Against the backdrop of a widespread call on China from both home and abroad to boost domestic demand, a keynote report delivered by Chinese President Hu Jintao at the opening of the 18th National Congress of the Communist Party of China stressed that China should "comprehensively improve the level of an open economy". This term is a breakthrough and upgrade from the long-used notion of "enhancing opening-up", for it reflects that the CPC has realized the risk of immiserizing growth in an export-oriented economy, and tends to focus on boosting China's status in the world economy and increasing its returns from the expanding exports and trade.

A large country should rely on domestic demand to boost its economy. But under current globalization, any large country, especially like China which relies heavily on exports, would miss significant opportunities of economic growth by inadequately developing an open economy. The importance of foreign trade is not just about external resources, job creation or its contribution to GDP. Its steady growth is also a prerequisite to macro-economic control. China's economy has maintained a fast growth for 30 years, and is now slowing down. In the long run, if China fails to develop an open economy to secure rapidly expanding markets, the country will lose its competitive edge in international trade and a hard-won advantage. To a large extent, the recession in Japan's home appliance market was caused by Japanese companies' inadequacy of expanding overseas markets. China should not follow suit.

The purposes of promoting an opening-up model are to use external resources for Chinese economic and social development, to boost China's status in the international division system and to increase the country's returns from international trade. More extended opening-up is not an end but a means. Instead, more interest gains are the end. China must have absolute control of the areas, sequences, time, degree, requisites and revocability of its opening-up policy.

At the initial stage of the reform and opening-up model, China did not have large overseas business interests. At that time, the overseas market that China accessed was large enough for its business which operated on a limited scale. Except some so-called "window companies" funded by Chinese local governments in Hong Kong and Macao, China had few large direct overseas investments. There was no need for the country to use its diplomatic resources to ask its trade partners for bigger market access. At that time, China did not see any side effects from bringing in foreign commodities and investments. What was urgent was bringing in foreign capital to fill in the capital and foreign exchange gaps. Therefore, opening-up was the only policy that China focused on.

Now 30 years after China opened its door to foreign investment, the country has accumulated enough capital and is rid of foreign exchange gaps. Side effects of opening its commodity and investment markets have started to emerge. China now has considerable overseas economic interests (including material and energy supplies, sales markets and investment markets). Meanwhile, China's trade partners set ceilings for the market accessibility of Chinese commodities and investments. Therefore, China will restrain itself if it keeps opening itself up more but does not ask its trade partners to receive more Chinese products or investments. It is high time for China to shift its focus from simply opening-up to comprehensively improving the level of an open economy.

Right now, China is the biggest exporter in the world. But it still has room to grow in some areas. The first area is exports from emerging industries. The second is material exports for processing industries, like cloth materials, dyestuff and supplementary materials for apparel manufacturing. The third is finished machinery used in China's overseas projects. To improve the level of an open economy, therefore, is not only about upgrading industries, export structures and investment structures, but also about maintaining traditional labor-intensive industries and their exports, as well as increasing their added values and export profits.

Domestic demand does not go against open economy. They support each other. China's export-oriented economy has not only created hundreds of millions of jobs, but also generated considerable domestic demands. A large domestic market is also an attraction and base for developing advanced manufacturing industries.

In a long run, China should take two key measures in order to strike a balance between domestic demand and an open economy. The first is to develop emerging industries. The other is to move fully developed industries to central and western regions of the country, which can offset increased labor costs, boost industrial capacity in those regions and narrow regional economic development gaps.

The author is a researcher at Chinese Academy of International Trade and Economic Cooperation, Ministry of Commerce.

The article was published in Chinese and translated by Pang Li.

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