Decoupling China before Trade War: (draft) Abstract and presentation… · The westward movement of...

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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.

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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.

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40000

60000

80000

100000

120000

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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 (%)


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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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%


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)


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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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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