs in recent years: the developed countries implement the "reindustrialization" strategy; the US transfers its strategic focus eastward and promotes the high-standard TPP; and an overhaul of globalization rules is imminent. Sizing up the complex international environment, the 18th National Congress of the CPC pointed out that China is still in a period of strategic opportunities, and some major changes will take place related to relevant conditions and connotations. What major changes will occur in the connotations in the period of strategic opportunities?

I. Accurate Judgment of International Environment is Pivotal

No country can develop itself in isolation from the rest of the world, therefore, judgment of the international environment has a direct bearing on a country's development strategy. In 1960s, Mao Zedong held that it would be better to confront the world war earlier than later since it was inevitable. Under such circumstances and for the need of national defense construction and in accordance with the principle of "with mountain as the back support, spreading around, and good cover-up", a lot of industrial enterprises were established in inland areas across the country. It is known as "Third Front Construction" in history. After the Great Cultural Revolution, the second generation of leadership of the CPC with Deng Xiaoping at the core, based on an all-round analysis of the then international environment, held that peace and development were the mainstream of the world, and kicked off the grand reform and opening up. As proved by history, the understanding of the international environment, different as it might be in concrete situations, would exert a huge impact upon a country's development strategy.

Since 1970s, East Asia has seen large-scale relocation of the labor-intensive and export-oriented industries, which brought strategic opportunities for China to be involved in global labor division. The East Asian economies represented by Japan and the"four Asian tigers" successfully pursued the development strategy characterized by export orientation after the end of World War Two. In face of the challenges from the rising labor cost, these economies relocated their labor-intensive export industries on a large scale to pursue low-cost processing and assembling bases abroad. This has brought the industry-receiving countries major opportunities to develop the export-oriented processing industry and thus become part of the industrial chain of international labor division.

Since implementing the opening up strategy in late 1970s, China has become one of the most successful economies that make the best of the transfer of the export-oriented industries. China is a populous country, with low per capita possession of resources, however, for quite a long period of time after the founding new China, it overly relied on export of primary products for foreign exchange earnings because of low competitiveness in manufacturing and service industries. Up to 1985, primary products still accounted for more than half of its export. Today, China has risen to be the largest exporter in the world, registering great changes in the export mix – the export of finished products reaching up to 95% of the total, electromechanical products over 60% and hi-tech products more than 30%. In addition, China has overtaken US to be the largest manufacturer in the world, known as the "World's Factory". All the tremendous changes are attributable to the fact that China has grasped the opportunities related to the cross-border industrialtransfer in East Asia.

The booming economy of the developed countries represented by the US not only injects vitality to the world market, but also provides important foreign markets conducive to the development of China's export-oriented industries and thus drives rapid growth of China's export. Since 1980s, the dividends resulting from the reform in the US and Western countries amid stagflation, the peace dividends coming along with the end of the Cold War, the technology dividends induced by the IT and Internet revolution and the institutional dividends of economic globalization brought about by the founding the WTO, plus many other factors, have led to prosperity of US among other developed economies and flourishing global economy from the mid- 1990s on. This in turn gave rise to the rapid expansion of China's export-oriented industries and presented significant opportunities for fast development of its labor-intensive export-oriented enterprises.

II. The Period of Strategic Opportunities Holds New Connotations

The international financial crisis fused by the US subprime crisis in 2007 totally changed China' foreign trade environment. The US economy is still plagued by high unemployment and a high financial deficit; Europe is bogged down in sovereignty debt crisis; Japan's economy suffers from insufficient domestic demand and declining competitiveness caused by population ageing, large deficits, high costs and energy shortage. Meanwhile, the rapidly rising labor cost in China is eroding competitiveness of its labor-intensive export-oriented industries. Far different from before, China is in face of challenges of insufficient demand of the international market, but still, a good many new strategic opportunities.

First, China faces significant opportunities to import high-end industrial activities and production factors. After the outbreak of financial crisis, the Research Department of Foreign Economic Relations the Development Research Center of the State Council conducted a questionnaire survey on the transnational companies in China. The results show that China's comparative advantages are undergoing profound changes – its newly acquired advantages in terms of the local market, infrastructure, supporting industries, and human resources rather than low labor cost have come to attract multinationals' investment. From the perspective of international comparison, in the next decade China will be the only country worldwide that boasts a large domestic market with overall low cost for business operation. Out of such consideration, the multinationals are making important adjustment to their business strategy in China. To take China as a low-cost manufacturing base remains their objective, but no longer the paramount one. Actually, to further open up the market and use human resources in Chinahas become a more important goal for the multinationals in implementing their strategy in the country. Against the background of sluggish global economy, Chinamaintainsprosperity, exerting unprecedented attraction to high-end industrial activities and production factors. According to the survey findings, 31% of business respondents held that they would carry out research and development in China. The World Investment Report of UNCTAD also revealed that China outshines US to be the first choice as the destination for research and development by multinationals. In spite of the sharp fall in overall cross-border direct investment after the international financial crisis, China attracted increasing foreign direct investment to such an extent that in the first half of 2012 China overtook US to become the top destination of foreign direct investment in the world. More importantly, major changes have taken place to the foreign investment structure, as is shown in the phenomena that more foreign direct investment goes to the manufacturing industry with fairly advanced technology as well as modern service industry of higher added value, and some multinationals have made complete relocation of their research and development centers into China. The flow of the most dynamic production factor in terms of human resources also took a turn for the better. Take overseas Chinese students for example: nearly 50,000 overseas Chinese students returned in 2008, representing a one fold increase than in 2004, or more than 1/6 of all the returned overseas Chinese students since the inception of reform and opening up in 1978¹. The swift move of high-end industrial activities and production factors toward China is undoubtedly conducive to the upgrading China's industrial structure and the enhancement of the international competitiveness of its technology-intensive enterprises.

Second, China has the opportunity to integrate world resources and realize technological upgrading of the market. After the outbreak of the financial crisis, quite many Western enterprises fell into the quagmire of capital shortage, which afforded a lot more opportunities for China to open up markets and make low-cost merger and acquisition abroad. With the acquisition of Volvo, Geely has realized the transformation from an ugly duckling to a white swan; after acquiring Putzmeister, Sany has grown to be the world's leading enterprise in concrete and machinery industry. Chinese enterprises, through merger and acquisition abroad, can take the initiative to integrate overseas resources and markets, and obtain resources, technologies, research and development competence, international brands and world market channels at a low cost, greatly enhancing China's capability of innovation and international competitiveness.

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¹ An Internal Document of State Administration of Foreign Experts Affairs: A Research Report on High-Level Professionals Flow Trend in Relevant Countries and Regions Against the Backdrop of International Financial Crisis.