The Macro & Microeconomic Of China - Essay Example

?The Macro & Microeconomic Of China China has become a good model for ongoing rapid growth for a developing country as a whole. Compared to a developed country’s performance like the USA, its growth has been more than 300% as of the most recent year. The heavily populated nation with 1.3 billion people has been outperforming USA for over ten (10) consecutive years in terms of both GDP growth rates yearly and unemployment rates also yearly. See Figures 1, 2, 3, and 4 for a quick reference of historical statistics. This research looks into the microeconomic and macroeconomic factors that have made it possible for China to grow consistently over the past decade up to the present, with intentions to learn from that developing country’s economic principles and practices. There have been envious criticisms about Chinese ways of progressing. Are such accusations like currency manipulation and piracy of intellectual property the real reasons for such rapid economic growth? If not what enabled China to sustain its growth and to comparatively maintain low unemployment rates? The hypothesis to be proven in this term paper is that China, although ruled by the Communist Party which practices dictatorship up to a certain extent, was able to draw a general cooperation from among the majority of people. Its culture was actually practicing some aspects of democracy and genuine concern by the government for the welfare of the Chinese people. From its vast manpower resource, and the willingness of the government to fund the people’s productive endeavours, the aggregate productivity soared to great heights and was able to make China very competitive in meeting the global demand for goods and services. In other words, there were reforms (Fosu 2013, p.154) from harsh dictatorial rule in the past, to rational approaches in government transactions with people within China and in the international community. This paper also provides recommendations for other developing and developed countries to consider for adoption, as well as recommendations how China can further improve its socio-economic acceptance worldwide in spite of being a Communistic country. From State-Owned Enterprises to Restructured Business Enterprises Dosi et. al. (2013) described the companies in Mainland China to be made up of seven categories of ownership under the reformed or restructured economy, namely, (1) the State-Owned enterprises, (2) foreign-invested made up of foreign Multinational Corporations (MNC)s and Joint Ventures (JVs), (3)private-owned enterprises (POEs), (4)shareholding enterprises, (5)collective-owned enterprises (COEs), (6) Hongkong, Macau, and Taiwan invested enterprises (HMTs), and (7) Other Domestic Enterprises (ODEs). Details of businesses are further identified in Figure 5 of the Appendix Section. These businesses became parts of the economy not instantly with one decision, but gradually over the years since 1978. The chronological reforms are as follows: Years Developments in terms of economic reforms 1978-1984 Stage 1. State-Owned Enterprises (SOEs) were decentralized. Both profits and power were transferred to the private sector. But government still ruled over the contracted businesses to the private sector. There were discouraging restrictions against foreign investors prior to 1978. (p.5) 1979 to mid-1980s A law on Joint Ventures enabled foreign investors to share technology with SOEs. Four (4) SEZz or Special Economic Zones were opened. Businesses were still restricted in the domestic market. Production was for export business operations. (p.5) 1985-1992 The government separated itself from the management of contracted businesses. Prior to this, SOE were controlled ultimately by the government. And there was only some delegation of management rights. SOEs experienced net losses up to 1997, This brought about a policy to let go of the small business activities still under government control and to simply maintain the big sectors like monopolistic enterprises (e.g. energy and other natural resources). 1994 Parts of the SOEs (a total of 540) were allowed to be owned by the private sector and were called mixed “mixed ownership economy within large SOEs.” Only 909 SOEs remained under 100% the State’s full ownership.(p.6) 1998 to 2007 Fully controlled SOEs and COEs combined eventually declined in number which used to make up 66% of of total in 1998 to only 7% by 2007. In contrast, the Capitalist shares in SOEs soared “from 7% in 1998 to 17.3% in 2007” (p.21). To see the trend for each type of enterprise, Figure 6 was added.. Improvements in Business Productivity After Reforms From 1980 to 1990, the manufacturing sector’s labour productivity grew at an average of 2.3% annually. This was followed by a rapid growth rate of 15.9% from 1990 to 2002. Which enterprise classification increased the labour productivity to a faster growth rate? It was not the State-Owned Enterprises (SOEs) but the Township and Village Enterprises (TVEs). SOE labour productivity grew annually at fluctuating rates ranging from 3.8% to 6.3% from 1978-1992 whereas TVE labour productivity grew at an average of 5.8% from 1980 to 1984, followed by an average of 14.4% from 1984 to 1988, and an even higher average of 17.7% from 1988 to 1992. (Dosi et. al., 2013, pp.3-4) Employees working within the manufacturing SOEs were reduced from “35 million in 1992 to 9.8 million in 2002” (p.7). A very important effect of growth in productivity was the successful “Export-Oriented Strategy” implementation. Chai (2011, p.198) described the average annual growth of exports since 1979 to 2008 to have hit 18.1 % based on the “China Statistical Yearbook 2009”. China became the world’s largest exporter and was recognized to be the factory of the world. But this took place only after structural changes took place. Chinese traditional products for exports used to be silk and tea. Lack of entrepreneurship was not the problem according to Chai (2011, p.58) but the absence of an opportunity to be the owner of properties gained through the hard work exerted by individuals, which was referred to as “weak property rights” (p.54). When the government changed policies, productivity increased partly by the entry of foreign technologies and foreign investments, and partly because the workers newthey had a chance to own wealth for themselves. Prior to that policy, the government used to expropriate private properties (p.66). Improvements in FDIs after Reforms Foreign Direct Investments (FDIs) started in 1979 when the law allowing joint ventures with foreign investors was allowed. The earliest stage was subdued, causing difficulties with growth from 1979-mid 1986 (p.199). Government reduced the intervention and even gave incentives for FDIs in 1986. Deng Xiaopeng later opened the doors for FDIs to enter the provinces of China in 1992. Although the Asian Economic Crisis slowed down the inflow of FDIs in 1997, after that crisis was resolved, FDIs poured into China until China became 2nd largest recipient of FDIs in 2009. The first was USA. By 2010, China became the number 1 exporter to the USA and, at the same time, # 3 importer of US goods (US Business Census 2011, p.36). By 2013, there was a publicized observation that sounded like a complaint regarding the monetary manipulation by China. Its people’s currency, the Renminbi or RMB, was said to be kept relatively low compared to the dollar, making its products in the international market relatively lower. Roach, S (2012) observed that China had eaten up 36% of USA GDP since 2005. From the viewpoint of Yueh (2013, p.1), the dramatic although gradual reforms in China has “dismantled mot but not all of its State-Owned enterprises and banks” in order to uplift its poor population from poverty. Determinants were identified to be supporting China’s sustained growth, namely, (a) rule of law, and (b) protection of private ownership to properties, although when the legal system is compared to that of USA, it is considered weak (p.4). (c)growth in the number of private enterprises and semi-private businesses (p.8), (d) availability of financial capital or entry of FDIs (p.9), (e) good sourcing of labor when needed to grow a business (p,10), (f) improvements in the human capital in terms of education and skills (p.11), and the (f)technological advancements gained from allowing foreign investors to do business in China with priorities for those foreign investors with new technologies that China can learn from. Perhaps one advantage of China’s centralized government was the availability of an expedient way to control inflation or price increases. And as mentioned earlier, the priority for FDIs in the early stages of allowing foreign investors was given to enterprises intending to export the manufactured products rather than supplying the local market. Thus, the industries that were developed actually improved the export potentials of China. Foreign companies were aware of the lower cost of manpower more readily available because the population used to be poor and living with lower standards of life. Using the low-cost advantage, exportable products became more competitive in the world market. Lin et. al. (2013, p.11) gave importance to the membership of China in the World Trade Organization. by 2012. And the “National Intellectual Capital (NIC), comprised mainly of human capital, market capital, process capital, and financial capital,. Is a valuable intangible asset and a key source of national competitive advantage.” (Introduction). In 2008, China also released stimulus funds equivalent to $ 586 billion, relaxed monetary policies to increase bank lending, and increased “investments in public infrastructure” (p.11). All these improved the capabilities of China to become very productive even after the 2008 global economic crisis. For one thing, developed countries were already known to be suffering from high labour cost which jacked up the prices of products. China was a very attractive place where multinational based in USA and UK, for examples, were able to contract the manufacturing of some p[roducts fopr the purpose of arriving at lower cost of production. China produces “about 70% of the world’s umbrellas, 60% of the world’s buttons, 70% of US shoes. . .50% of US kitchen appliances” (Hays, 2012). The fashion industry of UK, to be more specific, wherein there were multinationals supplying the global community with branded products, tapped China to do the manufacturing on certain conditions to maintain good quality standards. It should be noted that Hongkong used to be leased to UK up to June 1997. Further Analysis of Chinese Economy. Given the capabilities of China in terms of manpower, available financial capital to remain productive in order to supply its people with their needs, the active participation of this developing country is currently seen generally as a good prospect for the global economic progress in terms of being a rising market for goods, services, and technologies. One of the major reasons why developed countries have difficulties growing is because of a lack of market for many products which poor or developing countries cannot afford. And China, with 1.3 billion people, can be a solution to the developed countries in need of buyers. In order to sustain the productivity of China, effort has been exerted to ensure availability of scarce resources like energy sources. This is the other major cost factor that has been affecting almost all industries worldwide, with the effect of reducing the value of household income as a result of price increases of oil supply. There seems to be little or no problem with the macroeconomics after knowing all the empirical data pointing to fast growth with double digits. On the microeconomic side, there is a threat seen pertaining to the impact of scarcity of energy source in coming years. In the 120th Congressional hearing about US-China Economic and Security Hearing which discussed “China’s Global Quest for Resources. . .” (US-China Economic and Security Review Commission 2012, p.3), it was reported that “China has been a net importer of oil since 1993” and that there are many serious implications about that reality. In other words, USA is confronted with a situation wherein the initiatives of China to have ongoing supply of energy for economic growth may be a national security threat to some regions. The population of China is so big that people and industries there require so much oil supply as they grow in their productive effort, while the energy sources are obviously limited. If the Chinese government is not able to supply the needed energy, the microeconomic aspects can eventually realize limitations. There is no forecast at this time as to when China might become a fully developed country, which means that the search for more and more energy sources can be a problem to other parts of the world. As a matter of fact, China’s source of fish has led its fishing activities to go outside its territories and into disputed islands and fishing grounds claimed by other countries. This can happen also when China searches for more energy resources. It can be considered a macroeconomic issue eventually, especially because China is not the only country with over a billion people to satisfy. There is also India. The solution for such a crucial issue remains pending while frequent news informs the world about Chinese activities in search for the needed resources for the near future. Conclusion The empirical data gathered had shown adequate evidence about China’s apparent economic progress for more than a decade up to the present. Researched materials explained how it logically happened. There were gradual changes in the government policies from being restrictive with maintaining State-Owned Enterprises to allowing private ownership of business properties not only for the Chinese people but also for the foreign investors. The Chinese government saw the advantages of allowing FDIs to flow into provinces of China. Exportable products were eventually produced. Labour became more productive. The entire country received new technologies and learned from the technologies of the Western countries. Capital inflows increased. As a result of all these, China became a fast growing trading partner of various countries worldwide and became a member of the World Trade Organization with many countries hoping that this developing country will boost the world’s economic growth as a giant market in the near future and as a factory of the world with competitive advantages for multinationals. Its being a Communistic or Socialistic government was turned into an advantage. Because their political leaders can control themselves by not interfering with private enterprises, the economy has been observed to be growing faster than when restricted or when government interference was commonly practiced. The same government is better able to control the prices within China. As a matter of fact, there was news about entrepreneurs in the West complaining about the cheap value of Chinese currency in the market that keeps the product prices of China so low and very competitive. One other observation was the generally peaceful cooperation of the Chinese with whatever was the government policy, perhaps because the government would normally correct its policies when it sees a better alternative for the good of the people. Definitely, this peaceful environment has been facilitating the growth of enterprises within China, the growth of exports, and the overall growth in GDP. Appendix Figure 1 – The GDP Statistics of China’s Annual Growth Rate (Jan. 20000 to May 2013) Figure 2 – The GDP Statistics of USA’s Annual Growth Rate (Jan. 2000 to May 2013) Figure 3 – China’s Historical Unemployment Rate (Jan. 2002 to May 2013) Figure 4 – USA’s Historical Unemployment Rates (Jan. 2002 to May 2013) Figure 5 – Classifications of Business Enterprises in China [Source: Dosi, et. al. (2013). ). Institutional Change and Productivity Growth in China’s Manufacturing, 1998-2007: The Microeconomics of Creative Restructuring. Italy & China: LEM Working Paper Series, p. 10] Figure 6 – Reforms in Terms of Changes in Percentages of the Different Types of Enterprises in China [Source: Dosi, G.; Lei, J.; and Yu, X. (2013). Institutional Change and Productivity Growth in China’s Manufacturing, 1998-2007: The Microeconomics of Creative Restructuring. Italy & China: LEM Working Paper Series. P. 22] (Note: SOE = State-Owned Enterprises, COE= Collective Ownership Enterprises, HMT-Honking, Macau, and Taiwan enterprises, FIE- Foreign Investment Enterprises, SHE-Share Holding Ecterprises, and POE- Privately Owned Enterprises) Works Cited Chai, J.C.H.. An Economic History of Modern China. UK & USA: Edward Elgar Publishing Limited. 2011. Print. Dosi, G.; Lei, J.; and Yu, X.. Institutional Change and Productivity Growth in China’s Manufacturing, 1998-2007: The Microeconomics of Creative Restructuring. Italy & China: LEM Working Paper Series. 2013. Print. Fosu, A.K. ed.. Achieving Development Success: Strategies and Lessons from the Developing World. Oxford University Press. 2013. Print. Hays, J. Facts and Details: Cheap Labor Industries in China and the End of Cheap Labor in China. 2008. Web. May 19, 2013. Lin, C. Y-Y.; Edvinsson, L.; Chen, J.; and Beding, T. National Intellectual Capital and the Financial Crisis in China, Hongkong, Singapore, and Taiwan. USA,UK, Sweden, and Taiwan: Springer Briefs in Economics, 2013. Print. Ricky, M. “British-made Fashion is Back in Business.” The Guardian, Jan. 20, 2013. Web. May 19, 2013 Roach, S. “China’s Currency Manipulation: A Policy Debate”. World Affairs Journal. September/October 2012. Web. May 19, 2013. US Business Census. Top Trading Partners. May 10, 2011. Web. May 19, 2013. US-China Economic and Security Review Commission. China’s Global Quest for Resources and Implications for the United States. Jan. 26, 2012. Web. May 19, 2013. Yueh, L. China’s Growth: The Making of an Economic Superpower. Oxford University Press, April 11, 2013. Print. Read More