China Export-Led Growth

Over the last three decades, China has undergone a remarkable economic transformation, emerging from an agricultural-based economy to a manufacturing powerhouse based on the export-led model. During this period, China’s economy has experienced spectacular GDP growth that exceeds 9 percent on average. China’s GDP grew by an average of 8 percent in the early 1980s and increased to an annual growth rate of exceeding 15 percent in 2010 (Figure 1). Although the World Bank cuts China’s GDP projection for 2012 and 2013 recently, the forecast of the China’s economy growth still remains at approximately 7 to 8 percent for the next two years. As a result of this GDP growth, China’s contribution to world GDP increased from approximately 1 percent during the 1970s to over 14 percent in 2011. According to the International Monetary Fund (“IMF”), China has emerged to be the third largest economy in the world (Figure 2).

Much of China’s massive economic growth was mainly driven by the expansion of exports since the opening of China’s market and economic reform in 1978. After a period of self-imposed isolation from the 1950s to the 1970s, China found that its economy is significantly falling behind its East Asia neighbors. In order to catch up on this lag, the Chinese government quickly adopted the export-led growth model from its neighboring countries - the four “small dragons” namely Hong Kong, Taiwan, Singapore and Korea, and implemented a series of large scale economic reforms in the 1980s. The Chinese authorities began to launch a series of foreign trade reforms and encouraged exports by reducing tariff, reforming the exchange rate system and broadening the scope of exports licenses and quotas. In the early 1980s, special economic zones (“SEZs”) along the southeast coastal area of China were also set up to promote export processing.

In addition to the domestic reforms, the Chinese government also improved its foreign investment policies to attract export-oriented...