Understanding China’s Economic Geography

The Chinese economy is better understood not as a single unit but rather a decentralised collection of several regional economies that interact with one another less than one might expect. This arrangement—which differs from other large countries such as the United States—results from China’s transition from a command to a market economy.

In the 1980s, China initiated economic reforms by transferring control of many state-owned enterprises to provincial and local authorities. These authorities embarked on experimental reforms that, if proven successful, were later applied by the national government.

Decentralisation has largely worked; the Chinese have thus far managed the transition to a market economy relatively smoothly. In contrast, the ‘shock therapy’ method implemented by Russia led to widespread economic catastrophe in that country and a subsequent devastating drop of living standards for many. Living standards in China, on the other hand, have continually risen since initial economic reforms were implemented in the late 1970s.

Yet the consequences of decentralisation have not been entirely positive. During the 1980s and 1990s, individual Chinese provinces—and in some cases municipalities such as Shanghai—erected barriers to domestic trade and practised import-substitution as if they were separate countries. This lack of cooperation, exacerbated by GDP targets, meant that the Chinese economy failed to utilise many comparative advantage opportunities.

These inefficiencies persisted despite China’s overall integration into the global economy. In essence, regions within China had closer economic ties with foreign countries than amongst each other.

Such fragmentation has resulted in the apparent lack of major, globally recognized companies emerging from China, particularly given the size of its economy. Larger Chinese firms have enormous difficulty managing their parent-subsidiary networks; companies under the same corporate umbrella often fail to cooperate and even work at cross-purposes.

The underdeveloped domestic mergers and acquisitions (M&A) market also exemplifies the problem with localisation. Leaders of certain industries often dominate market share in certain individual markets yet have enormous difficulty consolidating these gains nation-wide.

The absence of major firms, many China-watchers believe, will impede Chinese efforts to compete in a globalised economy. Building national markets, then, may be necessary.

To do so, the Chinese government can reduce inefficiency by enforcing national standards for road transport and simplifying the tax system. Establishing a law akin to the Commerce Clause in the United States would also smooth the path to a truly national economy.

In the meantime, however, China is likely to be defined by its disparate economic regions. The three largest and most important of these are on the east coast; the Pearl River Delta abutting Hong Kong, the Yangtze River Delta surrounding Shanghai, and the Bohai Bay region near Beijing.

Emerging markets, many lying further inland, are noted for their strengthening ties to international markets. For example, north-eastern China, an industrial region once known for its loss-making State-owned enterprises, has reached out to Russia.

Likewise, southwest China has established important transport links to Southeast Asia and has positioned itself as China’s gateway to the increasingly vital region. Northwest China has similarly emerged as a key link to the energy-rich markets of Central Asia. The Shanghai Cooperative, a multi-lateral institution comprising China and several ex-Soviet central Asian states, exemplifies the growing importance of these ties.

Finally, central China has positioned itself as a bridge linking the developed markets of the east coast with the rising areas out west. Wuhan, inland China’s largest city and a major stop on the Yangtze River, has the potential to act as a pivot linking the many disparate spokes in the Chinese wheel.

As these regions maintain a large degree of economic autonomy from Beijing, a further consideration of their individual characteristics helps illuminate trends of the Chinese economy as a whole.