The Boom of the Chinese Economy, A Key Factor That Upsets Country Risk

The rise of China was certainly the biggest “game changer” of the globalization years.

This blog article is a short excerpt from Country Risk – The Bane of Foreign Investors (Springer, 2020) by Norbert Gaillard.

The reforms launched by Deng Xiaoping, embodied in the 1979 promulgation of the Joint Venture Law and in the establishment that same year of the China International Trust Investment Corporation (see, respectively, Richdale and Liu 1991, pp. 125–128; Collier 2017, pp. 74–77), led to four decades of sustained GDP growth – nearly 10% during 1979–2016 – and propelled China to its position as the world’s second-largest economy.

Beijing learned from the success of newly industrialized countries yet followed its own path. It attracted FDI, managed to obtain technology transfers, and moved up in the manufacturing value chain. In addition, Chinese authorities opted for financial repression measures in order to channel growing savings toward domestic firms and to facilitate the undervaluation of its currency. These policies yielded spectacular results: between 1991 and 2016, the share of China in world trade, inward FDI stock, and outward FDI stock rose by a factor of 9, 5, and 23, respectively (see Figure 1)1. The country is now a major capital exporter and, for the first time ever, its outward FDI stock exceeded its inward FDI stock in 2016.

Figure 1 China in the world, 1991–2016

Source: Author calculations based on and the World Bank’s World Development Indicators.

This emergence of “the Middle Kingdom” reshaped the world economy as well. Several structural trends can be observed. Chinese demand led to a boom in commodity markets during the 2000s (e.g., crude oil, aluminum, copper, iron ore, soybeans), which supported economic growth in emerging countries as well as in Australia and Canada (World Bank 2009, pp. 51–73; Roberts et al. 2016).

Moreover, China’s capacity to produce and export a massive quantity of low-priced manufacturing goods had deflationary effects on the rest of the world; this dynamic has depressed the profitability of its foreign competitors and in some cases has led to their bankruptcy (Qiu and Zhan 2016, pp. 49–51).

The combination of these trends entails that emerging economies risk losing part of their industrial capabilities and also risk being confined to the production of agricultural and mining products. These downsides are a major challenge for countries seeking to diversify their economy (see Costa et al. 2016, who examine the case of Brazil).

Another aspect of China’s success was the rapid ascent of its firms in the global value chain: some of them managed to upgrade their status from subcontractor (to Japanese, US, or European MNCs) to international leader in certain sectors. Lenovo and BYD are two examples. Lenovo was Hewlett-Packard’s distributor in China in the 1990s before acquiring IBM’s personal computer segment in 2005.2 Established in 1995, BYD started out manufacturing rechargeable batteries but expanded its activities to become the world’s third leading seller of plug-in electric vehicles in 2016 – trailing only Tesla and Renault-Nissan.3

The Chinese growth model provided an alternative to liberal capitalism and thus restored the status of state capitalism in the eyes of some foreign policymakers. Beijing promoted this model and developed training programs for Asian and African officials (Kurlantzick 2016, pp. 108–114). However, such initiatives were limited by the failure of state capitalism in most countries (especially in Algeria, Argentina, Iran, and Venezuela).

1 Author calculations based on and the World Bank’s World Development Indicators.

2 See “Legend in the Making,” The Economist, 13 September 2001, and Sumner Lemon, “Lenovo Completes Purchase of IBM’s PC Unit,” PC World, 2 May 2005.

3 See M. Gunther, “Warren Buffett Takes Charge,” CNN Money, 13 April 2009 (available at, and J. Cobb, “China’s BYD Becomes World’s Third-Largest Plug-in Car Maker,” Hybrid Cars, 7 November 2016 (available at


Collier, A. (2017), Shadow Banking and the Rise of Capitalism in China, Palgrave Macmillan, London.

Costa, F., Garred, J. and Pessoa, J. P. (2016), “Winners and Losers from a Commodities-for-Manufactures Trade Boom,” Journal of International Economics, Vol. 102.

Kurlantzick, J. (2016), State Capitalism – How The Return of Statism is Transforming the World, Oxford University Press, Oxford and New York.

Qiu, L. D. and Zhan, C. (2016), “China’s Global Influence: A Survey Through the Lens of International Trade,” Pacific Economic Review, Vol. 21 (1).

Richdale, K. G. and Liu, W. H. (1991), “The Politics of ‘Glasnost’ in China, 1978–1990,” Journal of East Asian Affairs, Vol. 5 (1).

Roberts, I., Saunders, T., Spence, G. and Cassidy, N. (2016), “China’s Evolving Demand for Commodities,” in Day, I. and Simon, J. (Eds.), Structural Change in China: Implications for Australia and the World, Reserve Bank of Australia, Sydney.

World Bank (2009), Global Economic Prospects: Commodities at the Crossroads, Washington, DC.

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