The emergence of regional economies in China and its implications,with special reference to Hong Kong and Guangdong

  China's continental physical expanse has been a dominant, shaping influence of its political, social and economic development throughout its modern history. Thanks to its relative ethnic homogeneity, as well as the absence of political reform, it has – unlike the former Soviet Union – preserved its unity as a state. Nevertheless, regionalism remains a powerful counterpoint to centralisation in China. In particular, under the impact of post-1978 economic reforms, differentials and tensions between provinces and regions have emerged as a potent force, threatening the authority and power of Beijing. This article begins by seeking to explore some of the regional forms in which economic change has manifested itself during the last two decades. It highlights the unique problems faced by an economy that is still in transition in a country as large as China. Brief consideration is also given to the wider regional context in which China is sometimes placed as the central player – namely, that of `Greater China'. At the heart of the article is a case study that examines the evolution of a particular kind of regionalism, captured in the economic integration – even symbiosis - between Hong Kong and Guangdong. The question is addressed whether the form of regionalism contained within the forging of an ever-closer economic relationship between these two areas of South China can be a model for the integration of other regions both within and across China's national boundaries. Hong Kong's transformation from a tiny, dependent, colonial enclave into one of the most successful economies in the world is one of the most remarkable stories of post-World War II economic history. During the 1960s and 1970s, Hong Kong's growth record was unmatched anywhere else in the world. But by the beginning of the 1980s, high land rents and spiralling wages started to erode the international competitiveness that had been the basis of Hong Kong's previous economic success. By a happy coincidence, however, the emergence of such pressures coincided with the opening of China to the outside world. China's `open door' policy thereby made available to Hong Kong entrepreneurs a huge, hitherto untapped reservoir of cheap labour and gave them access to inexpensive factory sites just across the border in Guangdong. It was a lifeline to which they responded eagerly and, through the relocation of their factories, provided the means whereby Hong Kong manufacturers discovered a new lease of life. The benefits associated with this process accrued not only to Hong Kong through the regeneration of its manufacturing industry. Rather, it was a two-way process that also facilitated economic growth, structural transformation and improvements in living standards in Guangdong (above all, in the Pearl River Delta). In short, the process became the basis of deepening integration between the economies of the two regions. Indeed, it was the key element in the emergence of a new regional economic grouping, known as `Greater China' – an informal triangular partnership between Hong Kong, Taiwan and two southern Chinese provinces (Guangdong and Fujian). The emergence of `Greater China' can be regarded as a particular manifestation of the coastal bias that has so strongly characterised China's economic trajectory under reform. To this day, the triangular economic nexus between Hong Kong, Taiwan and South China remains an important dimension of China's external economic relations, even if developments in other coastal provinces have caused it to weaken. To what extent recent and future developments have challenged and will continue to challenge the regionalism inherent in the original notion of Greater China is something that deserves close attention. Not least, the strategic initiative of opening up China's western regions poses interesting and important questions that touch on future developments of `trans-nationalism' and `trans-regionalism' affecting China.     

The role of interest rates during the transition to a market economy

We construct a simple two period model of an economy in transition from being centrally planned to being market oriented. Using this model, we draw certain positive conclusions about economic policies that reduce distortions during the transition period. In particular, we focus on the role of interest rates, a market parameter that has previously been almost entirely ignored in planned economies. Using stylized data derived from Czechoslovakia, we show that increase in nominal interest rates can actually be welfare-improving by partially compensating for the distortions induced by the transition process. The model is sufficiently general to be applied to a number of transition economies, and we use the cases of Czechoslovakia, the USSR, and China as examples of some of the phenomena that we are trying to explain. We show that the model generates a constrained, suboptimal equilibrium. In particular, we see that raising interest rates during the transition period reduces repressed savings, brought about by shortages in the controlled market. An improvement in consumer utility can therefore be brought about.