Microsoft Word EcRefChina Oct06. doc

individuals
are less protected against competitive forces in 
agriculture than in industry. While market forces automatically expose individual 

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members of farm households to competitive pressure (which may take the form of 
declining income), employees in SOEs are still relatively protected through income-
insurance arrangements and in some cases (although much less than earlier) also by direct 
job protection.
Turning to the last dimension in Figure 1, the pronounced openness of the Chinese 
economy is one of the most remarkable features of the reforms. Naturally, the large export 
share – about 30 percent of GDP in 2005 as measured by the official exchange rate – is 
only 
one
among several measures of the high degree of internationalization of the Chinese 
economy. Another is that fixed investment by firms registered outside mainland China has 
amounted to 4-5 percent of GDP during the last decade, or about 10 percent of investment 
in real capital assets.
11
While these investments, to begin with, mainly took the form of 
joint ventures, they have recently occurred more often in non-mainland owned firms. 
Indeed there is a close relation between investment by firms owned by agents outside 
mainland China and the export performance of the country, since about half of China’s 
export emanates from such firms.
12
This development has been facilitated by the 
important role of entrepreneurs of Chinese origin living outside mainland China, mainly 
in Hong Kong, Macau, Taiwan/China and Singapore. However, some of the financing of 
these investments, in fact, originates in mainland China. Agents in other areas have then 
simply functioned as financial intermediaries for “roundtrips” of capital flows (Garnaut 
and Song, 1999), perhaps because of tax considerations or ambitions to balance political 
risks. 
Most likely, the internationalization of the Chinese economy, which has been more 
important in industry than in agriculture, results not only in traditional static (text-book 
type) gains from trade and international capital mobility, but also in efficiency-enhancing 
international competition and greater opportunities to learn from foreign firms.
13
It is also 
likely that China’s interaction with the rest of the world influences the values and life 
styles of the domestic population. We may expect the emergence of more individualistic 
11
These figures can be derived from official statistics on investment by non-mainland firms, assuming 
an aggregate investment ratio of 43 percent of GDP. (Statistical Yearbook of China, 2005, Table 6.1).
12
Chow’s (2006c) estimate is 60 percent. Moreover, in 2003 about 27 percent of value-added in 
industrial enterprises with annual sales revenues in excess of 5m yuan (USD 0.6m) within China was 
produced by firms funded outside mainland China (Holz, 2005b). 
13
Indeed, there is empirical evidence of such learning among Chinese firms (Li et al., 2006). 

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(and perhaps also hedonistic) values, in particular among the urban young – a process that 
already seems to be underway. 
China’s choice of a strongly outward-oriented development strategy, subsequently 
codified by its entry into the WTO as of 2001, must have come as a surprise to observers 
who, a few decades ago, asserted that such a strategy is mainly suitable for modest-sized 
countries.
These observers were clearly wrong.
14
It is unlikely, however, that such a huge 
country as China will continue to have a similarly high export share in a long-term 
perspective. In particular, the statistically recorded export share of GDP in current prices 
is bound to fall when real wages, and hence the relative prices of non-tradables, rise in the 
future.
15
Moreover, with higher skills and better technology, China is likely to expand its 
domestic production of components of manufactured goods. We may speculate that this 
will reduce the country’s dependence on international trade. 
In principle, China’s increased presence on world markets would be expected to boost the 
potential
 
gains from trade also for developed countries, since such gains tend to increase 
by the difference in factor proportions among trading partners. In other words, Heckscher-
Ohlin type of trade, based on different factor proportions, would be expected to increase. 
Nevertheless, it is an open question to what extent the outside world will allow China to 
continue its distinctly outward-oriented growth strategy.
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To a considerable extent, this 
probably depends on the ability of today’s developed countries to adjust to the new global 
competitive situation, with an increased presence on the world market of not only a 
number of large developing countries, including India and Brazil, but also former Soviet 
republics and previous socialist countries in Eastern Europe – all with abundant labor and 
low real wages as compared to developed countries. 
China has, of course, already exerted considerable influence on the market for labor-
intensive products in developed countries. However, worries are often also expressed in 
these countries to the effect that China is already becoming an important exporter of high-
14
During about two decades of exceptionally fast GDP growth, Japan – and not just the four small 
“Asian Tigers” (Hong Kong, Taiwan/China, Singapore and South Korea) – recorded export-growth rates 
similar to recent rates in China (Siebert, 2006). 
15
For low-wage countries, such as China, the export share is much lower when measured in terms of PPP than 
in terms of the official exchanges rate. Such calculations are, however, quite hazardous. 
16
According to the WTO (2006), China’s share of world exports (total merchandise trade in current 
USD) has increased from 0.9 percent in 1980 to 6.5 percent in 2004.

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tech and high-skill products. For instance, many observers point to the fact that China’s 
export-product mix is more similar to that of the OECD countries than we would expect 
on the basis of China’s modest per capita GDP.
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In a short- and medium term 
perspective, these worries are, however, exaggerated. China is a large