Economic Systems in China - Term Paper Example

Economic Systems in China Economic growth of a nation is controlled mainly by parameters like, political stability, lack of agitations in the society or industrial sectors and also the country’s ability to mobilize the internal resources along with attracting foreign direct investments (FDI). The people’s living standards, unemployment problems, educational levels, infrastructure developments, overall domestic peace levels and also the relationships with the neighboring countries all will reflect the economic growth of a nation. According to the article China’s Economic Rise—Fact and Fiction, by Albert Keidel (2008), China’s economy will surpass that of the United States by 2035 and be twice its size by midcentury (Keidel). Even though the recent recession has created immense problems to the economic growths of many countries like America, Britain, Germany etc, China seems to be unaffected by the recession problems. Many people believe that China will put an end to the US supremacy and may become the highly influential superpower in the world in the near future itself. Although, Globalization and liberalization policies were the brain child of the capitalist countries like U.S and UK, China seems to be the number one country which exploited it. The growth of a nation towards an economic power can be identified by analyzing whether the state in question is much more economically and politically present or active in more places around the globe than before. “China’s increasing economic activities in Africa and Latin America proves beyond doubt that China is actively participating in global issues more than ever” (Iain). Another aspect which is generally considered while evaluating the economic growth of a nation is the global presence of its products. Chinese products are nowadays conquering the global markets and also creating lot of headaches to others because of its cheaper price. China believes more in bulk production rather than the quality of their products and hence their product prices are always cheaper. The cheaper prices and fair quality made Chinese products favourite for the ordinary people in the world. In fact China was able to monopolize the consumer market in the world. This paper briefly analyses the Chinese economic systems such as industrial organizations, Banking, Labour-Management relations, The role of government etc in general and Unemployment, Inflation etc in particular. General economic systems in China Industrial organizations Gao (2005) has mentioned that the industry sector has relieved from the complete dominance of the government and lot of small scale industries under private ownership has been developed as part of the reformation process. He also mentioned that in China, “the local officials and the plant managers have given more authority and the economy has opened more to attract FDI” (Gao). Industrial organizations in China are working strictly in accordance with the communist principles. Earlier, no organizations were functioned in the private sector because of the strict adherence to the communist principles. But Deng, the Chinese leader who succeeded Mao, has rewritten many of the communist principles which gave momentum to the economic progress of China. Deng allowed privatization of business partly. Many small scale industries were developed in China because of the privatization policies implemented by Deng. Moreover, Deng gave more authority to the local officials and plant managers which helped these officials to take immediate decisions suitable for the company or organization without waiting for the governmental intervention. Business enterprises have been granted independence as part of economic reforms in China which served as a blessing for the Chinese economy. The government officials and the mangers got autonomy and they started to function more efficiently because of the reformation. These reforms contributed to the development of some kind of private enterprises and manufacturing units in China and the Chinese stock markets started to grow because of the economic reforms in the 70s and 80s (China Economy) Apart from encouraging the domestic industrial sector, China is keener in attracting foreign direct investments. The administration has realized that FDI is essential for the economic growth of China like heavily populated country. Because of the economic reformation process implemented in the 80’s and 90’s, many foreign companies are operating in China at present. Even though, America has strong differences with China in topics such as human right issues, many American companies like Google, Microsoft, Apple Inc etc are currently working in China. China’s rapid GDP growth is indebted to the ability of China to attract FDI. The figure given below illustrates the GDP growth of China in the recent past. (Back) It is evident from the figure that even though the GDP growth slowed down a bit in 2009 because of global recession, it again picked up during the latter half of the 2009 onwards. Currently the Chinese GDP growth approached the all time high 12% Banking China’s financial system is much stronger than that of other countries and hence the current recession has affected it less compared to many other countries. “China’s banking sector was able to support the financing of infrastructure development and other public utility segments necessary for sustained rapid growth even amidst the current crisis” (Keidel). China’s banking sector is functioning strictly under the public sector. Unlike the banking sectors in other countries like America or Britain, Chinese banks cannot formulate policies without the permission from the government. Chinese banks gave more importance to the infrastructure development- one of the major indicators of economic development- which helped China to tackle the recession problems much easier than other countries. Real estate and construction sectors in China are getting immense assistance from the Chinese banking sector and hence the construction activities were not affected by the recent financial crisis. BACK,(2010) mentioned that “in any other major economy where growth had accelerated as quickly as Chinas, higher interest rates would seem inevitable. But in China, authorities have been reluctant to raise rates” (Back). In other words, most of the developing countries will increase the interest rates when they feel that that their economy is overheated because of over economic exercises. But China did nothing to cool down the over activities in economic sector and kept the interest rates at a lower level. Even though economists have some concerns about the over activities in Chinese economic sector and the low interest rates, no big problems were reported so far from China. “Still, the government isnt dramatically cutting state-supplied credit. This years loan target, although down considerably from last year, is still more than 50% higher than that of 2008” (Roberts). Raising the interest rate is one way to cool down the overheated economy. Even though Chinese government has taken some measures for cooling down the economy, they are hesitant in going for a complete cool down because such a measure may drastically affect the foreign capital inflows (Back). Labor-management relations Labor- management relations in China are one among the bests in the world. Even though unionism is so strong in China, it may not affect the labor management relations. For example, 55 of the 59 Panasonic Group companies have unions; however, “there are active efforts to hold labor-management talks and joint labor-management recreation activities every couple of months” (Healthy Labor-Management Relations). Unlike unionism in many other countries, Chinese labor unions are more particular about the growth of the country rather than the individual benefits of the employees. China has started its economic reforms in the 70s and 80s. Initially China’s focus was mainly on the agricultural sector, however later they realized that agricultural developments alone may not be enough for the rapid development of economy and hence they started to focus on industrialization also. Till the Mao era, China was so particular in safeguarding the interests of the labours or the working class. But the administrators like Deng, who succeeded Mao, realised the importance of safeguarding the interests of the working class as well as that of the organizations. They realised that industry will never grow properly if workers give more importance to their rights rather than their duties. The above awareness forced Chinese administrators to implement better labour polices at the workplace which safeguard the interests of both the workers and the organizations. The role of the government China is believed to be one of the most successful countries in the world as far as the exploitation of the opportunities provided by globalization. In fact China was one of the strong protestors of globalization when it came into existence for the first time. It opposed the “global economic order, political order and the major global institutions such as the IMF and the World Bank before the reforms started in China” (Overholt, p.3). Earlier, China interpreted globalization as a product of capitalist countries to exploit the wealth of other countries. Because of the reluctance in accepting globalization, China escaped from the onslaught of early globalization. In other words, China’s hesitance in implementing globalization policies helped them to escape from the initial drawbacks of globalization. At the same time, when such drawbacks were sorted out, immediately China started the economic reformation process. In other words, the Chinese government’s earlier reluctance in implementing globalization policies served as a blessing for China rather than a curse. Even though, Chinese governments were reluctant in opening their economy earlier, at present their economy is more transparent than even Japan’s economy. Moreover, “China’s trade in 2004 was equal to 70% of its GDP, while that of Japan was 24%. China received $60.6 billion of foreign direct investment in 2004, while Japan, received only $20.1 billion” (Overholt, p.5). Chinese administration never opened their critical sectors for the private participation. At the same time they have encouraged privatization in many small scale industries and less important industry sectors and that also in bulk. China has ensured that the sovereignty and the safety of the country should not be forgotten while trying to reap the benefits of globalization. “Chinas opening to the outside world is comprehensive. It opens not only to developed countries, but also to developing countries, not only in economic field, but also in all areas of social development” (Peixin). According to World Bank chief economist, Deepak Bhattasalithe, “not only the Chinese Governments effective policies on taxation, but its long-term investment in infrastructure construction also contributed to a more pleasant investment climate” (Globalization Boosts Chinas Economic Growth). Chinese administration has realized the importance of infrastructure development in exploiting the possibilities of globalization. Lack of infrastructure facilities is the major reason which prevents underdeveloped countries from exploiting globalization. Chinese administration realized the importance of infrastructure development in economic growth and spent billions of dollars in developing infrastructure to attract FDI. International companies usually look for land availability, transportation facilities, power availability, and water availability, legal formalities etc while investing in a country and China was able to offer all such things. Factors which affect Chinese economic growth There are many issues which retard the economic progress of China. The tight censorship on Medias, internet and lack of freedom of expression has made it almost impossible for foreign companies or workers to operate in China. Chinese work culture and attitude towards aesthetic values is not digestible to others working in China. These censorship and restrictions on freedom of expressions is one of the main weaknesses of China’s progress towards economic stability. “An Internet user in China searches for the word "persecution," "Tibetan independence," or "democracy movements", likely to come up with a link to a blank screen which says, Page cannot be displayed” (Wiseman) Amnesty has also reported that many people has been arrested for disseminating information about the spread of Severe Acute Respiratory Syndrome (SARS) over the Internet (Censorship in China, overview, 2008) The Chinese government wants to hide the exact casualties and the causes of SARS diseases from the international community since they feared that the exact details and causes of the disease may reveal the inefficiency of the communist led government. They were afraid that the awareness about the exact reasons of SARS and the failed measures taken by the government to control SARS may result in another human agitation in China just like the Tainan men Square incident. Corruption is another factor which can be considered as a factor which retards the Chinese progress towards becoming a super power. “Though the Chinese government has more than 1,200 laws, rules, and directives against corruption, implementation is spotty and ineffective. Roughly 10 percent of government spending, contracts, and transactions is estimated to be used as kickbacks and bribes, or simply stolen”(Pei). Foreign investors have big concerns about the bribery and corruption scandals in China and hence they are somewhat reluctant in establishing their business units in China. Strong laws and rules are the features of the socialist’s rule, but even the socialists who argues for equality in all the segments of life, could not prevent the corruption from spreading in their society. Dr. Xu Cheng Gang, a lecturer at the London School of Economics, argues that, “with China in the midst of economic upheaval, the government continues to allocate resources, placing officials at the center of the market and enabling them to channel profits into their own pockets” (Yao). Chinese political leadership is not keen in controlling the corruption because, they know very well that corruption prevention process needs political reforms which the government does not like. Money intended for utilizing in the infrastructure development, real estate development and financial services areas are looted by government officials. Even a low level government official can make huge amount of money as bribes because of the political and bureaucratic systems in China. Recent economic performances of China ‘China’s economy is huge and expanding rapidly towards attaining a stable proposition. Last 30 years, the world has witnessed miraculous Chinese economic growth, averaging 8% growth in Gross Domestic Product (GDP) per annum. The economy has grown in all the segments more than 10 times during that period. The Chinese GDP has already crossed 3.42 trillion US dollars and it is still growing towards much larger extent. China already has the biggest economy after the United States in purchasing power (China Economy). Most economic analysts expect China to become the largest economy in near future itself China’s GDP was dollar 4.5 trillion in 2000, second only to US whereas the GDP per capita was $ 3600 in 2000. The trading power of China was in the 32nd place in 1978, 15 th in 1989, and 6 th in 2001. China was the world’s fifth largest exporter and 6 th largest importer in 2002. FDI in 2002 was around $ 50 billion. The number of poor has declined from 250 million in 1978 to 30 million in 2000. Population growth has been controlled by controlling the birth rate. The average life expectancy of Chinese people increased from 35 years in 1949 to 71.8 years in 2001 (Gao). “By 2020, Chinas GDP might be approximately $4 trillion with a per capita level of around $3,000” (Jintao). Even amidst such brighter performances of economy, inflation and unemployment are major problems in China at present. Moreover, “the per capita income of China is only about 2,000 US dollars,(107th out of 179 countries) which is fairly poor when judged against global standards” (China Economy) Inflation “The inflation rate in China was last reported at 4.4 percent in October of 2010. From 1994 until 2010, the average inflation rate in China was 4.25 percent reaching an historical high of 27.70 percent in October of 1994 and a record low of -2.20 percent in March of 1999” (China Inflation Rates). Inflation rate of a country reflects the purchasing power of the people and rise in prices of the essential commodities in that country. Too big or too small inflation rates are equally undesirable. According to economic gurus the inflation rates should not be fluctuated much for the proper economic growth of the country. Bigger inflation rates will result in less purchasing power. The following graph and table illustrates the latest inflation rates in China. (China Inflation rates) The above figures are not much good for China’s ambitions to become the world’s topmost economic power. Consumer prices increased a lot in the last few years and the Chinese central bank is thinking in terms of tightening their policies at present in order to control the inflation related problems. The lending rates could be increased most probably in the near future even though the central bank was reluctant in increasing the lending rates. Apart from the food price hikes, the consumer price index also reached alarming levels as a result of inflation. Unemployment On papers, China’s unemployment rates are as low as 4.1% in the third quarter of 2010 (White). But considering the huge population size, this 4.1% unemployment means, more than 230 million people in China are still jobless. In short, unemployment problems in China are severe even though statistically it gives us a better picture. The table given below gives some important information about the unemployment rates in China in the recent years. Year Unemployment rate Rank Percent Change Date of Information 2004 10.10 % 93   2003 est. 2005 9.80 % 88 -2.97 % 2004 est. 2006 9.00 % 92 -8.16 % 2005 est. 2007 4.20 % 50 -53.33 % 2005 2008 4.00 % 49 -4.76 % 2007 est. 2009 4.00 % 45 0.00 % 2008 est. 2010 4.30 % 38 7.50 % September 2009 est. (China Unemployment Rate) Conclusions Undoubtedly, China is rapidly marching towards attaining the status of a global super power in near future itself. No other country can claim the same economic growth as that of China at present. Most of the economic growth indicators are on the higher side now in China. The current global financial crisis has not caused many damages to the Chinese economy. Wide spread corruption and the regulations on freedom of expression are some of the weaknesses which retard the economic progress of China. Though China is considered to be a socialist republic where all citizens are equal rights and private income is not at all encouraged; the Chinese society still consists of rich and poor. Works Cited 1. BACK, AARON. “China Adjusts Policy but Avoids Rate Increase to Cool Prices”. 2010. The Wall Street Journal. Web. 03 December 2010. 2. “China Inflation Rates”. Web. 03 December 2010. 3. “China Unemployment Rate”. 2010. 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BusinessWeek. Web. 03 December 2010. 16. White, Gregory. “Unemployment In China Is Just 4.1%, But Its Unemployment Problem Is Still Gigantic”. 2010. Web. 03 December 2010. 17. Wiseman, Paul. “Cracking the Great Firewall of Chinas Web censorship”. 22 April 2008. USA TODAY. Web. 03 December 2010. 18. Yao, Shuntian. “Privilege and Corruption: The Problems of Chinas Socialist Market Economy - New Perspectives on Transition Economics: Asia”. 2002. Web. 03 December 2010. Read More