Chinas Attractiveness to International Trade and Investment - Case Study Example

REPORT: CHINA’S ATTRACTIVENESS TO INTERNATIONAL TRADE AND INVESTMENT Introduction China is one of the fastest growing economies according to the World Investment Report by United Nations Conference for Trade and Development (UNCTAD) in 2015. It is among the highest 2015-2017 of countries most beckoning to Foreign Direct Investment (FDI).It attracts more foreign investors than the United States of America, making it a global envy. Her Gross Domestic Product (GDP) has been sustained at an average of 1437.04 USD Billion all the way from 1960 to 2014 representing 16.70% of the global economy as reported by the World Bank Group. Many a factor can be attributed to the phenomenal growth of this country. These factors are delineated hereunder. Infrastructure development China has a sophisticated infrastructure. McKinsey Quarterly Article in June 2013 in its lead headline “ Chinese Infrastructure: The big picture” by Yougang Chen, Stefan Matzinger and Jonathan Woetzel reported that infrastructure development remains one of the top priorities of China’s government. The article further acknowledges that the government has come to terms with reality that the modern economy depends on reliable roads, electricity, rails and telecommunications. From 1990 to 2005, about a hundred million Chinese saw the realization of benefiting from telecommunication and electricity upgrades; and between 2001 and 2004, there was a growth in rural roads by 51% per annum. Her roads, highways, bridges that span even through the seas and oceans, and telecommunication services are of high standards. This makes it easy for investors to transact their businesses. As such, great investors from the world risk their huge resources in investing in China. Availability of labour United Nations, Department of Economic and Social Affairs, Population Division (2015) China’s population stood at 1,376,048,943.This population is about 18.72% of the total global population. In real sense, China is the most populated all over the world. The median age is 37.3 years. These statistics bear a testimony that labour is plenteous. The sheer size of the population makes labour cheap according to the low of demand and supply. China has many skilled and semi-skilled workers who can take a variety of tasks that comes their way. The tasks range from manufacturing, processing and provision of services. Therefore, many investors from countries such as the United States of America among others get attracted to the cheap labour and so decide to locate the multinationals in China. This reduces unemployment by a great margin. Besides, it contributes to the growth of the economy since the multinationals give a proportion of their profits to the state in terms of corporate taxes which are in turn used by the government to better infrastructure, provide health services to its citizens and promote other areas the likes of education and hospitality. Though the China’s population is a promising cheap labour source, the Chinese government policy of one child per couple does not augur well for her future because it is most likely that the majority of the population will comprise the aged who will not be able to work but only depend on the state for pension which is a withdrawal from the national income according to economics. Openness to international markets Policies that favour international trade have been put in place to encourage minimum interference to the flow of goods and services to and from China. Her joining of the World Trade Organization on December 11, 2011 after a series of negotiations made its dream of being a world trade a reality. China liberalized its markets, thereby encouraging international traders to find their way easily into her markets. China also undertook to reduce tariff and non-tariff barriers. The level of import tariffs reduced from 15.35 in 2001 to 9.9% in 2005.In 2010, tariffs had reduced to 9.8% in terms of agricultural products and 8.9% in terms of industrial products. It has also embarked on lowering of its non-tariff barriers, for example, quotas. These statistics are according to the economic brief given by the Information Office of the State Council of the Peoples Republic Of China, December 2011, Beijing: China’s Foreign Trade. All these attempts by the Chinese government serve to stimulate the world to be beckoned to invest in the country in the process attracting foreign direct investment. Though China is touted for its pro-international trade policies, the tariff and non-tariff barriers have not yet reached their maximum low to really woo investors with no ounce of probability of failure to achieve its goals. There is also bureaucracy and administrative red tape. So, it behooves it to step up the policies further in a clear and most transparent manner in order to come to the accomplishment of its dream of becoming the world investor attraction. This challenge notwithstanding, China has tried it utmost to make the playing ground even for international traders. Political and economic stability China has experienced a period of relative peace and economic stability. A country that is rocked by civil unrest and arbitrary political coups is not unlikely to be shunned by international investors. The system of government in China is quite interesting. Whereas the central government governs the government officials, the local government looks after the affairs of the citizens. This contributes to the prevailing stability of its political system. The Carters Program is dedicated to maintaining peace during elections in China. It is aimed at building and strengthening relations between the Republic of China and the United States and also advancing greater cooperation between them and other countries. It was started by President Carter and his wife who received a Nobel Peace Prize for sustained peace in China during his regime. In the same vein an economy that is unpredictable is equally an anathema to any potential investor. For, though it is known that investors are risk takers, some risks are as good as not taken owing to their devastating aftermath. Foreign exchange rates are kept at a stable rate so that they do not cause an economic meltdown. The financial system is developed to ensure the currency value does not depreciate inconsistently. The stability of the government and the economy makes China a better candidate for foreign direct investment since the traders are assured of returns on their investments. Therefore, many investors scramble for opportunities to secure trade deals with China given its attractiveness. However, the economy of China is not immune to external shocks. Favourable regulatory environment The government enacts laws and policies that are tilted towards promoting international trade. The motive of China’s present regulatory framework is two pronged: to support outward foreign direct investment to enhance global competitiveness of Chinese firms and to pressurize the state to allow local firms to internationalize (Karl P. Sauvant, 2014).This statement means that the legal framework is a deliberate effort aimed at expediting international trade integration. China provides financial incentives to investors both locally and internationally. The government ensures that the costs for start-ups are greatly reduced. This is done through the reduction of legal formalities relating to registration of companies and licensing. It is rather easy to register a new company in China thus encouraging investors to flock to China. Tax holidays and subsidies serve to spur the desire of traders both local and international to find it easier to trade with and in the country. Again concessional loans are given to investors so as to help them undertake the businesses of their scales as they deem fit so long as they do not interfere in any way with the security and safety of the Chinese. The government has come up with the five economic zones and the fourteen coastal provinces. The five economic zones were chosen because they were sorely underdeveloped and the government wanted them to develop. Any investor from overseas and within who wants to risk their stake in these zones is given some privileges. The privileges range from tax exemptions on dividends, and zero taxes for the first few years until the business picks inter alia. The provinces also serve the purpose of promoting multilateral trade through reduction of regulations. Drawbacks on the legal framework are inevitable including inadequate transparency and corruption but still with this it tries its level best to reduce them and seduce investors all over the globe. Size of local market and raw material availability Given the high population of about a billion people as recently indicated by the statistics of the United Nations and World Bank Group, China offers a vast market for the local and foreign products. China has also bounties of natural resources. It has a vast land upon which industries can be set; water resource which can be used to cool millions of machines that run the economy. Over and above, it is endowed with minerals of so many a kind. The peoples website of China, www.people.com.cn, records that that the land area is 122400sq.km, the country holds 67500 sq. km of water, has 135 mineral deposits out of the possible 150 deposits in the world making it being ranked third in mineral richness in globally; and it has animal resources and beautiful beaches. All these make China a country every investor in the world would love to trade with. It is however admitted that the resources are unevenly distributed throughout the Chinese community making it really a hitch. Conclusion China has become a world economic hub, attracting investors from many corners of the world. This is attributed to factors that include: stability of economy and politics, availability of ready market and resources just to mention but a few. Though China has all these factors in place some challenges are also faced. These challenges are: lack of transparency, legal uncertainty, corruption among others. So, for China to continue growing and move the state of a developed economy, it should enhance the factors as well as address the challenges. Recommendations After much consideration of China’s factors that attract international trade and investment and the challenges thereof, the following should be done by the Chinese government: 1. There legal framework must be structured in such a way as to enable certainty. 2. The government should prosecute all the corrupt individuals to in an attempt to reduce encourage foreign investment. 3. Policies should be formulated to reduce bureaucratic and administrative red tape Report compiled by, …………………………………….. References United Nations Conference for Trade and Development, UNTAD: World Investment Report (2015) NDRC,MOFCOM, Ministry of Finance, Ministry of Science and Technology, Ministry of Industry and Information Technology, Peoples Bank of China, and General Administration of Customs.2012.Guideline for Accelerating the Promotion of International Cooperation and New Competitive Advantages.Beijing:NDRC et al.. http://wzs.gov.cn/zcfg/zhp/t20120625-487154.htm. Survey on Chinese Enterprises’ Outbound Investment and Operation, Beijing: CCPIT.http;//www.ccpit.org/docs/2012-08-03/2012-haiwaitouzi-diaochabaogao.pdf(CBRC, 2012). MOFCOM.2009.Administrative Measures for Overseas Investment (MOFCOM 2009 No.5 Order). Beijing: MOFCOM. Government of China.20116.The 588th Order of the State Council of the People’s Republic of China. Beijing: Government of China. http://www.gov.cn/zwgk/2011-01/17/content-1785957.htm. 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