Economic Variables and Factors That Led China Become an Emerging Economy - Coursework Example

EMERGING ECONOMY CHINA Abstract China is emerging as a major player on the world economy. When its economy pushes full steam ahead, other countries and worldwide business organizations are being forced to examine how to act in response. Even though there are various studies and researches regarding the variables and economic indicators that make China as the world’s largest emerging economy, it is highly important to analyze those factors in a crucial situation of credit crunch where businesses and economies are being seriously studied, analyzed and evaluated. This paper provides a detailed study on Chinese economy and its background. The main pre-crisis economic indicators and the impact of credit crisis are analyzed. TABLE OF CONTENTS Introduction 4 Economic Background 4 Economic Reforms in China 5 Global Trading 5 Foreign Direct Investment (FDI) 7 Institutional Stability of Chinese economy 9 Impact of financial Crisis on Chinese Economy 9 Impact on China’s Foreign Direct Investment 11 Impacts on China’s exports and Labors 11 Chinese Economy and Future 13 Conclusion 13 References 14 Introduction The world is experiencing one of the biggest revolutions in the known history as economic power moves from the developed world to China and other emerging giants. Brazil, Russia, India and China (BRICs) are considered to be large emerging economies and are identified as having potentially significant future impact on the global economy. The emerging economies and their markets had been showing 7 – 10 % growth rates for years. During 2007, the world economy had grown by 5.2 % of which China’s economy had shown a growth rate of 11%. Within the next 50 years economies of BRIC countries could become a much larger force in the global economy. (Wilson and Purushothaman, p.3) China’s economy expands rapidly and offers significant opportunities for multinational corporations to market their products and thus it became as an attractive market for foreign firms. Within the last 30 years Chinese economic growth rate has been proving its success as an average of 8 % in Gross Domestic Product per annum. In 2007, Chinese GDP reached $ 3.42 trillion. This paper analyzes Chinese economy and its key indicators and factors that led China to become an emerging economy. This paper outlines the impacts of current financial crisis on Chinese economy and its financial variables. Economic Background “China’s current economic policies are not decided in a vacuum but are subject to the influence of the cultural and historical traditions of Chinese people, including the leaders who make the policies and common citizens whose support is required” (Gregory C. Chow,p.10). Human capital that Chinese people acquired various educational revolutions through cultural tradition that dates back to 4000 years ago is a significant factor for the functioning of the economy. Particular features of Chinese population like respecting scholars, honesty, and trustworthiness in human relations, family and social system set ups etc all have affected the economy of China. China’s growing population, that now accounts to be over 1.3 billion, the largest of the world, is an important determinant of Chinese economy. Foreign trade was an important component among economic activities that was practiced by Chinese years ago. The Republic of China set up in 1911 demonstrates that Chinese people always had resourcefulness and energy that were sufficient to carry out a well developed market economy. Economic Reforms in China While more independence was given to the business enterprises that were controlled by state government various types of privately owned enterprises began to start both in manufacturing and service sectors. This had led diversification in banking and financial sectors and to develop stock markets in China. China’s economic reforms started in the 1970 and 1980s. At that time it had focused more on collectivizing the agricultural activities and Chinese leaders were trying to change the phase of economy by transforming the centre of agriculture from farming to household activities. Global trading Before the economic reform, China was world’s most important opponent of globalization and global economic and politic orders. About three years after China had joined the World Trade Organization, China had been rising to be the third largest international trader showing $ 1.1 trillion total trade in 2004. Once China had joined WTO, people within China worried that it would bring about the collapse of its agriculture sector and infant industries. China has proved that it is more constructive and cooperative within the WTO. It resolved trade disputes so effectively with its major trading partners and thus it has shown as having sound dispute settlement system. Its initiative in Cancun at the Doha Rounds and its political arrangement with emerging countries has been considered to be a rather exceptional approach. The success story of China as becoming an emerging economy and achieving rapid developments after accessing in to WTO can be well realized from the fact that after it has joined WTO, the US sale to other countries have declined by 9 % at the same time it has increased by 76% to China. Despite the controversies and talking up and down about China’s compliance with WTO, China continued to concentrate on agriculture, service sectors, intellectual property protection and enforcement and so on. China’s globalization has not confined to opening the economy but more significantly to open institutions to be globalized. This approach helped them to adapt foreign technology and foreign corporate management strategies as well as various types of foreign institution and institutional practices. It includes foreign accounting standards, securities law etc. When China adopted English language as a second language for the educated Chinese people and encouraged more students to acquire foreign education especially from developed counties, it in turn removed their great barrier of language in dealing with international transactions and opened greater opportunities of making use of highly educated Chinese population. Economic growth can be mainly achieved through efficient human capital and effective use of it. In China, there has been a massive inflow of new students in to university higher education courses that accounted to be 3.9 million students only in 2005. An OECD report shows the quality education in China as a key factor in helping country to develop rapidly. “The number of researchers in China has tremendously increased, from 695,000 in 2000 to 1.1 million in 2005. In absolute terms China ranks third behind the United States (1.4 million), EU (1.2 million) and ahead of Japan (705 000) and Russia (465 000)” (OECD, p.60). When China continued to be a significant global producer for manufactured goods, its role as a market for raw-materials also has grown. The following graph illustrates Chinese economy for four years after it started becoming as an emerging economy. China’s economic growth during 2001 to 2004 The fastest growing sectors were machinery and electrical products accounted to be 44.8% and developed technology products that accounted to be 62.7%. At the same time, China imported large amounts of crude oils, oil products, steels and natural rubber. Foreign Direct Investment (FDI) Foreign Direct Investment in China has been one of the key factors behind the success of China in becoming an emerging economy. China has also played a vital role in global investing as its companies have increasingly utilized the opportunities of global investing. China’s best role in both global trader and global investor has been viewed as fundamental factor that transformed China from an isolated nation in to the global state. According to Zhiwu Chen, “the open door policy reopened China for foreign capital and for international trade. This policy has created two results: China is now the largest destination for foreign direct investment and it has become an export-oriented manufacturing powerhouse” (Zhiwu Chen, p.159). Foreign Investment in China during 1990 had grown from $ billion to $ 300 billion in 1999 and it turned the development phase of the country in a more rapid pace and it became the leader among all developing nations. Sebastian Edward emphasizes that “China accounts for over 6 percent of total world trade, and it has become a magnet for foreign direct investment (FDI) overtaking the United States as the number one destination for foreign direct investment” (Sebastian, p. 421) China’s approach towards Foreign Direct Investment has been viewed as transformative as it is gradually changing the way most other countries manage economic development. Most countries have been avoiding dependence on foreign investment by depending on both domestic and foreign bank loans. Those countries government controlled the industry and its development by channeling bank loans and it made companies to depend more on banks. This led governments to hold too much control on businesses and to encourage mismanagement, corruption and even unfair advantages to large companies over small companies. But Chinese attitude welcoming Foreign Direct Investment was noteworthy because the investment has boomed. China’s capital inflow generated by Foreign Direct Investment forms a preferred form of inflow because this type of investment is most likely to be stable and associated with other advantages like technology transfer and managerial expertise. It was more obvious while China’s largest computer manufacturer Lenovo acquired global PC business of IBM through 1.25 billion worth deal. China’s economic power is illustrated by the fact that it is expected to be the fifth largest source of outward foreign direct investment during 2004- 2007. In addition, China has become the largest global recipient of foreign direct investment in recent years (UNCTAD, 2003). There were other reasons behind Chins’ decision to join GATT/WTO and it has been described as normative commitment of China. China’s access to WTO helps to foster new normative basis to sustain Chain’s ever changing trade policies and agreements that are compatible with the WTO principles and regulations. It in turn promotes China’s acceptance of laws, institutions and different business related standards prevailing in the global market. Institutional Stability of Chinese economy Institutional stability is an important indicator that can play vital role in determining an economy and development of many countries. It is regarded to be particularly important for an emerging economy. China has developed slowly toward more open market policies. Even though it started economic reforms many years ago, it still has a central control on its economy. Chinese firms have operated with a long term orientation and with an intention of achieving capabilities that should help them compete in their domestic market as well as foreign markets. This example shows that China has been able to maintain institutional stability while promoting economic development. Impact of financial Crisis on Chinese Economy The global financial crisis that started in August 2007 seems to claim new victims of manufacturers, banks, financial institutions and countries day by day. While some institutions and countries have been severely hit by this crisis, some other institutions and countries are less affected and weather the sever storm of it. Whether China is affected by global credit crisis and which sectors of the Chinese economy hit severely are becoming matters of discussions. Generally, it is viewed that all emerging economies are affected by credit crisis due to a large scale withdrawal of investments that foreign investors mainly from US made in emerging markets. Most US investors have withdrawn cash because they need capital as they become risk averse. This in turn made a great and fast impact on various sectors of emerging economies like China and India. Another main reason why credit crisis affected China is that it that Chinese economy is highly dependable to the international trade relations with United Nations and European Union. More specifically, the financial sectors within China are hit by present crisis, but the direct losses of Chinese banks from the US subprime crisis are more or less not large in the amount. Chinese banks are exposed for about less than $10 billion on subprime mortgages. The major impact of this crisis on China’s economy is on the real economy instead of the financial sector. During August 2008, prices began to fall as compared with past months. Houses and properties that are on construction have also shown significant declines. Some economists and overseas analysts had overestimated the impact of credit crunch on China’s economy, but the latest reports show that it was not as expected or estimated by others. The ICBC, China’s largest financial lender faced a loss of $1.2 billion and Bank of China faced $4.99 billion in 2007. The impacts of credit crisis on the Chinese real markets have brought a declining demand for goods and lower production that caused decrease in the demand for Chinese products and thus it resulted in increasing some commodity prices. The credit crunch and financial turmoil are bringing uncertainty among the overseas operators and it is most likely to lead a drop in future foreign direct investment in China. The effect could be a slowdown in the emerging economy of China. Impact on China’s Foreign Direct Investment Foreign Direct Investment plays a vital role in economic globalization of the emerging economy of China and hence any severe hits on FDI can easily affect whole economy of China. China received € 63.23 billion of FDI during 2007 showing 44.5 % up year on year. China has accepted total amounts of € 1338 billion as Foreign Direct Investment by the end of 2007 showing 30% up from 2006 figures. It shows that the impact of global credit crisis on China’s FDI is comparatively less than that of many other countries. According to a report quoted by Premier Wen Jiabao, “China is confident that it can maintain financial market stability in the face of the global credit crisis which has so far had a limited and controllable impact on it” (Jason Subler, 2008). Despite the severe hits of credit crisis, it has been proved that China’s foreign direct investment has recently grown as it jumped 23.58 % annually to $ 92.4 billions during 2008 (LvSha 2009). In the first half of 2008, the value of transactions was less by 29% that that of second half of 2007. Syndicate loans were reported to be declining in China. Even though Foreign Direct Investment in China rises 39% year on year in the first few months of 2008, from 2008 September onwards it has been showing much lower than the monthly average showing about € 628 billion. China is holding a large financial reserve and a major part of it is denominated in US dollars. Recently, US dollar dropped and it resulted in the trade deficit meltdown. Impacts on China’s exports and Labors The reports have proved that until September 2008, China’s exports have continued to increase at an annual rate of more than 20% despite of the global challenging crisis. In the beginning of the financial crisis, China’s trade partner countries have been affected largely by credit crisis and their trade began to slowdown their trade with China as it involved a reduction in Chinese exports. The sub prime crisis has reduced consumption demand and risk tolerance of US and European investors and it directly affects China’s exports and the operation of export based businesses and financial markets. Over 2007 and 2008, many developed countries enhanced their trading activity in the global markets especially with Chinese government and this can considered to be the reason why China is able to maintain its export growing at a rate higher than 20% per year. Due to the contraction in US consumer spending, china’s exports have been hit up to an extent. Exports to US have declined from the beginning of 2007 dropping from 20.4% year-on-year based rise in the first quarter to 12.4% in the third quarter of 2008. China’s exports have reduced and it affected the whole economy of China because, exports only accounts to be more than one third of the China’s economic growth and the US is the second largest recipient of made in china products exported. When export collapses, it would necessarily affect its labor wealth as well resulting in massive lay-offs. China’s export sector had already shown that there were always huge labor problem because of decreasing number of migrant workers in export industry. Poor labor conditions and less pays were their major concerns. The introduction of new labor law and forces made by trade unions for collective agreements were playing roles in closing some low-earning companies. Chinese Economy and Future Recently, Financial Times reported that China overtook Germany to become the world’s third largest economy in 2007 after the Chinese authorities revised developing figures for growth during 2007. (Geoff Dyer, January 2009)China’s national Bureau of Statistics revealed that the economy developed by 13% in 2007showing a sharp increasing from the 11.9% growth rate previously revealed. This shows the greater possibilities and growing opportunities of China in the global market as a leading emerging economy China has become the largest recipient of foreign direct investment and it has many recourses among those is the larger population with low-rage workers. China nowadays places major focuses on developing technologies and bringing innovations in almost sectors of economy. In recent years, China has been performing as a recipient of approximately 300 multinational corporations’ R&D facilities. All these show that China has greater chances of exploring new phases of developments and more growth in its economy through institutional transition and development Conclusion This paper outlines China’s economic variables and factors that led China become as an emerging economy. The paper analyses the factors including globalization and foreign direct investment that are key factors in determining the economy of China. There was growing discussions regarding impacts of global credit crisis on different emerging economies, especially on China. This paper provides an analytical study on the impacts of global financial downturn on China’s economy. 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