Post on 30-Apr-2020
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Decoupling China before Trade War:
Policies Change and Stagnation of Manufacturing’s Westward Movement (draft)
Abstract
The westward movement of manufacturing from the coastal to the inland region
has attracted considerable attention in the field of China Studies. Many experts expect
the movement could decrease the inequality of development between the coastal and
inland regions. However, this study revealed that the industrial relocation in China has
been stagnated since the middle of the 2010s. Using the fixed-asset investment as the
index of the major source of economic growth, we discovered that the inland China’s
main engine of economic growth had been the infrastructure construction from the
official investment until 2010. Due to the industrial relocation, interior China’s main
stimulus of growth shifted to the manufacturing since 2011. However, the main
engine o turned back to its old pattern, public infrastructure, in 2016 and 2017.
The causes of the stagnation of manufacturing’s westward movement will attract
plenty of research in the near future. This paper contributes the literature by exploring
the transform of central government’s attitude to the industrial relocation. This study
demonstrates Chinese government’s change of the preferential policies which once
attracted coastal factories to go west and then made coastal enterprises hesitate to
invest more in the inland region. The evidence bases on the authors’ a serious of
fieldworks and interviews with factory managers, local government officials (from
provincial to township level), foreign businessmen association and branch offices of
foreign government-related organization since 2011. Furthermore, this paper
contributes the theory of strategic coupling by providing a dynamic case. The concept
of strategic coupling emphasizes the cooperation between the governments of
developing countries and multinational enterprises to connect countries’ resource with
global production network and subsequently brings the economic prosperity. However,
few cases in the literature could show the dynamic process that the government
changed its preferential policies in a short period and deeply affected foreign capital’s
responses. Meanwhile, the previous literature also seldom mentioned the
inconsistence between different sectors inside the government of developing country.
China’s case that central government not only changed its preferential policies but
restrained local governments from providing special treatment could significantly
enrich the discussion of strategic coupling.
keywords: regional inequality; manufacturing; China; processing trade; strategic
coupling
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The Stagnation of Manufacturing’s Westward Movement
In this section, we will demonstrate the stagnation of manufacturing’s westward
movement and the torpid growth of manufacturing in the inland region by 3 indicators:
(1) the annual growth of fixed-asset investment in manufacturing in the coastal and
inland region; (2) the ratio of fixed-asset investment in real estate industry,
manufacturing and, public infrastructure to total fixed-asset investment in the two
regions; (3) the value of exports of goods of foreign-funded enterprises in central
region.
In our research, fixed-asset investment is a key index for estimating the degree of
industrial development. Investment-driven growth remains a crucial development
strategy in China. Capital formation has risen significantly in terms of its GDP
composition from below 30% in the 1980s to above 40% since 2003(Qin & Song
2009). In light of that, to compare the changes between the coastal and the inland
regions on the fixed-asset investment in manufacturing is a good approach in order to
grasp the dynamic process of the industrial transfer.
The stagnation of manufacturing’s westward movement (1): the investment
Figure 1. The Annual Growth of Fixed-Asset Investment in Manufacturing in the
Coastal and Inland Region, 2005-2017 (100m RMB)
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Source: Calculated the data from National Bureau of Statistics (ed.) 2005-2018.
Figure 1 shows the annual growth of fixed-asset investment in manufacturing in
the coastal and inland region from 2005-2017. This indicator demonstrates how much
the investment increased in coastal and inland regions’ manufacturing every year. If
the amount in the inland region is larger than that in the coastal region, it means
inland region processes a more significant growth in manufacturing than that in the
coastal region. Conventionally, China’s manufacturing had been concentrated in the
coastal region. Therefore when the interior region confirmed a larger increase in the
manufacturing than that in the coastal, it could be considered as the period of
manufacturing’s westward movement.
In the 2004, the fixed-asset investment in manufacturing in the inland region was
641 billion RMB which was roughly half of the investment in the coastal region. Zhu
& Pickles(2014)argued that since the early 2000s, coastal factories have increasingly
had to confront difficulties generated by the increasing social and economic costs of
this regionally concentrated low wage growth model. Figure 1 shows that the growth
of investment in manufacturing in the coastal region was stagnated since the middle
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of 2000s. On the other way, since the same period of time, investment in
manufacturing in the inland region significant increased. In 2007, the growth of
fixed-asset investment in manufacturing in the inland region started to exceed that in
coastal region and lasted for 6 years. After 2014, the annual growth of investment in
the inland region significantly decreased to a level which is close to the amount in
coastal region1.
The interior region had experienced a constant and larger increase in
manufacturing than that in the coastal region from 2007 to 2013. This caused a
fundamental change of China’s regional development of manufacturing. Figure 2
shows that the fixed-asset investment in manufacturing in the inland region was
roughly half of the investment in the coastal region in the 2004. However after a
decade of speedy growth, the investment in the inland region exceeded that in the
coastal region in 2012. Since then, manufacturing’s investment in the inland region
has been slightly surpassed the investment in the coastal region.
Figure 2. The Fixed-Asset Investment of Manufacturing in the Coastal and Inland
Region, 2004-2017
1 However, the amount in coastal region shows an unusual decrease in 2016. In January 2017, the
provincial governor of Liaoning , Chen Qiufa, admitted that the province had manipulated economic
data in the past (The Economist 2017). For correcting the doctored data, Liaoning, one of the major
industrial provinces in the coastal region, showed a significant cut of its fixed-asset investment in
manufacturing in the statistical data of 2016.Then, the correctness of Liaoning’s data leaded a large
decrease of the total number of coastal region. Since the number of 2016 was disturbed by Liaoning’s
correctness, so we chose to neglect the data of this year.
5
Source: Calculated the data from National Bureau of Statistics (ed.) 2005-2018.
Figure 2 demonstrate that manufacturing’s westward movement has largely
improved the inequality of industrial capacity between the coastal and inland China.
However, the stagnation of manufacturing’s investment in the inland region since the
middle of 2010s, as shown in Figure 1, indicates that the speedy growth of industrial
development in interior region disappeared. Furthermore, the stagnation causes a deep
concern over the sustainable growth of interior region, due to the transformation of
growth pattern, which the detail will be explored in next section.
The stagnation of manufacturing’s westward movement (2): the leading sector
Figure 3. The Ratio of Fixed-Asset Investment in (1) Real Estate Industry2; (2)
Manufacturing; (3) Public Infrastructure3 to Total Fixed-Asset Investment
in the Coastal Region, 2004-2017 (%)
2 The fixed-asset investment in the real estate industry is the combination of two sectors in China
Statistical Yearbook's classification: Construction and Real Estate. 3 The fixed-asset investment in the public infrastructure is the combination of six sectors in China
Statistical Yearbook's classification: Production and Distribution of Electricity, Gas and Water;
Transport, Storage and Post; Water Management of Conservancy, Environment and Public Facilities;
Education; Health, Social Securities and Social Welfare and Public Management and Social
Organization.
0
20000
40000
60000
80000
100000
120000
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
coastal egion inland region
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Source: National Bureau of Statistics (ed.) 2005-2018.
Figure 4. The Ratio of Fixed-Asset Investment in (1) Real Estate Industry; (2)
Manufacturing; (3) Public Infrastructure to Total Fixed-Asset Investment in
the Inland Region, 2004-2017 (%)
Source: National Bureau of Statistics (ed.) 2005-2018.
As shown in Figure 3 & 4, both in the coastal and the inland regions, investments
in the real estate industry, manufacturing and public infrastructure are the most
important sources for the accumulation of fixed assets. In 2012, the ratios of the total
amount of these three investments to all fixed-asset investments were 86.4% in the
East and 83.7% in the Midwest. However, the details of the developmental trajectory
of manufacturing between the two regions are quite different.
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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
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In the coastal region, the investments in manufacturing have been the most
significant source of regional fixed-assets. The weighting of manufacturing
significantly increased from 2004 to the global financial crisis and has kept a trend of
slightly decreasing in recent years. As a consequence, the ratio of manufacturing in
2017 was similar the figure in 2004, separately 33.6% and the 32.6%. On the other
hand, in the inland region, the investments in manufacturing were the most significant
source of regional fixed-assets only from 2011 to 2015. Except this period, public
infrastructure has been the leading sector of regional investments. In the interior
region, ratio of manufacturing had kept a trend of increase from 2004 to 2012, except
the impact of financial crisis in 2009. Then, the ratio has been decreasing for 5 years.
As the result, ratio of manufacturing in 2004 and 2017 are separately 22.2% and
28.1%. Although there is a significant expansion of the ratio of manufacturing over
the past decade, the extension may narrow down in the future concerning the recent
trend of shrink.
Regarding the proportion of public infrastructure, the coastal and inland region
experienced a similar tendency. They both were first through the period of constant
decrease from 2004 to 2013 and then a significant rebound since 2014. They also
simultaneously showed a temporary recovering at the end of the 2000s in the first
phase of declining. After the global financial crisis, the Chinese government
implemented a short-term but large-scale economic stimulus programme estimated at
4 trillion RMB, where 1.5 trillion RMB were spent in building public infrastructure4.
The effect of the stimulus programme was obvious but only for few years. After the
official stimulant, the coastal region’s economic growth was supported by the increase
of investment in the real estate industry; while the inland region’s growth were
sustained by the real estate industry and manufacturing. However, the prosperity of
4 Diyi caijing ribao 2012.
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the real estate industry also only last few years in both regions5. After 2013, public
infrastructure has been the only sector with significant increase in both regions.
Basically, we could consider the investments from real estate industry and
manufacturing are sources for economic growth which driven by private sector or
market incentives. Meanwhile public infrastructure is driven by public sector and
government’s budget. Although, public infrastructure has been the only sector with
significant increase in both regions since 2013, the implications for the two regions
are definitely different. In the coastal region, the share of public infrastructure has
been smallest in the three sectors since the financial crisis and the number is 26.1% in
2017. Oppositely, the rate in the inland region has been the largest in all sectors since
2016 and the number in 2017 is as high as 34.1%. Furthermore, the investments from
real estate industry and manufacturing in the inland region have constantly decreased
since 2013 but the shares of the two sectors have more stable in the coastal region.
For example, the sum of two sectors in the inland region reduced 4.1% in two years
from 2015 to 2017, but the share in the coastal region in the same period only lost
1.9%.
In short, due to the stagnation of manufacturing’s westward movement, the
main engine of investment in the interior region has been back to the old way, where
public infrastructure supported by government’s budget was the main driving force
for economic growth. The share of public infrastructure in the interior region was as
high as 38.8% in 2004 and once down to as low as 24.2% in 2013, then back to 34.1%
in 2017. The significant rebound of the investments in public infrastructure in the
short term implies that if the interior region intended to keep the same level of
5 To curb the soaring housing prices, the government adopted a series of policies, among which
home-purchase restrictions, first implemented in Beijing in 2010 and then progressively in more than
40 cities, are considered as the strictest housing policy in China (Du & Zhang, 2015).
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economic growth as the eastern region, the public sector had to pump more and more
funds into the region.
Table 1. The regional growth of GDP and investments of fixed-asset, 2008-2017
2008-2012 2013-2017
The increase in four years coastal inland coastal inland
Regional GDP 65% 84% 35% 34%
Investments of fixed-asset in
Public infrastructure 71% 101% 76% 115%
Manufacturing 86% 166% 29% 33%
Real estate industry 124% 172% 21% 24%
Source: Calculated the data from National Bureau of Statistics (ed.) 2009-2018.
Table 1 shows the coastal and inland regions’ growth of GDP and investments of
fixed-asset in two periods after the financial crisis: the expansion of industrial
relocation (2008-2012) and the stagnation (2013-2017). Influenced by the large-scale
economic stimulus programme after the crisis, both regions experienced momentous
growth of GDP from 2008-2012. Meanwhile, the expanding industrial relocation
significantly promoted the investments in manufacturing and real estate industry and
the growth of GDP in the interior region6. As the result, the Midwest demonstrated a
higher economic growth than the East in the 4 years. In the next 4 years, under the
new slogan “New normal”, which the economy shifted gear from the previous high
speed to a medium-to-high speed growth7, both regions experienced a moderate
growth. However, with the stagnation of industrial relocation, as shown in Figure 1,
the inland region experienced a more significant contraction of GDP growth and the
6 Since the first quarter of 2012, China’s mass media started to ask why the economic performance of
the interior region has been much better than that of the coastal region. A new phrase, Dongman Xikuai
东慢西快 (the slow-growing east and the fast-growing west) is being used in the discussions, and
seems like a metaphor for a new era in China’s regional economies. In the discussions, many experts in
China agreed that the outstanding economic performances in the Midwest are highly related to the
westward movement of the coastal manufacturing industries (Xinhua News Agency 2012). 7 President Xi Jinping first used the phrase "new normal" in May 2014 (China Daily, 2017).
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investments in manufacturing and real estate industry than the coastal region.
Meanwhile, even the inland region input more resource in the investments of public
infrastructure with a growth rate of 115% for the 4 years, comparing the rate of 76%
in the coastal region, its growth of GDP barely accomplished to a level similar to the
coastal region.
The stagnation of manufacturing’s westward movement (3): the export
In this section, we use another indicator, the export of foreign-funded enterprises
in central region, to demonstrate the stagnation of industrial relocation. As Lai (2007),
Guo & Wei (2013) demonstrated that the large-scale industrial transfer was triggered
by the official policies at the middle of 2000s when Chinese government executed
projects to urge the export-oriented and foreign-funded enterprises in the coastal
region to transfer to the central region. Therefore, the development of the
export-oriented and foreign-funded enterprises in the central region could be a good
indicator to estimate the expansion and stagnation of manufacturing’s westward
movement. Figure 3 shows the value of exports of goods of foreign-funded
enterprises in central region from 2004 to 2017.
There are three distinct points were observed from Figure 3. Firstly, the value of
export of foreign-funded firms in all six provinces of central region experienced
obvious growth since the middle of 2000s. Secondly, if we define the beginning of
stagnation as the decrease of the export after a series of years of significant increase,
or the next year of historic peak of the export, most provinces stagnated around the
middle of 2010s: Shanxi in 2017; Anhui in 2015; Jiangxi in 2016; Henan in 2016;
Hubei in 2015; Hunan in 2016.
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Figure 3. Value of Exports of Goods of Foreign-funded Enterprises in Central Region,
2004-2017 (USD 10,000)
Source: National Bureau of Statistics (ed.) 2005-2018.
Thirdly, Henan’s growth is exceptional. Henan’s performance of export wasn’t
outstanding in the 2000s among six provinces but demonstrated a speedy expansion
after 2010. In 2012 Henan’s export was already two to three times than other
provinces’ export. The extreme expansion was largely contributed by the production
of iPhone by Hon Hai Precision Industry (also known as Foxconn), the world's largest
contract electronics manufacturer. Foxconn transferred its partial production capacity
from coastal Shenzhen city to Zhengzhou, Henan’s capital in 2010 (Pomfret 2010).
Foxconn’s plant in Zhengzhou soon became one of the main production bases of
iPhone, with more than 50% of the world’s iPhone 5 shipments were out of Henan
Province in 2012. Meanwhile, Foxconn group total import-export revenue in Henan
Province reached $29.39 billion, accounting for 56.8% of the total import-export
revenue in the province in the same year (Li 2013).
Foxconn’s plant in Zhengzhou expanded rapidly in the fast half of the 2010s. In
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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Shanxi Anhui Jiangxi Henan Hubei Hunan
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2011, Zhengzhou’s plant hired about 100 thousand workers. In 2017, the amount of
workers expanded to 250 thousand and Zhengzhou was called “the city of iPhone”
(Dou 2017). However, due to the sales performance of iPhone 6 wasn’t as good as
expectation, the plant’s production stagnated in 2016, where the city government even
provided Foxconn a subsidy of 81.9 million RMB for the plant not to lay off
employees in the January (Dou 2016). Additionly, Foxconn’s plant in Zhengzhou
never completely replaces the production capacity of Shenzhen’s plant. As sales
volume of iPhone has been sluggish in recent years, 50 thousand workers in
Zhengzhou’s plant were laid off from the winter of 2018 to the spring of 2019.
Meanwhile, Shenzhen’s plant stably kept its employment with around 200 thousand
workers in the same period (Li 2019).
Strategic coupling, Recoupling and Decoupling: a Dynamic
Perspective of China’s Regional Evolution
Literature Review: Strategic Coupling, Recoupling and Decoupling
In the past decade, the GPN approach has developed the concept of strategic
coupling to explore the trajectories by which regions can achieve economic
development through integration into the global production networks. This
perspective argues strategic coupling is a process whereby the regional assets
complement the strategic needs of leading multinational corporations (MNCs) (Coe et
al., 2004; Yeung, 2009; Yeung and Coe, 2015). The dynamic process, where regional
assets are effectively incorporated into GPNs, could be interpreted as Figure 4. In
Figure 4, these regional actors can be state agencies, labor organizations, and business
associations, etc. Regional assets are embodied in local industrial firms and
technology institutes that cooperate with global lead firms and their partners and
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suppliers. This mutual articulation provides the underlying strategic platform for
regional growth to occur. Strategic coupling is a mutually dependent and constitutive
process involving shared interests and cooperation between two or more groups of
actors (Yeung, 2015).
Figure 4. The Framework of Regional Development and Strategic Coupling in GPN
Source: Yeung (2015)
Because of the theoretical contribution by MacKinnon (2012), where forged a set
of links between GPNs and evolutionary economic geography (EEG), the strategic
coupling perspective has extended to a more dynamic analytical framework: not only
coupling but also recoupling and decoupling (Coe and Yeung, 2015). It means
strategic coupling can be organic through the co-evolution of regional assets, lead
firms and other actors. This evolutionary process depends critically on the bargaining
and cooperation relationships between regional institutions and key actors in GPNs
(Yeung, 2015). However, successful strategic coupling means host region accurately
integrates itself into the global production networks and bring technological or
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economic development, recoupling and decoupling implies a result of regional
selection and abandonment processes, respectively, and can be seen as key
mechanisms of uneven socioeconomic development (MacKinnon, 2012).
Although, theoretically decoupling from GPNs has been given conceptual
consideration, researches on strategic decoupling with empirical evidence are few
(Yang, 2013; Horner, 2014). Horner (2014) provides an interesting case study where a
developing country could choose to decouple from GPNs and may lead to positive
development outcomes. He argued that the Indian pharmaceutical industry in the
period 1947 to 1970 can be characterized as structural coupling, with a highly uneven
power relationship between the global lead firms controlling the Indian market and
the state possessing limited bargaining power. Then, official policies from 1970
onwards supported a wide-ranging strategic decoupling with an objective of
increasing domestic pharmaceutical production and making medicines more
affordable had resulted in significant influence. The number of foreign pharmaceutical
companies more than halved in a few years, from 45 in 1978 to 22 in 1981 and only
half a dozen foreign pharmaceutical companies remained in India By the late 1980s.
Meanwhile, the Indian domestic industry grew quickly, much of it independently from
the global lead firms. The share of the MNCs in the domestic pharmaceutical market
declined from around 90% in 1970 to 39% in 1993. The period of strategic
decoupling with extensive restrictions on MNCs from 1970 to 1991, have
accomplished India a successful pharmaceutical industry which the third largest in the
world in volume terms.
Yang (2013) also demonstrated a motivating research where official policies are
also crucial for MNCs’ decision to decouple from the host region. The study
demonstrates that since the mid 2000s, China has attempted to change its role in the
global economy from a low-tech assembler to a high value-added
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technology-intensive producer. For example, in Guangdong, the Party Secretary Wang
Yang designated the so-called “empty the cage for new birds” strategy to foster the
industrial upgrading, through which the low-end production as “old birds” would be
relocated out the Pearl River Delta (PRD) to other less-developed areas or inland
provinces, while the PRD would be replaced by high-tech industries as “new birds”.
Meanwhile, China has increasingly emerged as one of the world’s largest consumer
markets since the 2000s. As the result, in response to the state-designated
transformation from the prevalent export-oriented to domestic market-driven
development after the financial crisis, Hong Kong and Taiwanese investment have
restructured their the cross-border production networks by decoupling from source
regions in coastal China, and recoupling with the inland provinces. Referring to the
process of recoupling with the inland provinces, we will discuss related literature in
next section.
China’s Regional Evolution: a Dynamic Perspective on Strategic Coupling
Coastal China’s re-entry into the world of global production in the late 1970s
was a government’s strategy by the then leader, Deng Xiaoping, to modernize the
communist state (Yeung, 2015). The significant economic development in the coastal
region since 1980s, especially in Yangtze River Delta (YRD) and PRD, has attracted
abundant academic attention with the approach of GPN and recently strategic
coupling. For example, Vang & Asheim (2006) demonstrated that the strategic
coupling with the transnational corporations is crucial for developing self-organized
and self-sustained regional innovation systems, such as Shanghai’s high-tech regions.
Yang (2009) argued that the redistribution, where Taiwanese personal computer
investment from PRD to the YRD since the early 2000s, is resulted from divergent
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strategic coupling between respective Taiwanese firms in PRD and YRD and their
lead firm counterparts fostered by different local institutional initiatives. Wei & Liao
(2013) argued that strategic coupling between TNCs and domestic Chinese firms
rarely exists in Suzhou’s ICT industry and global production networks have not
brought substantial benefits to the development of domestic firms in the region.
However, Liu & Yang (2014) demonstrated that the home appliance industry in
Shunde mobilized its regional assets to develop strategic coupling with foreign firms
in a conducive institutional environment and achieved industrial catch-up.
The late literature of Chinese studies with the perspective on strategic coupling
also notices manufacturing’s westward movement. Van Grunsven & Wang (2013)
argued that electronics manufacturers became interested in Chengdu at the particular
juncture of the second half of the 2000s. This was associated with circumstances
external to Chengdu (or inland China in general), including the Western Development
policy by the central government and measures for developing electronic information
industry by Sichuan and Chengdu government. When a range of circumstances began
to coincide with manufacturers’ need, Chengdu’s regional assets (human resource
supply, consumption market, etc.) actually came to fruition. Gao et al. (2017) explores
the factors permitting strategic coupling in Chongqing, where has become a new
notebook manufacturing cluster since 2008. The reasons including: changes in
circumstances in the existing clusters in PRD and YRD, the ability of Chongqing
Municipal Government (CMG) with central state support to persuade leading global
corporations to relocate to Chongqing, and modern modular value chains offer the
possibility of a rapid but piecemeal transfer of a complete chain. Yang (2017)
considers that the rapid development of notebook manufacturing in Chongqing could
been largely attributed to the rising power of strategic partner suppliers and their
changing power relations with lead firms in the negotiation with local states in
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Chongqing in the process of laptop production relocation from coastal since the late
2000s.
These literature with perspective on strategic coupling shed light on the dynamic
process of Chinese regional development and industrial upgrading by the cooperation
with GPNs. However, there are few literatures dealing with the stagnation of
manufacturing’s westward movement or the process where GPNs decouple from
China. This paper aims to contribute the literature of Chinese studies by exploring the
mechanism of the stagnation of industrial relocation and the literature of strategic
coupling by adding new case study where GPNs decouple from the developing
countries. Previous researches on strategic decoupling with empirical evidence
demonstrated that official policies are crucial for MNCs to leave the host region or
country (Yang, 2013; Horner, 2014). Meanwhile, the literature of manufacturing’s
westward movement with the perspective on strategic coupling confirmed that
government’s policies or measures are critical to attract transnational companies to
transfer production bases to inland China (Van Grunsven & Wang, 2013; Gao et al.,
2017; Yang, 2017). These researches imply that the change of preferential policies and
conducive institutional environment, which once fostered the strategic coupling and
industrial relocation, may touch off the process of decoupling. In the following
sections, we will explore the transformation of preferential policies related to
manufacturing’s westward movement and its consequences.
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Polices Change on Promoting Industrial Transfer
Period Ⅰ: Both Central and Local Government were Active
Since the mid-2000s the State Council executed a series of policies which were
specifically aimed at the processing trade to attract or even enforce export-oriented
factories in the eastern region to move their production bases to the interior. The
processing trade system in China, which is based on the temporary admission of
imports and China's comparative advantage of labour costs, started at the end of
1970s and the system expanded rapidly, supported by the fast growing foreign direct
investment (FDI). In the 1990s, the processing trade amounted to about half of
China's international trade8. The processing trade firms, responsible for the import of
intermediate materials for re-export after processing and assembling in China, had
been the critical engine of this nation's export-leading economic growth and treated
with preferential policies. However, due to trade frictions and the pressure on Yuan's
appreciation largely caused by the enormous export from the processing trade, the
Chinese government gradually decreased preferential treatments to processing trade
firms since the beginning of the 2000s, especially to the ones in the labour-intensive
industries, where the benefit of technology spillover is small9. Finally, the State
Council started to push these labour-intensive and export-oriented factories from the
coastal region to the Midwest after the mid-2000s.
8 Until recently, the share of the processing trade to China's international trade is still critical. In 2012,
the 42.1% of China's total export value was through the processing trade (Ministry of Commerce 2013).
However, as the demand in developed economies declined and multinational firms have found cheaper
production bases outside China, the “workshop of the world” has slowed down its production and led
to a sharp contraction of the processing trade. The processing activities were responsible for 46 percent
of China’s exports and 39 percent of its imports in 2007. This share declined dramatically, to 33 percent
of exports and 27 percent of imports in 2015( Lemoine and Ünal 2017 ). 9 Guo 2011.
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In 2006 the Ministry of Commerce started a project called Wanshang Xijin 万商
西进 (thousands of enterprises go west) to urge the coastal manufacturers to transfer
to the central and western region. The main content of Wanshang Xijin is improving
the infrastructure, the condition of industrial parks and labour skill in the interior
region with the central government's financial assistance to attract coastal processing
trade firms to set up factories there. The Ministry of Commerce declared that it would
cooperate with the China Development Bank and provide 15 billion RMB of
preferential loans to NETDZs (National Economic and Technological Development
Zones) and some promising Provincial Development Zones in the Midwest to upgrade
the investment environment there from 2006 to 201010.
In 2007 the policies became much aggressive while the Ministry of Commerce
purposely created artificial and extra costs for the labour-intensive factories. On July
23, 2007, the Ministry of Commerce and the General Administration of Customs
jointly announced a new policy of the processing trade, Notice 44, which was put into
practice one month later. Notice 44 issued a new catalogue of products restricted from
the processing trade. The restricted catalogue added 1853 commodities, accounting
for 15% of total commodity codes. Most restricted commodities are products of
labour-intensive industries, including plastics and their products, yarn, fabrics,
furniture, and base metals and their products. All enterprises engaging in products
under the restricted category are required to pay a 50% or 100% deposit on the import
taxes payable (i.e. Customs Duties and Import VAT) on the bonded import materials,
depending on the enterprises’ records of Customs affairs. However, enterprises
located in the central and western regions can be exempted from paying this deposit.
Furthermore, newly established processing trade firms in the eastern region are
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The Ministry of Commerce 2006.
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not allowed to conduct the processing trade of products under the restricted category.
In sum, since August 23, 2007 (1) many processing trade firms located in the eastern
region have been required to pay a deposit amounting to 50% or 100% of import taxes,
which would much affect the cash flow of these firms; (2) it became very hard for
new investors to set up production bases for low-cost, export-oriented and
labour-intensive products in the eastern region11. Obviously, this policy aggressively
forced processing trade enterprises to move to the central and western regions.
Four months after of the announcement of Notice 44, the Ministry of Commerce
issued a new project, called Jiagong Maoyi Zhongdian Chengjiedi加工贸易重点承接
地 (the key recipient cities of processing trade), to promote the industrial transfer. It
planned to create 50 recipient cities of processing trade in the Midwest and increase
the ratio of international trade through processing trade in the Midwest to 5%, almost
the double the figure in 200612, by the end of 2010. The crucial point of the policy is
that China Development Bank would provide a total of 30 billion RMB in preferential
loans to recipient cities for improving infrastructure and directly to key enterprises
who will set up factories in the recipient cities with low interest rates which, at best,
could be lower than the market level by 10%. Simultaneously, the Government also
revealed the first nine recipient cities in six provinces, which were all located in the
central region13.
Notice 44 aggressively forced labour-intensive processing trade enterprises to
relocate to the Midwest. However, the policy only lasted for about one year. Due to
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Notice 44 was not applicable to new enterprises established in special Customs zones, such as Free
Trade Zones (FTZs) and Export Processing Zones (EPZs) in the eastern region. However, the
production costs, such as land and utilities, in special Customs zones are relative high. This exception
did not have much meaning for labor-intensive enterprises. See Guo 2011. 12
In 2006, the ratio of the processing trade in the Midwest to the whole nation is only 2.6%. See Guo
2011. 13
The list of nine cities see table 2. Ministry of Commerce 2007.
21
the dramatic collapse of China's exports after the global financial crisis, the Ministry
of Commerce and China Customs suspended Notice 44 in the end of 200814 and no
similar policies have been put into practice since then. Although the stick approach of
driving labour-intensive enterprises to the Midwest was interrupted by the global
financial crisis15, the carrot approach of attracting key enterprises with preferential
loans was executed continuously. The second and third batch of recipient cities were
separately revealed in April 2008 and November 2010; consequently there are 43
prefecture-level cities, 2 of which are not the whole city but only the area of EDTZ
(Economic And Technological Development Zone), across 18 provinces and
Chongqing city could enjoy the preferential policies of the industrial transfer.
Table 2 shows the list of 44 recipient cities of the processing trade and we can
observe some characteristics from the table. Firstly, the policy extended the
geographic scope from the central region to a national scale. The first batch of cities
were all located in the central region, but the second batch of cities extended to the
eastern and western region. Secondly, although it extended the spatial scope, recipient
cities were still aggregated in the central region. Many provinces have only one
recipient city; on the other hand, a few provinces in the central region own
multi-recipient cities, as many as five or six, such as Anhui, Jiangxi and Hunan.
Almost two-thirds of the 44 recipient cities are located in the central region so that the
central region owns the most intensive clusters of industrial transfer. Finally, the
policy of industrial transfer was upgraded in bureaucratic level from the Ministry of
Commerce level to the State Council level. The first and second batch of recipient
14
See Guo 2011. 15
Although Notice 44 was suspended in the end of 2008, the stress it put on the coastal enterprises
never disappeared. The owners or managers of labor-intensive enterprises know that the similar
policies may come back only if China's exports become prosperous again. Therefore, after the
suspension, the owners or managers of coastal enterprises still came to visit recipient cities to
investigate the environment for investment. Interview with a local officer at city hall in Chenzhou, 15
June 2011.
22
cities were announced singly by the Ministry of Commerce, however the third batch
of recipient cities were announced jointly by three departments of the State Council:
the Ministry of Commerce, the Ministry of Human Resources and Social Security and
the General Administration of Customs.
Table 2. The Recipient Cities of Processing Trade
Eastern Regions Central Regions Western Regions
Hainan: Haikou
Fujian: Longyan
Liaoning: Jinzhou
Anhui: Hefei, Wuhu, Anqing,
Maanshan, Chaohu
Jilin: Yanbian
Jiangxi: Nanchang, Ganzhou,
Jian, Shangrao, Yichun
Hubei: Wuhan, Yichang,
Xiangfan, Jingmen
Hunan: Chenzhou, Yueyang,
Yongzhou, Yiyang,
Henyang, Changde
Henan:, Xinxiang, Jiaozuo,
Luoyang, Zhengzhou
Shanxi: Taiyuan, Houma
EDTZ,
Heilongjiang: Haerbin
Chongqing
Sichuan: Chengdou,
Mianyang, Deyang
Xinjiang: Shihezi EDTZ
Neimenggu: Baotou
Guangxi: Nanning, Qinzhou,
Wuzhou, Beihai
Yunnan: Kunming
Shanxi: Xian
Ningxia: Yinchuan
*Underline : the first batch of recipient cities; no underline: the second batch;
Underline : the third batch.
Source: Ministry of Commerce 2007, 2008; Ministry of Commerce & Ministry of Human
Resources and Social Security & General Administration of Customs 2010.
Besides its united announcement, the State Council also revealed its first guiding
opinions about the industrial transfer (Document Number: No.28 [2010] of the State
Council)16. Instead of the Ministry of Commerce's promoting policy which is focusing
on the processing trade, the State Council encouraged more kinds of industries to
move to the Midwest, such as mining and advanced service industries, in Document
No.28. However, the State Council did not announce any new preferential policy
which exceeded the Ministry of Commerce's plan.
16
State Council 2010.
23
Period Ⅱ: Only Local Government was Active
Document No.28 of the State Council did not bring any new preferential policy.
That means only the recipient cities and processing trade firms in it could enjoy the
preferential loans and other financial support from the central government. So
provincial governments in the interior region were eager to get their inner-province
cities onto the list of recipient cities 17. In the competition, Anhui successfully
conducted a national level model area strategy which was imitated by other provinces
later. After the first batch of recipient cities was announced, Anhui set up a Wanjiang
Chengshidai Guojiaji Chengjie Chanye Zhuanyi Shifanqu 皖江城市带承接产业转
移示范区 (the model area of undertaking industrial transfer in Wan-jiang urban belt)
project and appealed for it to the National Development and Reform Commission in
2008. It planned to make a broad area, mainly a group of cities along the Yangtze
River inside Anhui, to be the bases for undertaking the industrial transfer from the
downstream area, the Yangtze River Delta.
With support from the National Development and Reform Commission, the State
Council approved the establishment of the model area in January 2009 and recognized
the provincial plan of the area's development one year later. Although the central
government did not directly commit any extra support for developing the model area,
there were three main cities, Anqing, Maanshan and Chaohu, inside the model area
which were listed in the second and third batches of recipient cities. Combining the
other two main cities in the model area, Hefei and Wuhu which were previously listed
in the first batch of cities, the Wan-jiang urban belt has become the one of the most
intensive areas of the processing trade's recipient cities. After the Wan-jiang urban belt,
17
21 Shiji jingji baodao 2007.
24
the State Council approved another nine applications of model areas between 2010
and 2014: Guangxi Guidong 广西桂东 (a batch of Guangxi's cities which are close
to Guangdon), Chongqing Yanjiang 重庆沿江 (the riverside area of Chongqing),
Hunan Xiangnan 湖南湘南 (a batch of Hunan's cities which are close to
Guangdong ), Hubei Jingzhou 湖北荆州 (Jingzhou and a batch of cities near to it)
and Jin Shan Yu Huanghe Jinsanjiao 晋陕豫黄河金三角 (the neighbouring parts of
Shanxi, Shaanxi, and Henan on both sides of the Yellow River), Gansu Lanbai
Economic Zone甘肃兰白经济区( the area of Lanzhou and Baiyin city), Gannan赣南
(Ganzhou city, Jiangxi), Sichuan Guangan 四川广安 (Guangan city), Ningxia
Yinchuan Shizuishan宁夏银川石嘴山 (the area of Yinchuan and Shizuishan city).
The policy change from “recipient cities of the processing trade” (2007-2010) to
“ the model area of undertaking industrial transfer” (2010-2014) demonstrated the
transformation of central government’s attitude toward promoting industrial transfer
from active to passive. Firstly, setting up the model area is a bottom-up process. As
mentioned earlier, the first model area was initially planned by Anhui government and
then recognized by National Development and Reform Commission (Yang, 2012). In
our fieldwork, the officers of Chenzhou city confirmed that the project of Hunan
Xiangnan model area was originally drawn by them, and emendated and submitted to
the central government by Hunan government 18. Secondly, comparing to period of
recipient cities, the central government provided fewer financial incentive to
encourage industrial transfer. Previously China Development Bank provided
numerous preferential loans to recipient cities for building infrastructure. However the
model area only received rare fiscal support. The officers of Hunan government told
us, after Hunan Xiangnan model area established in 2012, the provincial government
18 Interview with local officers at city hall in Chenzhou, 29 July 2015.
25
only received 10 million RMB subsidies from the central government every year and
the subsidy merely last for 3 years. Instead of the rare support from the country,
Hunan government has budgeted 100 million RMB to the 3 recipient cities for
building infrastructures since 201219.
In short, in the period of the model area, the central government almost only
provided nominal support. The provincial government mainly received the brand of
nation-recognized model area for attracting more coastal firms to move into the area.
Although being recipient cities could obtain more essential support from the national
banks, the central government never increased recipient cities since 2010. Under such
circumstances, some latecomers of model area even have no recipient cities inside the
area, such as Sichuan Guangan and Gansu Lanbai Economic Zone. To the end, the
central government has become reluctant to give the nominal support. The provincial
government of Inner Mongolia has endeavoured to set up Mengdong (eastern region
of Inner Mongolia) model area since 2012 and the project has not been recognized by
the central government yet (Government of Inner Mongolia, 2019).
Period Ⅲ: The Inconsistent between Central and Local Government
After the “recipient cities of the processing trade” (2007-2010), the central
government has been passive to release preferential policies for stimulating industrial
relocation. Provincial and prefectural governments have become the main actors of
state agency to attract coastal GPNs to transfer manufacturing bases into inland
regions. The competition of providing preferential measures amid local governments
for drawing the attention from coastal firms has been fierce and even chaotic (Guo &
Li, 2017). Against this backdrop, the Ministry of Industry and Information
19 Interview with provincial officers in Changsha, 21 July 2015.
26
Technology released “Catalog for Guiding Industry Transfer” in 2012. In the
introduction part of this guiding opinion, the Ministry explained that one of main
reasons for formulating the guidelines is to deal with the chaos of industrial transfer:
in recent years, many areas have been aggressively promoted industrial relocation,
rapid growth of regional economy and the upgrading of industrial level. However, the
trans-regional transfer has been lack of guiding and coordinative policies. The
phenomenon of manufacturing’s blind transfer and chaotic relocation has been
existed (Ministry of Industry and Information Technology, 2012, p.1)20. However, this
official guiding book didn’t draw up any penalty clause. Eventually it couldn’t stop
local governments’ competition of preferential policies for attracting industrial
transfer.
For depressing excessive competition, the central government revealed a forceful
policy in the end of 2014. The State Council issued “Notice of the State Council on
Sorting out the Preferential Tax Policies and Other Preferences” (No. 62 [2014], State
Council) on trimming local preferential tax measures:“In recent years, for developing
regional economies, some areas and government branches gave specific companies
and investors preferential policies, such as special taxes, non-taxes treatment and
government’s subsidy. These policies to some extent have promoted the growth of
investment and industrial agglomeration. However, some preferential policies
disturbed market’s order, undermined the effect of government’s macroeconomic
policies, even against our diplomatic agreements with other countries and caused
trade friction.”(State of Council, 2014).
The notice stressed that the move aims to build a more orderly and open market
20 In 2018, the ministry released the“Catalog for Guiding Industry Transfer” again. Correcting the
chaos of the transfer was not the purpose anymore in this new version. This time the Ministry
emphasized that the release was for restoring the momentum of regional development in a complicated
environment of international economies (Ministry of Industry and Information Technology, 2018).
27
and fight against regional protectionism, seeking to eliminate the barriers hindering
free flows and give full play to the dominant role of market in resource distribution.
For adhering to the tax statutory principle, the regulation bans any form of preferential
tax policies without approval by the State Council, except for the tax administrative
privilege set by laws (China Daily, 2014). In practice, local governments’ own
preferential policies which were not approved by the central government or set by
national laws must be abandoned after Dec. 1, 2014. Or local governments have to
give detailed reports on their own preferential policies to the Ministry of Finance by
the end of March 2015 and then the State Council will review and examine the
preferential policies (Ministry of Finance, 2014).
Although Notice 62 aimed to terminate the excessive competition of prefer
policies amid backward areas, most of them in the inland region (China Business
News, 2014), it threatened all companies across the nation which were enjoying the
special treatment provided by local authorities. The pressure of losing special
treatment led to enterprises’ comprehensive petitions for suspending the Notice. For
example, Taiwan’s six main business groups for the first time in history unitedly
submitted a petition to President Xi Jinping in March, 2015 (Qiu 2015). Two months
later after Taiwanese businessmen’s large-scale appeal, the State Council revealed
“Notice of the State Council on Preferential Tax Policies and Other Preferences” (No.
25 [2015], State Council) and suspended the most influence of Notice 62 (Want Daily,
2015a).
Polices Change and Strategic Decoupling of GPNs
Even though the central government released Notice 25 to offset the most impact
caused by Notice 62, Notice 62 still remained significant influence on GPNs’ decision
28
of holding up their investments in the inland region or even decoupling from China.
Firstly, numerous investments forward the Midwest were suddenly suspend after the
announcement of Notice. For example, in the period of Lianghui ( the National
People's Congress and the Chinese People's Political Consultative Conference) in the
March 2015, Wei Hong, the governor of Sichuan province, appeal to Premier Li
Keqiang and expressed that around 700 investment projects with total amount of one
hundred million RMB were suspended since the release of Notice 62(Want Daily,
2015b).
However Notice 25 could not restore all the investment projects suspended by
Notice 62. The fundamental principles of Notice 25 are: 1. referring existed projects
with contract period, companies could benefit the special treatment before expiration;
2. existed projects without contract period, local governments must set up the
deadlines foe preferential measures; 3. no more new projects could enjoy local
governments’ own preferential policies unless approved by the central government
(State of Council, 2015). Therefore, Notice 25 only could restore the investment
projects in which companies and the local governments already signed the contract
before the end of 2014. Meanwhile, Notice 25 could not change the critical
consequence of Notice 62: local governments could not provide their own preferential
policies to attract new investments.
Local governments’ preferential policies actually decrease investors’ production
cost and have been an effective tool to attract investments. Without this important tool,
local governments significant lose their negotiation power when they want to draw
GPNs into the region. Although, all local governments across China have to abandon
the special treatment for attracting investment21, the situation is much crucial in the
21 Even the winners of China’s regional economies have to face the constraint of Notice 62. For
example, for encouraging the development of venture capital, Shenzhen city decreased the income tax
rate of venture capital’s founders or partners from 35% to 20% since 2010. This preferential measure
29
Midwest. As one Taiwanese businessman said: the Midwest naturally has been that
kind of region which is short of comparative advantage at manufacturing. If there
were not those preferential policies, no one would come here. However, the good days
with special treatment didn’t last for 3 years. Now the cut-throat reform (Notice 62)
and increasing cost, such as labor and transportation, make us like abandoned babies
(Want Daily, 2015c). For example, the chairman of the association of Taiwanese
businessmen in Chongqing expressed that the average auction price of industrial land
is one are for 300-400 thousand Yuan. However with local government’s tax refund,
the de facto price is one are for 100 thousand Yuan. Without the preferential measures,
the new investments in Chongqing have to pay at least the double price in the cost of
acquiring land for factories (Want Daily, 2015d).
The historical meaning of the dispute of Notice 62 could be considered as a
centralization process of China’s taxation system. Although Notice 25 eased the
immediate effect caused by Notice 62, in which contracts signed before the end of
2014 still could last their preferential for a while, Notice 25 couldn’t changed the
main purpose of Notice 62 that firmly establishes the principle of taxation by central
government’s laws and policies (Li, 2015). The fiscal reforms in 1994 established a
tax- sharing system between the central and subnational governments and assigned a
number of tax revenues to subnational governments as local taxes. Local government
revenues include local tax revenues and shared tax revenues. A number of taxes were
assigned to local governments as local taxes, including the urban land use tax, land
value- added tax, real estate tax, deed tax, vehicle and vessel tax, tobacco tax,
farmland occupation tax, and others. In addition, provincial and local governments
can share with the central government the revenues from the VAT, business tax,
obviously was inconstant with national law, so Shenzhen city cancelled the policy in Feb. 2015(Qiu,
2015).
30
individual and corporate income tax, resource tax, and urban maintenance and
construction tax (Man, 2010).
Local governments used to return part of the local tax revenues or shared tax
revenues to firms that already paid the taxes or fees as the subsidies for encouraging
firms operating the manufacturing in the region. The central government aimed to
draw back local governments’ measures of tax refunding by Notice 62. Although
Notice 25 absorbed some shock but it could not change the fact new contracts after
the end of 2014 with special tax treatment are illegal. Since then, even if local
governments venture preferential tax policies on attracting investments, firms knows
that the central government could revoke the preferential measures at any moment.
Taiwanese accounting magazine estimated that without the preferential policies of tax
return Taiwanese firms of manufacturing in China may lose 5% to 10% of their profits
and to some industries of low gross profit it means operating factories in the red (Du
& Chen, 2015).
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