China Trading and Investment - Essay Example

Introduction In 1978, China’s government embarked on a major program of economic reforms. The program went on board after years of control of the state of all productive assets. In an attempt to awaken a dormant economic giant, it encouraged rural enterprise and private businesses. It also encouraged liberalized foreign trade and investment and relaxed control of the state. Industrial production investment and the education of its workforce were also encouraged (Zhuli and Mohsin, par. 1). The strategy has worked outstandingly by all accounts. Before 1978, China had seen a yearly growth of 6 percent annually. However, after 1978, the country has experienced actual growth of more than 9 percent annually. In the topmost years, Chinas economy grew more than 13 percent. For the last 15 years, the nation has increased its per capita income (Zhuli and Mohsin, par. 1). Furthermore, some experts are even predicting that in about 20 years, the economy of China will be larger than US. What makes China trading and investment different from other countries? An IMF research team that recently examined the sources of Chinas growth reached a surprising conclusion. The constant productivity increase was the driving force behind Chinas economic boom. According to Zhulu and Mohsin (par. 5), productivity gains in the years 1979 to 1994 accounted for more than 42% of the growth of China. By the early 1990s, it had overtaken the capital as the most important source of that growth. A traditional development view in which capital investment takes the lead is marked from this. The productivity jump originated in the reforms of the economy begun in the year 1978. Additionally, the much earlier study on the development of the economy have suggested an important role of capital investment in the growth of the economy. It has also proposed a sizable portion of the recent growth of the country is in fact accredited to capital investment that has made China more productive. The meaning of this is that better technology, new machinery, and more infrastructure investment has helped China to raise its output. Higher productivity has performed the most recent economic miracle in China, Zhuli and Mohsin (par. 10) state. The countys productivity increased at a yearly rate of 3.9 percent during 1979 to 1994, compared with 1953-1978s 1.1 percent. Output growth productivity share exceeded 50 percent. Such explosive growth is outstanding. Chinas economic growth rate of almost 4 percent puts the country in a class by itself (Zhuli and Mohsin, par. 10). Pre and post-1978 China experts indicate that market-oriented reforms embarked on by China were significant in creating the productivity boom. The market-oriented reforms raised economic efficiency by introducing profit incentives to rural collective initiatives. The initiatives are owned by the local government, but are guided by the principles of the market. Additionally, many initiatives were freed from constant intervention by authorities of the state. Consequently, the output of enterprises owned by the state between 1978 and 1992 declined from 56 percent of the national output to 40 percent. On the other hand, collective initiatives’ share rose from 42 percent to 50 percent. That of private businesses and cooperative ventures rose from 2 percent to ten percent (Zhuli and Mohsin, par. 11). An affirmative effect was felt even further in the private capital market as owners of factories and small producers were eager to increase profits. They also devoted more and more of the revenues from their businesses to improve performance of their businesses Productivity Boom that makes China different The countrys economic reforms worked to boost productivity in many ways. One way was in the significant rural sector. Before the 1978 reforms, approximately four in five Chinese practiced agriculture. By the year 1994, only one in two Chinese practiced agriculture (Zhuli and Mohsin, par 13-17). The Chinese reforms expanded rights to property in the rural areas and touched off a race to establish nonagricultural businesses in the countryside. Higher agricultural prices also led to farms that were more productive and more efficient labor use. All these forces encouraged several farmers to move out of agriculture. The subsequent rapid rural enterprise growth has drawn tens of millions of people from traditional agriculture into manufacturing that has an added higher value. Additionally, the post-1978 reforms that were established, granted greater autonomy to enterprise manager, Zhuli and Mohsin (par. 13-17) assert. The managers became freer to set their goals of production and sell some of their products in the private market at prices that were competitive. They also gained the authority to grant bonuses to good employees and fire the bad ones. They enterprise managers also retained some portion of the earnings of their firm for investment in the future. The countrys reforms also gave greater opportunity for private production ownership. Some businesses that were privately held created jobs and developed consumer products that were much needed. The private businesses also gained significant hard currency through foreign trade, paid taxes of the state and remitted the national economy a flexibility and resilience it did not possess before. Measurement of growth of China’s emerging economy Economists use the neoclassical framework approach. It describes how productive aspects such as capital and labor combine to generate output. It also provides analytical simplicity and a well-established methodology. The neoclassical framework is a suitable first step in examining the Chinese economy and produces useful benchmark estimates for research in the future. However, in the context of China, the framework has some limitations. Power for the economic transformation has also been added to the countrys open-door policy that welcomed investment from foreigners. Aggregate foreign direct investment insignificant before 1978, reached almost 100 billion dollars in the year 1994. Yearly inflows surged from below 1 percent of total fixed investment in 1979 to 18 percent in 1994. The capital from foreign investment has created employment, built industries and has connected China to the global markets. Foreign investment has also led to significant technology transfers (Zhuli and Mohsin, par. 6-8). These trends are particularly apparent in the more than one dozen open regions of the coast where foreign investors enjoy tax advantages. Additionally, Chinese exports have been boosted by economic liberalization. In turn, strong growth of the countys export seems to have fueled productivity growth in domestic industries. In one last area, price reform that China has progressed with caution. It has granted a fair amount of independence to producers or goods’ consumers and products of agriculture but much less to other segments. However, numerous inflation bouts have rocked the Chinese economy in the past two decades. The inflation deterred the government from implementing full-scale liberalization. High growth rates also raise worries about inflation. It may pose the single greatest threat to the growth of China. Nevertheless, it has been largely controlled. Trade and investment issues According to Columbus (16), Asian economies depend very much on the economic performance of their trading and partners of investment. Southeast Asias major investment and trading partners are the EU, the US, and Japan. Because of the weak performance of the EU, US and Japan economies, continuing dependence has become a problem. Even the approvals by FDI have portrayed a wide trend that is deteriorating. Southeast Asia has depended on FDI. Because of the heavy dependence on FDI and trade, some states have re-examined their outward-oriented policies in favor of policies that are domestic-oriented. The countries are promoting domestic SME and agricultural activities. Another issue is Asian economies competitiveness. For instance, the evolving China economies and India offer both opportunities and threats to each other (Columbus 16). Moreover, trade growth between China and the West is likely to slow down over the subsequent years. China’s economy is maturing. The chains of industrial supply catering for the west are becoming shorter once again. Commercial activity between China and the West will be much more than in the previous years, concerning the non-merchandise trade. They include investment in services such as infrastructure and services of the environment in urban areas. The policy topics of trade on the table of economic diplomacy between Beijing and Brussels were less about tariffs. The subject of focus is progressively on the liberalization of investment and protection, government procurement, and the cross-border movement professionals (Columbus 16). The discussion of these issues between China and the EU is also not new. The new aspect is with Europe making demands on China that is proving to be unresponsive. Companies in China have begun investing in technology and infrastructure industries in Europe. Moreover, such issues are becoming more interesting to the Chinese companies. The EU is less geopolitical in its attitude to China than the United States. Brussels is paying more attention to the likely economic downsides of keeping China out of trade talks. Additionally, investments from China have been welcomed in Europe with much pragmatism, given the severe sovereign debt and economic crisis in Europe. Nonetheless, the European Union is attempting to press harder no China on certain topics. Its aim is to bring China to the table of negotiation on subsidies to its exporting firms (Columbus 16). Another issue, according to Hachigian (4), is mistrust between the US and China. The two countries differ enormously. They have different histories, political systems, social structures, and economies. Both countries are extremely sophisticated societies and are, therefore, hard to understand. China now predicts overtaking the US at some point in total economic size from its second position in terms of GDP. Many Chinese have the assumption that the US must be concerned not to lose its ranking at the top, to China (Hachigian 4). Therefore, according to China, the US is very likely engaged in a wide-ranging effort to delay, complicate, or even disrupt the emergence of China’s economy. As a result, overall China relations and US are effectively framed in zero-sum terms. What could make China better? The existing China’s opening strategy should be adjusted based on alterations in internal and external contexts. A rising China should create an external environment that is favorable for peaceful development (Guoqiang, par. 18). It should also take maximum advantage of the external markets and resources to accelerate its economic transformation. Furthermore, the country should also improve its position in progressively globalized value chains. The key to Chinas new opening strategy success is the generation of an institutional arrangement that is supportive or an open system for the development of the economy. The economic system in China should not be reformed for reform’s sake, but should employ a new strategy. Innovation of an institution is a means and not an end. Hence, the novel system of the economy should focus on the opening strategy priorities. For China to be better, it needs to establish newfangled strategic priorities. China should center its efforts on generating a permitting environment for global trade. China is an independent variable in the global economy that can influence the external environment because of its economic size. A huge economy needs first to explore how to generate opportunities. A large economy also is required to respond to the concerns and anticipations of the universal community. It is right or in order for the international community to anticipate a liable role from China. China should deliberate on new developments in international governance and play a role in governance that is rule-based. In this regard, it should strengthen its ability. In the governance of the future, the country should never be selfish that only cares about its interests. Instead, it should be a responsible stakeholder balancing its interest with the international community. Besides, China needs to speed up its free trade zone strategy through regional trade arrangements. The free trade zone strategy should be enhanced to cover liberalization and trade and investment facilitation. As stated by Guoqiang (par. 19), China should also center on opening the services segment in refining its business environment China faces significant prospects in the international markets. The first opening comes from the worldwide craze for the construction of infrastructure. Evolving economies need to build novel infrastructure to satisfy growing needs. They are in urgent need of advanced infrastructure to speed their industrialization and urbanization. Companies in China are strong players in this sector. Chinas export of equipment packages will be driven by its success in securing contracts of infrastructure. The latest Chinas power generation, telecommunications, and transport equipment are much more capital intensive, with greater benefit. The countrys export mix will be optimized when driven by worldwide development of infrastructure. Additionally, in the past few years, it has been observed that several multinationals have speeded their regional headquarters transfer and R & D centers in China. The shift in the countrys comparative advantage has become a magnet for economic activities and talents that are advanced. For instance, the yearly number of overseas students returning to China has skyrocketed to 345000, last year (Guoqiang, par. 13). The trend is a convincing case in point of the countrys economic potential as well as the huge prospects related to them. The students will attract more talent that is advanced and production aspects that are more beneficial to the transition of the Chinese economy China also has a prospect in overseas investment. From a small investor and a huge capital recipient, the country has become a huge recipient of capital, and an investor in the international market. Its investment in foreign lands has jumped to over 100 billion dollars, up from the previous year’s 2.85 billion dollars in 2003. Varied reactions should inspire companies in China to invest internationally. The most significant international investment form is acquisition. Acquisition will permit these companies to access technology, brands, R & D capabilities and international channels (Guoqiang, par. 10-12). Acquisition will help the companies combine universal advanced technology, sales channels and brands with its local manufacturing strength and low-cost resources. Subsequently, their competitiveness across value chains will be strengthened. However, there is a huge change in Chinas foreign investment use. It has shifted its focus of opening from manufacturing to services. The second development has taken place in the foreign investors administration. It will not only compel changes in approach to the behavior of the government, but it will indicate a shifting mindset of the government. Further, according to Guoqiang (par. 32), China’s opening up has played a significant role. Opening has augmented the link of domestic and international markets and resources, but then again it has driven domestic reforms. Consequently, augmenting international and trade investment reform will momentously speed up China’s reform of its whole economy. Conclusion Even though, China occupies a unique niche in the political economy of the world, its huge population, and great physical size mark it as a powerful worldwide presence. Other developing countries can draw some general lessons from Chinas experience. Most significantly, while the investment of capital is important to a growth, it becomes even more effective when accompanied by reforms that are market-oriented. The reforms introduced profit incentives to rural initiatives and small businesses that are privately owned. The resultant combination unleashes a productivity boom that will drive collective growth. The Chinese pattern may be particularly instructive for countries with a large populace segment that is underemployed in agriculture. China has effectively moved millions of workers from farms and into industries without creating an urban crisis. This has been achieved by encouraging the rural initiative growth and not focusing entirely on the urban industrial sector. Lastly, the open-door policy has prompted direct investment in the country from foreign firms, creating more employment and connecting the countrys economy with global markets. The strong productivity growth of China prompted by the market-oriented reforms is the foremost reason for Chinas unparalleled performance in its economy. Works Cited Columbus, Franklin. Asian Economic and Political Issues, Volume 12. New York: Nova Science Publishers, 2013. Print Guoqiang, Long. What is the future of Chinese trade? 2015. Online Hachigian, Nina. Debating China: the U.S.-China Relationship in Ten Conversations. New York: Oxford University Press, 2014. Print Zuliu, Hu and Mohsin Khan. Why is China growing so fast? International Monetary Fund. 2015. Online Read More