Modern Economy, 2011, 2, 757-768
doi:10.4236/me.2011.25084 Published Online November 2011 (
Copyright © 2011 SciRes. ME
A Different Development Model in China’s Western and
Eastern Provinces?
Meine Pieter van Dijk
Water Services Management UNESCO-IHE Institute for Water Education, Erasmus Un iversity Rotterdam, Rotterdam,
Received June 7, 2011; revised July 28, 2011; accepted August 9, 2011
Economic growth in China has declined between 2008 and 2009. The global financial crisis of 2008/9 has
shown a number of structural weaknesses in the Chinese economy, such as the functioning of its capital and
labor markets and the substantial income differences between the developed eastern and less developed
western provinces. Migration is the linchpin of China’s development model; workers move from the western
to the eastern provinces and back, in particular because of the crisis. How has China reacted to the financial
crisis of 2008? After assessing the Chinese stimulus program and its negative effects on liquidity in general
and the financial sector in particular some of the resulting issues, such as a dual development model for the
eastern and western part of China and the development of the internal market at the expense of more export
will be reviewed, before assessing which factors can still constrain China’s ascent.
Keywords: China Dual Development Crisis Provinces
1. Introduction
A number of structural weaknesses in the Chinese econ-
omy became clear during the crisis of 2008/9. We will
discuss distortions in the functioning of China’s labor
and capital markets and the substantial income differ-
ences between the developed eastern and less developed
western provinces. Migration is very important in ex-
plaining the success of China’s development model.
Workers from the western provinces have moved in large
numbers to the eastern provinces. Some of them were
forced to go back during the recent crisis.
In this article we analyze what the consequences of the
global financial crisis for China are and how China has
reacted to the crisis of 2008. We start with assessing the
Chinese stimulus program and its positive and negative
effects. In particular we assess its effects on liquidity in
general and the financial sector in particular. Then some
of the resulting issu es, such as a dual developmen t model
(different for the eastern and western part of China) and
the issue of developing local consumption instead of
depending on exports will be analyzed, before assessing
what all this means for the relative position of China in
the world economy. We will argue that China in the
meanwhile continued its ascent as a superpower.
2. The Financial Crisis in General
The 2008 crisis started as a financial crisis in the United
Sates (US) and became an economic crisis with world-
wide repercussions. It came to Europe and Asia, origi-
nally in the form of less trus t in the financial markets, but
also resulted in a decline in demand, and eventually re-
sulted in a global economic crisis. A number of structural
weaknesses of China’s capital and labor market became
clear during the recession. In the labor market we note
that in times of crisis migration flows may reverse, as it
happened in China in 2008/09. Currently there are short-
ages of skilled labor in eastern provinces and some of the
migration flows have reversed again in 2009. To solve
these problems unskilled migrant workers were hired for
higher wages for job s requiring skills. In the capital mar-
ket we see additional lending, which is promoted by the
Chinese government to stimulate the economy, but
which has also undesira ble effects.
Because of the economic crisis of 2008/09 economic
growth in China declined at the end of 2008. Exports
decreased rapidly and it is estimated that millions of Chi-
nese workers lost their jobs and many returned to their
provinces in the western part of China. Subsequently in
November 2008 the Chinese government launched an
important stimulus program. A lot of funds for infra-
structure development were made available and cities
and provinces were also invited to make a contribution.
Much of the currently rapidly increasing growth is due to
the stimulus package of 500 billion do llar [1]. What were
the effects of the recession for the Chinese economy?
Van Dijk [1] distinguishes short and medium term ef-
fects and looks at the rebound (Table 1).
3. The Crisis in China
The Chinese economy has grown rapidly since 1978 in
particular in the big cities in the eastern part of the coun -
try, fueled by the Special Economic Zones located
closely to these cities. Because of the recent economic
crisis growth declined from an averag e of 10 to 7 pe rcen t
in 2008, but exports declined almost 40 percent at the
end of 2008 (for August 2009 the decrease was 23 per-
cent compared to a year earlier; NRC, 14-10-2009). Ac-
cording to the Asian Development Bank economic
growth in Asia was only 5 percent at the end of 2008 [2].
The IMF announced that China’s growth would decline
from 9.3 to 8.5 (Ch ina Daily, 8-11-2008). Feb ruary 2009
the figures would be adjusted to 6.7 percent. The Chinese
government later announced 8.9 percent growth for 2009,
indicating the crisis did not last long.
Rapid urbanization is a key driver for socio-economic
change in China!1 Agglomeration played a major role in
China’s growth and was reinforced by increased gov-
ernment investments in cities which later attracted more
foreign direct investment (FDI). Big cities benefited in
particular from these policies and investments made by
the national, provincial or municipal authorities. How-
ever, the crisis resulted in 23 million unemployed work-
ers, who mostly had to go back to their province of ori-
gin. In particular textile, games and furniture industries
suffered (Financial Times, 25-8-2009). The Chinese
press also pointed to the decline in the ship building and
machine industry (China Daily, 8-11-2008) . This number
of unemployed workers would be about 20 percent of the
130 million migrants that moved to the eastern cities
during the last decade. During the first half of 2008
60.000 companies closed down and FDI dipped. In the
second half of 2008 another 80.000 companies closed
down and that only in the Chinese power house the Pearl
River Delta near Hong Kong. Reasons mentioned in the
Chinese press, besides the financial crisis, were the
Olympic Games, heavy snow storms at the beginning of
2008 and the earthquake in Sichuan in May 2008.
Western provinces have grown more slowly in the past
than the eastern provinces and many workers from these
provinces migrated to the eastern provinces to find a job ,
sending back a substantial part of their revenues. At least
130 million migrated during the last decade and another
200 million is expected to leave the rural areas in the
next decade, willing to work for a low income and con-
tinuing China’s competitive advantage, until a serious
graying of the one child population will start after 2020.
China wants to change the regional imbalance by stimu-
lating the economic development of the western part of
the country. Policies like promoting investments in the
west, stressing the availability of cheap labor and space
and facilitating loans have been imple mented.
At the same time economic growth is leveling off in
the mega cities in the eastern part of China and picking
up in the regional capitals in the western provinces. The
eastern provinces need investments for the upgrading of
their infrastructure and housing stock and to move to-
wards a more capital intensive model of production,
while labor and space intensive industries move to the
western provincial capitals. These developments may
change the migratory flows, where the eastern provinces
need more skilled workers and the potential migrants
from the western provinces can find employment in the
more labor intensive industries that shifted west. This
development would also contribute to the development
of China’s internal market and wean it off from its export
Table 1. Repercussions of the financial crisis for Chinese cities.
Higher unemploymen t and the ne ed to support unemployed wor kers
Problems with social services for migrant labor: schooling, health, housing, etc
Short term
Reversal in migration flows
The impact of the one child policy
Growth of intermediate towns
Medium term
Decline of Chinese export-oriented development mo d e l
Urban spending has in c reased
Shortage of skilled labor Rebound
A different kind of ur ba n d ev elo pment, including attention to e cological aspects
1We do not discuss the negative impact of economic growth on the expansion of cities and the resulting demand for rural land [3]. They found that
economic growth of 10 percent results in 3 percent expansion of urban land!
Copyright © 2011 SciRes. ME
China reacted to the crisis by putting together a stimu-
lus plan of more than 500 billion dollar to be spent in
2009 and 2010 (Table 2). According to some estimates
the program concerns between 15 and 17 percent of the
Gross Domestic Product (GDP; Financial Times, 22-10-
2009). The focus is very much on improving infrastruc-
ture and dealing with the consequences of the Sichuan
province earth quake of May 2008.
Most of the money is spent on infrastructure and only
a small part on services, such as housing or health care.
One may wonder whether all this money is new money,
or whether planned investments have just been moved
forward. In total about US$ 409 billion has been made
available in the form of loans since the crisis started (Fi-
nancial Times, 25-8-2009). Some of these expenditures
had to be financed by the provinces or cities th emselves.
The stimulus program is meant to be temporary. What is
going to stimulate the economy once these funds are ex-
hausted? The current program is certainly going to lead
to a substantial government debt, which needs to be
served and could lead to crowding out of private invest-
ments by dynamic small enterprises in China. Usually
these smaller companies create the jobs that China needs
Early 2009 the Chin ese Prime minister announced that
a second stimulus program was considered (Financial
Times, 2-2-2009). The second program of fiscal meas-
ures would help to keep the growth of the economy at 8
percent. The fir st program was already consider able. 500
billion dollar additional expenditures in two years is al-
most as much as the 800 billion president Obama re-
ceived from congress after his election to fight the reces-
sion, although the American economy is three times the
The Chinese New Year in 2009 was really the turning
point for the Chinese economy. In the eastern Guang-
dong province by the end of Feb ruary 2009 more th an 90
percent of migrants had come back to this province,
Table 2. First Chinese stimulus plan of more than 500 bil-
lion dollar for 2009 and 2010.
Type of expenditure Share (%)
Infrastructure: rail roads, highroads, airports &
electricity grid 45
Repair activities after the Sichuan province earth q u a k e 25
Rural development and infrastructure projects 9.25
Ecological and environmenta l a c ti vi t ie s 8.75
Housing projects 7
Innovation activities 4
Health care, cultural and education activities 1
Source: Wall Street Journal (28-11-2008).
meaning three things. It shows determination among
migrant workers to move permanently to the east coast.
Secondly, these workers still seem to be necessary and
finally a large numbers of these migrant workers is still
living outside the Chinese social security system [4].
Fleischer et al. [5] summarize the major factor deter-
mining economic development, which so far tended to
favor the eastern provinces. According to Fleischer et al.
[5] regional development is the resu lt of physical capital,
human capital, infrastructural capital, new technologies
and market reforms.
Out of a 20 million population in Shanghai there ar e at
least three million migrant workers2. They represent one
third of all workers in Shanghai. This is one of the rea-
sons why the municipal government decided to allow
inhabitants who are both ‘only child’ to have two chil-
dren. Su ch a policy would also r esult in a more ev en age
distribution of the future population, which currently
tends to be skewed because of the one child policy. Cur-
rently the debate on illegal labor heats up in China, be-
cause some workers in the eastern provinces now come
from neighboring countries. The official slogan for mi-
grants is “special group, equal treatment”, but it would
be quite a step forward if these poor people would be
given citizen’s rights!
Migration leads to problems in the city and in the
country side3. Migrant labo r is often misused in the cities,
for example in Shanghai, although officially rights of
migrants are inviolable4. The average wage of unskilled
labor in China is about US$ 7 dollar per day. Plans to
deal with the current social exclusion of migrants are
developed. Changing the situation of migrants in the big
eastern cities require different policies, such as legal ad-
justments: changing the Hukou (residency permit) sys-
tem and recognition of migrant rights. In the past the
migrants would just get temporary residence permits.
The Guangdong Province subsequently announced plans
to safeguard the rights of migrant workers and their
2On a trial basis by the end of 2002 already 770,000 such workers had
received an integrated assurance, covering medical expenses, occupa-
tional injuries and allowances for retirement paid by their employers
3Chinese newspapers describe the problems under heading like: “Fear
over countryside childcare” (or: Home alone in country side). Anothe
type of problems is battles over the user rights for the land the migrants
have left behind. The China Daily recently wrote about these protests
under the title “Suzhou protests over payouts for seized land”.
4The Shanghai Star (9 December 2004) gives an example of seven
migrants from the countryside who had been working under a labor
contractor who was in charge of the construction job but fled withou
aying the workers’ wages when the project was almost finished. They
then attempted to commit suicide by consuming large quantities o
drugs in their temporary shed in the city of Shenyang in Northeas
China. The solution the Chinese have found for these kinds of problems
is that the workers should start registering themselves in the city, which
is not very likely for most migrants, who know they are not supposed to
leave their rural areas.
Copyright © 2011 SciRes. ME
families in this province. This floating population of
about 23.3 million temporary workers is about one third
of the 78.5 million permanent residents in the province5.
4. China’s Unequal Development
China has a large number of provin ces and can be sp lit in
three (west-central-east) or two parts (taking middle and
far west together) as will be done in this contribution.
Table 3 provides the basic data for three regions. Table
4 provides the names of the provinces and their capital
city. Four cities are so-called city provinces. The differ-
ences in development level between the provinces are
big. Inequality exists in China between the urban and
rural areas, between the Eastern and Western provinces
and between the workers in the industrial sector and the
farmers. China’s western provinces are less developed
than its eastern provinces. China's increasing Gini coef-
ficient is an indicator of the personnel income distribu-
tion. It increased from 41.5 in 1995 [7] to 49.6 in 2006
(Financial Times, 27-12-2006). Also differences in
wages, investments and per capita production illustrate
the inequa lity.
The western provinces are less developed than the
eastern provinces. The increasing ineq ua lity is a poten tial
source of dissatisfaction and the government would like
to develop the western provinces. China has shown high
annual rates of economic growth since Deng Xiaoping
started the economic reforms in 1978 with liberalizing
agriculture. However, the income distribution has be-
come very unequal [5], which can also be noticed from
Figure 1 comparing the per capita Gross Regional Prod-
uct (GRP) in western and eastern provinces. Both areas
have grown, but the gap between them has become big-
ger. Increasing inequality has been noted in particular
since the 1990s [8]. The reforms continued with stimu-
lating Special Economic Zones (SEZ), located mainly in
the south eastern provinces. Typically the per capita
GDP in these provinces is now even higher than in the
north eastern provinces where the traditional large scale
Table 3. The three regions of China data for 2008.
Area Population GDP Resident Consumption Level Per capita
Million km2 Percent Million Percent Billion YuanPercent Yuan Percent
Northeast and East Coastal part 1.70 17.8588.3844.320577.52 62.9158294 58.8
Middle and Near-Reach-West part 3.13 32.6666.0350.210812.2 33 88086 32.7
Far-Reach-West part 4.78 49.853.865.5 1332.27 4.1 22984 8.5
Source: calculated base d on the provinci al data available on the website of China Sta tistics Bureau, 20 09.
Figure 16. Per capita Gross Regional Product in Yuan 2004 until 2008 (Source: CSP [9]).
5The floating population in China is defined as people who are not entitled to be registered as permanent residents according to current laws and regu-
lations. It usually implies that travelling is more difficult and these people have no access to services such as housing, education and health in the city
where the migrants are working. The urban residency rules were designed after the founding of the People’s Republic in 1949 and intended to restrain
farmers from entering the c i ti e s a n d have the same status as permanent residents (China Daily, 11 March 2004).
6Figures 1 and 2 are the result of research with Paul Libaudiere (Erasmus University), ba se d on CSP [9].
Copyright © 2011 SciRes. ME
Table 4. The basic information of three areas of China.
Area Province Capital City
Liaoning Shenyang
Jilin Changchun
Heilongjiang Haerbin
Hebei Shijiazhuang
Shandong Jinan
Jiangsu Nanjing
Zhejiang Hangzhou
Fujian Fuzhou
Guangdong Guangzhou
East Area
Hainan Haikou
Sichuan Chengdu
Hubei Wuhan
Hunan Changsha
Anhui Hefei
Jiangxi Nanchang
Shanxi Xian
Gansu Lanzhou
Ningxia Yinchuan
Shanxi Taiyuan
Henan Zhengzhou
Yunnan Kunming
Guizhou Guiyang
Middle and Near-Reach-West Area
Guangxi Nanning
Inner Mongolia Huhehaote
Xinjiang Wulumuqi
Tibet Lasa
Far-Reach-West Area
Qinghai Xining
industries we r e located.
Shortly half of China’s 1.3 billion population will be
living in urban areas and this number is expected to in-
crease rapidly, if only because the authorities take a posi-
tive attitude towards migration and argue that the eco-
nomic growth is higher in the urban than in the rural ar-
eas.7 The current Chinese situation with respect to mi-
gration can be summarized as 200 million Chinese peo-
ple that are expected to move to the cities during the next
ten years [10]8. In China most migrant workers come
from poorer western provinces. They go to the more de-
veloped parts of the country, such as the Pearl and
Yangtze River Deltas in the eastern part of the country.
Inequalities tend to increase in times of crisis.
5. The Positive Effects of the Chinese
Stimulus Program Package
The economy recovered more quickly than expected.
After the positive effects of the stimulus packages China
now needs to deal with the negative consequences of the
high economic growth of 10.3% in 2010 [11] and the
resulting inflation (4.6% in 2010 and 5.3% in April 2011;
Financial Times, 12-5-2011). Can development be
spread more equally in China? The enterprises in the
developed eastern provinces have to choose between
facing strikes, or paying higher salaries. They can also
move their business to cities in western provinces, where
the agglomeration economies are not yet the same, but
many incentives are provided for labor intensive, space
intensive and even polluting industries.
Urban private spending on real estate and the stock
market has increased substantially since the crisis, this
may lead to bubbles. Mega cities in the east see their
economic growth leveling off, since they are facing con-
gestion, environmental and governance issues. China is
one of the few countries that actually wants to accelerate
urbanization and hence encourages migration and emi-
gration. It is actively promoting migration since it con-
siders cities to have more potential than China’s rural
areas. In the medium term we can expect the impact of
the one child policy, namely a graying of the population
by 2020. A decline of the Chinese export-oriented de-
velopment model is also due because of the development
of the medium and smaller size cities in western China,
which will generate more local demand.
The effects of the economic crisis on the Chinese
economy were higher unemployment and a need to sup-
port the unemployed migrants in the eastern cities. It
meant a temporary reversal of migration flows and more
unemployment. China recovered very fast from the in-
ternational financial crisis, because of its important
stimulus program and despite stagnating FDI in 2009 and
despite increasing Chinese investments abroad. Foreign
direct investments declined in China in 2009 with 40
percent compared to the record of 60 billion US dollar
invested in China in 2008. The expectations are that
China will continue to try to attract foreign investments
and enjoy the technology, the management skills and
markets that will come with it.
7Chinese farmers have at the average only half a hectare of land at thei
disposal and often this consists o f se veral plots.
8Emigration abroad has been promoted by a number of provincial gov-
ernments. Some Chinese provinces have an active migration policy
suggesting people even to go abroad, in particular to Africa and Latin
America. It is expected that these Chinese working abroad will send
money back to their family members, who were left behind and their
departure diminishes the pressure on the land [18].
Copyright © 2011 SciRes. ME
6. Chinese Stimulus Program the Negative
The Chinese government actively tries to promote de-
velopment in the western part of the country. However,
the inequalities in per capita GDP are very clear as can
be seen in Table 5 where the differences between per
capita GDP between eastern and western provinces in
2008 are presented. The per capita GDP is on average
more than twice as high in the eastern than in the western
provinces. Differences in average wages in selected
eastern and western capitals also illustrate the in equality.
But even between western provinces the difference be-
tween the highest and the lowest ranking province is a
factor four. The same gap can be found in the eastern
provinces between for example Hainan and Shanghai.
Also the wages paid in the eastern cities are on aver-
age 1.5 to 2 times what is paid in a city like Chongqing
in the west ( 26985 Yuan in 2008). Th e wage differences
are an argument for entrepreneurs to go west. However,
other factors, such as the lack of a skilled labor force,
cost of transportation and the speed of developing the
internal market are also important.
The total population of the western provinces is
slightly smaller than the total population of the eastern
provinces. However, according to Table 6, the eastern
are doing better than the western provinces, in all other
respects. Government expenditures are almost twice as
high and in 2008 investments in the eastern provinces are
8.5 times bigger than in the western provinces. This dif-
ference is statistically significant and suggests also sub-
stantial government investments still go to the eastern
rather than to the western provinces. Per capita FDI is
currently 11.7 times higher in the eastern than in the
western provinces. Exports are 139 times higher and
even the number of patents is significantly higher in the
eastern provinces.
However, the average growth of GRP is slightly
higher in the western provinces in Table 7 than in east-
ern provinces since 2006. This is not because of the dif-
ferences in per capita FDI or total investments (ten times
more in Eastern than in Western capitals), but may be
related to the fact that the western capitals are at average
smaller than those of the eastern provinces and govern-
ment has invested substantially in infrastructure (for
example the length of highroads exceeds the eastern
provinces). Also, the number of graduates in the western
provinces is gradually increasing and now almost the
same as in the eastern provinces (Figure 2).
The length of highroads is significantly higher in the
western provinces. This is related to the fact that most of
the city provinces (Beijing, Shanghai and Tianjin) are
located in the eastern part of the country and require
fewer high roads, while the western provinces tend to b e
An increasing number of industries is going west, but
what is the impact of these developments in particu lar on
economic growth of the western provinces and cities?
The growth rates of per capita GDP are indicative for the
changes that have taken place between the eastern and
western provinces since 2005 (Table 7) . The tab le show s
that cities make an important contribution to economic
development and that as of 2006 the GDP of cities in the
western provinces is growing faster than in the eastern
Although cities in the eastern part of the country are
bigger in population terms, the western capitals are
growing slightly faster in economic terms. Newspapers
and Chinese bank reports suggest that many industries
Table 5. Per capita GDP between selected eastern and west-
ern provinces in 2008.
provinces Per capita GDP in
renminbi Western
provinces Per capita GDP in
Source CSP [9, different years].
Table 6. Indicators of the differences between Eastern and Western provinces in 2008.
Variables Eastern provinces Western provinces Statistical significance
1. Government expenditure
2. Total investments
3. FDI
4. Exports
5. Number of graduates
6. Number of patents
7. Length highroads (km)
7664 E10
66,710 E10
100,080 E10
4568 E10
7624 E10
721 E10
0.171 Not significant
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Figure 2. Eastern versus western provinces: share of number of graduates per 1000 persons, 1992-2008.
Table 7. Growth of per capita GDP in eastern and western
Year East er n p ro v i n ce s ( %) Western provinces (%)
are already moving west, given the lower wages, the in-
vestments made by the government, the positive gov-
ernment policies and the less strict enforcement of labor
and environmental laws. In the western provinces of
China, municipalities are happy to attract some invest-
ments and not being too strict on labor and environ-
mental conditions. Hence in first instance the more labor
intensive, space con suming (given the lease price of land
and buildings in the eastern provinces) and polluting
industries move west. Given the incentives and the de-
velopment of the interior market, it may be expected that
more will follow.
7. The Stimulus Plan’s Negative Effects on
Liquidity and the Financial Sector
What did the government do to mitigate the negative
effects of the financial crisis? The Chinese population
started to spend more in 2009. Th e av erage in come in th e
urban areas increased about 10.5 percent in the first nine
months of 2009, more than the economy in total. This
did partially offset the lack of demand from the United
States. Kuijs [12] points to the fact that savings and in-
vestments are high in China and only gradually will de-
crease in the coming 20 years. This has to do with the
graying of the population in China, which is influenced
by the one child policy since the end of the 1970s. High
savings are necessary because social security in China is
no longer arranged collectively. Pensions are not avail-
able or very low, housing is more and more th e responsi-
bility of the individual citizen and education and health
care are relatively expensive. Consequently families save
up to 40 percent of their income. Private firms also save
substantial amounts because it is difficult for them to
obtain loans and their profit margins are thin [12]. To
promote consumption the government offers all kinds of
products at lower prices in the interior of the country.
Purchasing power of the people also increased because
of deflation in the first half of 2009. Su bsequently defla-
tion turned into inflation in July 2009 (China Daily, 28-
7-2009). Other measures taken to boost consumption
concerned an increase in pensions paid by the govern-
ment, additional ben efits for low inco me workers and the
distribution of vouchers in certain cities (China Daily,
28-7-2009). Through a sales tax reduction people were
also stimulated to buy smaller cars.
What has the government done to deal with the in-
creasing inequality? The recen tly launched 12 th Five year
development plan intends to promote regional develop-
ment and to create a more equal income distribution in
China. The strategy comes from the national level and
needs to be elaborated at the provincial level. Table 8
gives the details per region. Until recently migration was
officially discouraged. However, it is expected that eco-
nomic growth generated by migration to cities will lead
to higher econo mic growth, which will also solve a nu m-
ber of China’s other problems. According to the plan
rural-urban integration must be hastened and the plan
suggests granting citizenship rights to migrants, which
would provide basic entitlements, which are missing
under the current registration (Hukou) system for mi-
rants and mean a reversal of the policies of the past. g
Copyright © 2011 SciRes. ME
Table 8. Regional development strategy in 12th five year development plan.
Region Strategy Focused policies
Western National western development strategy
Special policy support
Infrastructure development
Protection of environment
Development of science and techno l og y
Development of industrie s with unique character
Development of areas where minorities live
Northeastern Rejuvenation strategy gi v en challenges of heavy industry in regionEstablishment of modern industry system
Transition activities for areas with exhausted resources
Middle National Central Region Development Strategy
Improvement of investment environment
Development of competitive industries
Establishment of modern industry system
Establishing comprehensi v e na t i o na l transport hub
Eastern National leading strategy
Competition & cooperation in the world economy
Transformation patt ern of economic development
Adjustment of economic structure
Encouragement of independent inn ovation
8. A Weaker Financial Sector and Inflation
Because of the governments fiscal policy and its pressure
on the banks to provide loans th e total loan portfolio has
increased substantially and the financial sector will end
up with a number of bad loans. Money supply grew 40
percent in 2009. Bank lending ballooned at 9,600 billion
Yuan in 2009 (Financial Times, 22-11-2010). The target
for 2010 was 7,500 billion, but that figure had been
reached almost after ten months. Some interesting news-
paper articles refer to the inflationary pressures because
of the importance of informal finance in China (Financial
Times, 22-11-2010, 1-4 and 9-4-2011).
Some of the loans have been used for consumption or
even led to speculation in the stock exchange or to buy-
ing houses. The index of the Shanghai stock exchange
increased rapidly in 2009 and it was estimated that 20
percent of the loans ended up in stocks or bonds (Finan-
cial Times, 25-8-2009). Also the number of sold cars
increased to 12 million in 12 months (China became the
biggest market for cars in 2009, by passing the US), par-
tially because of a tax cut for the smaller models (South
China Morning Post, 31-7-2009) and an increase of the
prices of real estate was observed (30 percent of the
loans may have been used to buy property; Financial
Times, 25-8-2009).
Recently the government has reacted to the increase of
money supply by making lending slightly more difficult
(International Herald Tribune, 31-7-2009), but this may
also discourage investment. Without loans no jobs are
created. In the past China has often provided new loans if
the old ones were not repaid. However, this does not lead
to the necessary restructuring of the economy to make
companies internationally competitive. Securitization of
loans is also a possibility to allow banks to issue new
loans. However, securitization of bad loans is inviting
problems in the financial sector (J. Foley in NRC 22-10-
2009). The increased liquidity can contribute to new bub-
bles, in particular in the stock and real estate markets,
which can lead to inflatio n, wh ich can lead to an in crease
of the rate of interest with a negative effect on invest-
ments. The government announced that wage increases
of 15 percent per year in the private sector could be ex-
pected (China Daily, 20-4-2011). This would certainly
fuel inflation even more.
The most important question is whether the loans will
be paid back. Otherwise they will weaken the financial
sector even further. Finance companies created by pro-
vincial and local governments were encouraged to take
up loans for infrastructure. An estimated one third of
these ‘directed loans’ will not be repaid. According to
the Financial Times (12-8-2009) economic growth was
lower in July 2009 becau se government controlled bank s
had received the instruction: “to rein in excessive lend-
ing”. The volume of new loans was 77 percent lower
than the month before. Reserve requirements for the
banks increased another 0.5 percent (China Daily, 18-4-
9. Developing the Internal Market and the
Rate of Exchange
The problem with the rate of exchange (6.5 yuan to the
dollar in April 2011; NRC 10-5-2011) is that it is fixed
by the government and is at a low level compared to the
dollar, to help China to build up market share in the
global markets. According to Martin Wolf (Financial
Times, 30-1-2009) the real problem is the internal con-
sumption in China. He calculated that the expenditures
within China have to increase ten percent to allow the
Copyright © 2011 SciRes. ME
trade deficit to disappear.
According to Guo and N’Diaye [13] the Chinese ex-
port model is no longer sustainable, for a number of rea-
sons. Guo and N’Diaye [13] state that China is already
such an important producer that in certain sectors it can
only step up its expor t by lowering prices. They consider
that if a further increase of export can only be achieved
through even lower prices, this economically does not
make sense, because it would go at the expense of the
already low wages. The alternatives are an increase in
productivity, or value added or a change in the composi-
tion of exports, which is also not very likely. According
to the IMF [11] China would grow out of the crisis if it
would stimulate the internal market. The IMF considers
this is a more realistic alternative than continuing to step
up exports, even to more non conventional markets such
as Africa and Latin-America where the purchasing power
is relatively low. During the first three months of 2011
China imported more than it exported, but in April it had
again a record surplus of 11.4 billion US$ (Financial
Times 3-5-2011). Th e irony is that China is now inclin ed
to revalue the renminbi slowly because it helps to fight
inflation at home (Wall Street Jou rnal, 21-4-2011)!
The stimulus program and the increase in loans re-
sulted in increased purchasing power stimulating the
local economy, but these effects are only temporarily.
Increased government spending also increases the gov-
ernment’s debt and may crowd out investments by dy-
namic private companies in China, while these small
ones are the ones to create employment. The internal
market can only develop in a sustainable way if the gov-
ernment takes action to improve social security in China.
More money is also needed because the environment
becomes more and more important. Doing the necessary
investments will lead to higher produ ction cost however.
10. A Dual Development Model for Eastern
and Western China?
Does the increased attention for the western provinces
mean that China's development is moving west? What
are the consequences for China’s development model of
such a trend? The party leader in the southern Guang-
dong province, which is part of the Pearl River Delta,
suggested that China should use the crisis to become a
more modern country. He argues to make the transition
to a more capital and knowledge intensive economy and
points to the fact that there is a shortage of skilled labor
in the Guangdong province (South China Morning Post,
31-7-2009). The question is whether he is not too early
with his suggestion given that every year still 20 million
low skilled Chinese farmers want to move to the cities
and that such a lab or reserve will keep th e wages low.
Some regional development in the western provinces
is taking place. We showed that since 2005 the western
provinces are growing slightly faster than the eastern. In
the development of the western provinces and their capi-
tals agglomeration economies play a role like they played
a role in the development of the eastern provincial capi-
tals [10]. Investments play an important role, but it is
necessary to distinguish between government invest-
ments, and investments by enterprises and foreigners,
which follow government investments in infrastructure
the past and are attracted by incentives provided as part
of the development policies for the western provinces.
Space is available and provided at more favorable condi-
tions than in the eastern cities. Similarly more labor is
available and substantially cheaper.
The fact that these workers do not have to migrate
means that their income is spent locally and contributes
to development in the western provinces. Labor intensive
technologies are available. Even in the eastern part of the
country usually the core technology is up to date, but
activities around it are carried out in a relatively labor
intensive way. This pattern is changing because some of
the eastern provinces have used the 2008 recession to
change to a different development model of more capital
and skill intensive technologies. This trend is reinforced
because most of the mega-cities are also in the eastern
part of China and suffer from diseconomies of urbaniza-
tion, such as for example congestion in Beijing where
700,000 new cars have hit the road in 2010. An impor-
tant part of the investments is still going into construc-
tion and a more capital intensive development of the in-
dustrial sector in the eastern provinces.
The development of the western part of China is not as
quick yet as the government had hoped. However, the
lower wages and the incentives provided to investors do
convince more and more enterprises to move to the west.
Cities which are competitive receive more of these firms.
Enrollment of students in higher education is also higher
in these cities, implying that the knowledge economy is
also starting to play a more important role. However,
social problems are also increasing and the question is
whether the Chinese government can control all these
Given the policies announced in the last plan and the
importance of government investment for urban devel-
opment in the west, it is expected that fewer migrants
will go from the western part of the country to the cities
in the eastern provinces, which are going for more capi-
tal intensive activities requiring more skilled labor. This
may lead China to develop its internal market more and
to focus less on export. This process can be reinforced by
a revaluation of the currency, or a round of wage in-
creases in eastern China, which will, however, erode
Copyright © 2011 SciRes. ME
China’s current competitive advantage. If Chinese work-
ers earn more they will spend it mainly on local products.
Local consumption is enhanced if migrants remain in
their respective provinces, where they will be more in-
clined to invest, while in the eastern cities the migrants
would send an important part of their income to their
relatives in their home provinces, but spend the rest of
the money in eastern cities, partially on imported goods.
These developments lead to a dualistic development
model, with a more capital intensive industrialization in
the eastern and more labor intensive industrialization in
the western part of China.
11. China Ascent as a Superpower
Economic power has moved from the Western countries
to the Far East. While the whole world was suffering
from the financial crisis, China continued its ascent as a
superpower. There are many indicators of this ascent.
The more factual ones are that China surpassed Germany
as the major exporting country in 2009 and Japan as the
world's second largest economy in 2010 and has the am-
bition to bypass the US as the biggest economy in the
world. On one arb itrary day three head lines in the Finan-
cial Times give the same impression (12-4-2011): ‘Bur-
mese junta grows wary of China’s ever closer embrace’,
‘Brazil’s president will be checking on China’ s statist
experiments’ and ‘Levi’s Chinese jeans brand poised for
US market launch’. The latter article notes that this is an
example of the growing influence of emerging econo-
mies on product innovation. This happ ens in the clothing
sector, where developments were always dominated by
trends in western tastes.
Other indications of China’s ascent are that China has
modernized its army and in particular its navy (Financial
Times 19-1-2011). Although the size of the economy is
now about one third of the US economy we should real-
ize that if the renminbi would revalue 40 percent (an
estimate of its real value), the Chinese economy all of
sudden becomes almost half the US economy. If the
Chinese economy continues to grow at 10 percent (ver-
sus the US at 2 percent) it will also not last very long
before both countries will be in the same league. The
question is whether this growth can continue at the cur-
rent pace ?
12. Why the Chinese Miracle May not Last
China has recovered rapidly from the international finan-
cial crisis and the world wide recession that resulted, but
there are doubts about China’s recovery. Different indi-
cators confirm positive developments, but there are also
some more fundamental trends suggesting that the high
economic growth of the past can not be sustained in the
future. In the first place foreign investments seem to be
declining in China, while China itself invests more and
more abroad9.
The development of the internal consumption in China
has not been as fast as expected. There is also still a big
gap between China and the western countries as far as
the level of social services is concerned. Bridging this
gap would require more government expenditure, but
also a different kind of expenditure than the current ex-
penditure focusing on providing infrastructure. Is the
Chinese government ready to make that change?
Also urban planning in China has resulted in “dissat-
isfying urban sprawls featuring inadequate services and
inconvenient settings, which are particularly unfavorable
to the low-income families” (China Daily, 5-11-2008).
The opposite way of planning would lead to a harmoni-
ous society, “narrowing the expanding gap between dif-
ferent social groups an d getting every member of society
to benefit from economic growth”, but does not seem to
take place.
China’s substantial exports to the US lead to a huge
trade deficit between the US and China, resu lting in a b ig
dollar surplus in China. These dollars were used to buy
US T-bonds to allow the US to continue to import Chi-
nese goods. However, China has a problem investing its
surplus of 2850 billio n US$ (Fin ancial Times 18-1-2011)
and Sovereign wealth funds like the China Investment
Corporation (CIC) have already invested 300 billion
dollar abroad. The surplus also explains the wave of for-
eign acquisitions that is currently taking place. In the
meanwhile the country has to ration electricity supply
again (Financial Times 18-5-2011) and announces that
export prices are set to rise (China Daily 20-4-2011).
Van Dijk [14] gives different reasons why the high
economic growth may not continue for ever. Among
them are congestion and environmental reasons [15].
Other factors mentioned, which could lead to a decrease
of the future growth are strikes, demands for higher
wages, the lack of social security for workers, unem-
ployment, and more retired people10. Lack of freedom,
for example on the web, or to travel, may also lead to
more unsatisfied people and China seems to react in a
very defensive way to the gulf of protests in the Middle
East in 2011.
A frequently heard argument why growth will slow
9The problem can be solved by allowing more foreign investors in
China because China already plays an important role itself in othe
countries. Van Dijk [18] argues that China has also become more vul-
nerable by increasing its presence in Africa and Latin America in a
very substantial way in a relatively short period.
10One of the reasons for the high current saving rate (40 percent) is that
eople consider they have to take care themselves for a number o
things other countries have solved collectively (pensions, education,
health etc.).
Copyright © 2011 SciRes. ME
down is China’s graying population. This will be acute
by 2020 when the relative size of the population of 12 -
24 to the population of 25 - 60 will have changed from
60 (1950) to 30 percent. The dependency ration of popu-
lation ages 0 - 14 and 65+ to the population between 15
and 64 will than be as high as 65 percent [1 6].
Finally, not all the positive figures published by the
Chinese authorities are accepted by the experts (Finan-
cial Times, 25-8-2009). The real growth of the internal
consumption could be lower and not be enough to com-
pensate for the decline in exports. If structural factors in
the labor and capital markets continue this could lead to
a next crisis (Financial Times 25-8-2009). The rebound
could be temporarily and not lead to the same levels of
growth China was used to in the 1980s and 1990s. Also
China’s recovery could not be V, but rather W shaped, or
what is called a double dip recession.
Other reasons mentioned in the press why China may
face problems are the number of students who can not
find jobs. In particular 6.1 million young people who
finish tertiary education each year will find it difficult to
find jobs (Financial Times, 25-8-2009). This is also the
group the authorities fear most for starting protests (Wall
Street Journal, 23-12-2008). In terms of the Financial
Times (22-12-2008) “Beijing prioritizes employment for
graduates to head off unrest ”.
Recently Park and Shin (Financial Times, 15-4-2011)
argued that the sustainable rate of Chinese economic
growth is set to decline by up to 2 percent points around
2015. They calculated that for developing countries like
China the slowdown generally came when per capita
income was in the US$ 13,000 to 18,000 range (with
15,058 as the median). The argument used is that the
easy and fastest phase of growth lasts as long as un-
skilled worker can be hooked into a rudimentary indus-
trial economy. However, the next phase implies a low
growth in industrial productivity and an increase of the
service sector. Also Hung [17] noted that: “in China the
decentralization of regulatory authority of the state ac-
celerates overinvestment among local economic agents
and hence more competition, which results in a source of
potential instabilit y”.
Nouriel Roubini (quoted in the Financial Times 18-1-
2011) says that the problem lies in the Chinese govern-
ment’s attempt to keep the economy going through a
huge increase in fixed investment. However, “no country
can be productive enough to reinvest 50 percent of GDP
in new capital stock without eventually facing immense
overcapacity and a staggering non-performing loan prob-
13. Conclusions
The developments since 2000 show that China is be-
coming more and more like western economies. It suf-
fered from the global economic crisis, it faces demand
for higher wages in the eastern provinces and its in ternal
market is starting to become more important, meaning
that the export model may no longer be sustainable. Guo
and N’Diaye [13] doubt that China’s export model can
survive these economic developments. More expendi-
tures will be needed in the near future for social security
and to stop the deterioration of the environment. All
these factors have a negative impact on China’s export
growth model and will contribute to the development of
the internal market with its consequences for migration.
How has China reacted to the financial crisis of 2008?
The Chinese stimulus program had positiv e and negative
effects. The economy recovered quickly, but the stimulus
plan has had also negative effects on the economy. It
stimulated liquidity by increasing money supply and
weakened the financial sector in particular because of the
‘directed’ loans to infrastructure. So many loans had an
effect on liquidity in general and on the reputation of the
financial sector in particular. Local consumption has not
yet grown fast enough to replace the role of exports. A
weakening of the financial sector took place, because the
government stimulus program was financed partially by
the banks which were forced to finance development
projects of provincial and municipal special purpose ve-
hicles, of which 30 percent is estimated no t to be able to
serve the debt.
We conclude that a dualistic development model is
emerging: growth is accelerating in the western prov-
inces and somewhat declining in the eastern provinces, in
particular in the mega cities. Development of the western
provinces also means the development of a new market
and less dependence on export. If worker s come f ro m the
western provinces they will also spend more money in
that region, contributing to the economic growth of the
western provinces [3].
Migration is the linchpin of China’s development
model. Recently migration is considered a more positive
phenomenon, despite all the social problems associated
with it, such as the reservation, or Hukou system, which
makes migrants second class citizens in cities with no
rights to government housing, health care or education
for their children, which has given rise to the increased
number of informal education and training institutes11.
Migration is the result of a certain development model.
The economic crisis of 2008 and 2009 showed that mi-
gration flows can also be reversed and that the eastern
provinces tend to go for more capital and skill intensive
11The mayors of the major Chinese cities are aware that something
needed to happen. Under the head ‘Mayors’ Promise to Help Their
Residents’ the China Daily (9 March 2004) carried a story about the
two major Chinese cities, Beijing and Shanghai, which revealed the
circumstances under which many migrants and small entrepreneurs
Copyright © 2011 SciRes. ME
Copyright © 2011 SciRes. ME
development with major consequences for migration.
Migration issues in China are extremely important since
migrants contributed to the high economic growth fig-
ures of the country since 1978. The Chinese government
has an active migration policy within China and even
promotes migration abroad. For regional development it
is important where income is being spent. This is in the
eastern provinces if the workers move there to find em-
ployment, but it will be spen t in the western provinces if
more economic activities are located there.
Some of the resulting issues, such as a dual develop-
ment model (for the eastern and western part of China)
and the development of the internal market were ana-
lyzed. The combined effects of more capital intensive
development in the eastern part of the country and the
greater use of more expensive skilled labor means that
the east is following a different development path, trig-
gered off by the last economic crisis. The current model
of bi-polar development, with capital intensive develop-
ment in the eastern and more labo r intensive activities in
the western provinces has important consequences for
the flows of migrants and the future of China as an ex-
porting nation, but developing the internal market may in
the end be more sustainable. Increasing local household
consumption would probably be a more sustainable op-
tion for China’s economic growth than continuing its
efforts to expand exports. However, such a development
would also require a revaluation of the renminbi, which
is politically very sensitive.
14. References
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