The Other Side of the Global Imbalances: The Politics of Economic Reform in China Under the ‘New Normal’ Chen Xie PhD University of York Politics March 2018 2 Abstract In the 21st century, the ‘rise of China’ in the post-financial crisis period is arguably the most important and widely debated topic in politics and international studies. Since, the 2008 financial crisis, compared with the US, whose power appears to have diminished, it seems more and more likely that China will soon become the engine of the world economy and, perhaps, one day the global hegemon. Although the financial crisis may have not, in itself, fundamentally changed the shape of the global order, it has arguably altered perceptions. This is especially so regarding the ‘global imbalances’ that are said to have provided the macro-economic conditions for the crisis to occur. Equally, the different positions occupied by the US - as the world’s largest debtor - and China - as the world’s largest creditor - both prior to and after the crisis are suggestive of a fundamental power shift in the global order. In this thesis, I aim to add to existing understandings of the rise of China by examining the relationship between its rise and the global imbalances in the contemporary order. In order to address my thesis questions, I utilise concepts and arguments about the relationship between power, institutions and the global order provided by different scholars and theoretical traditions in IPE. Based on these, I review the experiences of Britain and the US in three key historical periods of global imbalance in 19th and 20th centuries that are analogous to the role of China in the contemporary global imbalances. Specifically, I highlight the interaction between China’s ‘internal’ imbalances and external pressures in the post-crisis era, and explore the different influences of these in the rebalancing efforts of China’s with respect to its economic reform process. Overall, I argue that, although China is often caricatured as a ‘free- rider’ and beneficiary of the global imbalances, this neglects China’s serious internal problems caused by these imbalances due to its trade-oriented and investment- oriented economic model. I suggest that one of the central pillars of China’s rebalancing efforts in post-crisis is the economic restructuring through its new so- called Pilot Free Trade Zones (PFTZs), which represent a reform laboratory similar to the role of the Special Economic Zones (SEZs) in the 1980s and 1990s. As such, I provide a review and assessment of the PFTZs and use this to gauge China’s changing role in the global economic order. 3 4 Contents Abstract 3 List of Figures 7 Acknowledgements 9 Author’s Declaration 10 1. Introduction 1.1 Background 12 1.2 Research Puzzle 16 1.3 Research Questions 17 1.4 Argument and Contribution 18 1.5 The Theoretical Framework 21 1.6 Research Methods 23 1.7 The Thesis Outline 31 2. International Political Economy and Changing Global Order 2.1 Introduction 37 2.2 Robert Gilpin: A Realist Theory of International Political Economy 38 2.3 Robert O. Keohane: Complex Interdependence and Liberal 42 Institutionalism 2.4 Susan Strange: Structural Power and Its Diffusion 49 2.5 Robert W. Cox: State, Social Forces and World orders 54 2.6 Conclusion 59 3. Global Imbalances in Historical Perspective 3.1 Introduction 61 3.2 Global Imbalance in Historical Perspective 62 3.3 Pax Britannica and Pre-1914 Global Imbalance 64 3.4 The Power Shifts and Global Imbalances in Interwar Period 71 3.5 The US hegemony and Global Imbalance 1965-1971 79 3.6 Conclusion 90 4. Global Imbalances in the Post-Bretton Woods Era: the Global Financial Crisis and Rise of China 4.1 Introduction 93 4.2 The Jamaica System and Global Imbalances in the Late 1970s and 94 1980s 4.3 Contemporary Global Imbalances and 2008 Global Financial Crisis 99 4.4 China’s Internal Imbalances in Post-Crisis Era 110 4.5 Conclusion 124 5 5. China’s ‘Model’ of Development and the Political Economy of China’s Rebalancing 5.1 Introduction 127 5.2 The Chinese Model 128 5.3 China’s New Normal and rebalancing 143 5.4 Conclusion 158 6. The Political Economy of Internal Rebalancing: from ‘Special Economic Zones’ to ‘Pilot Free Trade Zones’ 6.1 Introduction 160 6.2 The Role of the SEZs in China’s Market-Oriented Reform and 162 Economic Development 6.3 The Pilot Free Trade Zones (PFTZs): the Policy Laboratory 2.0 and 178 China’s Economic Restructuring 6.4 Conclusion 190 7. China’s Pilot Free Trade Zone and Economic Restructuring 7.1 Introduction 192 7.2 Simplified Administration for Investment 194 7.3 Trade Facilitation 202 7.4 Financial Reforms 208 7.5 Encouraging Enterprises Innovation 217 7.6 Conclusion 221 8. Conclusion 8.1 Background and Research Puzzle 224 8.2 Chapter Findings 226 8.3 Conclusion of the Thesis 230 8.4 Distinct Contributions 233 8.5 Future Research 235 Appendix: List of Interviews 238 List of Abbreviations 241 References (English) 244 References (Chinese) 265 6 List of Figures Figures 2.1 Issue Structure Explanation 44 2.2 International Organization Explanation 45 3.1 Size of Global Imbalance From 1885 to 2005 63 3.2 Rules of Classical Gold Standard in Pre-1914 65 3.3 The Bretton Woods System Rules 84 4.1 Current Account Balance (% of GDP) In 1996-2006 of the US, China 101 and Japan 4.2 Personal Saving Rate of the US From 2000 to 2015 (percentage of 110 DPI) 4.3 Collapse in World Trade (change in monthly trade flows between 112 October and December 2008) 4.4 Gross Savings of China From 1982 to 2015 (% of GDP) 115 4.5 Capital Formation As Percent of GDP 116 4.6 Debt As % of GDP 117 4.7 Lagging Behind: China’s GDP Per Capita by Province Shows the 123 Disparities Between Inland and Coastal Regions 5.1 Contributions of Components of GDP Growth 147 6.1 The Size of the Five SEZs in China (2007) 165 6.2 The GDP of the Five SEZs in China (billion RMB) 167 6.3 The Government Revenue of the Five SEZs (billion RMB) 168 6.4 The Income of Urban Resident of the Five SEZs (RMB) 168 6.5 The Gross Value of Imports and Exports of the Five SEZs (US$ 100 169 millions) 6.6 The Port Cargo Throughput of the Five SEZs (10000-tonnes) 170 6.7 The Geographic Location of the Five SEZs and Hong Kong, Macau 171 and Taiwan 7 6.8 Trade Between Taiwan and Fujian 181 7.1 the Process of Business Registration Under ‘Three in One’ System 198 7.2 the Design of ‘Single Window’ Online System for International 203 Trade in Fujian PFTZ 7.3 Free Trade Account Types and Requirements for Account Holders 211 7.4 Designs of Fund Transfers Through FTZs in Shanghai PFTZ 212 7.5 One-off Subsidy of Starting for All Enterprises 219 7.6 Extra Subside of Starting for Enterprises with Taiwan Capitals 220 8 Acknowledgements First and foremost, I would like to thank to my generous and supportive supervisor, Tony Heron, for the continuous support of my PhD study and related research, for his immense knowledge, valuable guidance and advice, for his patience and motivation. His guidance helped me in all the time of research and writing of this thesis. I could not have imagined having a better advisor and mentor for my PhD study. Besides, I would like to thank my second supervisor - Liam Clegg, for giving me important suggestions on my PhD research and the thesis writing. My thanks also go to Ms. Liz O’Brien and other colleagues in the Department of Politics at the University of York, for giving me so much help in my PhD, particular supportive during the year while I have experienced bad health condition. Special thanks also to Professor Huang Maoxing from Fujian Normal University (China) for his supports for my field work in China. Last but not least, I wish to avail myself of this opportunity, express a sense of gratitude and love to my beloved parents and my friends for their manual support, strength, help and for everything place. 9 Author’s Declaration I declare that this thesis is a presentation of an original work and I am responsible for it. In some parts of this thesis I have adapted material from a paper that I presented at the Hallsworth Conference: China and the Changing Global Order in March 2017. This paper is not published. Footnotes with the chapters indicate where I have drawn on this paper. All sources are acknowledged as References. 10 11 Chapter One Introduction 1.1 Background The starting point for this thesis is the academic and political debate about the so- called ‘rise of China’ in post-crisis era and its growing influence on the global economic order. In the immediate postwar period, unlike most developed countries were seriously weakened and damaged by the war, the power of the United states was preponderant accordance with the theory of hegemonic stability theory (HST), American hegemony was synonymous with openness and stability, underpinned by the Bretton Woods institutions - the GATT/WTO, the IMF and World Bank - which both reflected the US interests but also gave measure of satisfaction to subordinate states (Gilpin, 2001:99). Even though during the Cold War, especially in the 1980s, the hegemony of the US faced geopolitical challenges from the Soviet Union and economic challenges the EU and Japan, this did not fundamentally alter the American- centric nature of the global order.