The Functioning of the Economy of China - Case Study Example

The rise of China Student’s Name: Instructor’s Name: Coarse Code and Name: University: Date Submitted: Table of contents Synopsis…………………………………………………………………………..3 Introduction……………………………………………………………………….4 History on the rise of China………………………………………………………5 The functioning of the economy of China………………………………………..7 Conclusion ……………………………………………………………………….10 Recommendations………..………………………………………………………10 Reference………………………………………………………...……………….11 Synopsis The rise of china is viewed as one of the most significant trend worldwide in this century. In future, when historians write about this era, they might summarize it as one of the most important development that saw the emergence of a dynamic army and market economy in the most heavily populated nation of the world. China’s economy is one of the fastest growing worldwide; in addition, it has one of the fastest expanding budgets for its military. The nation has a fast improving army, nuclear weapons, and border clashes with a majority of its neighbors. Such advancements in all its aspect has led to the nation being viewed as one of the top superpowers in the world. The US has for a long time been ranked as having the largest economy in the world, nevertheless the current patterns in the world indicate that soon China might be able to displace it future to clinch the top position in terms of economic growth. Introduction The rise of China can be defined as sustained and rapid growth of the economy of China from the time when open door policy and reforms were initiated in the late 1970s. The rise of China can also be viewed as the advancement of the Chinese military together with the revival of the Chinese culture. However, the heart of the rise of china is in its economic advancement. In other words, China’s rise is the continuous process of modernizing China, and specifically economic modernization. In 1979, Deng Xiaoping identified modernization construction, as the first priority for China. Xiaoping stressed on the importance of construction of socialist modernization. He viewed it as the most significant issue as he regarded it as, the representation of the fundamental and foremost interest of the people of China. In recent years, China’s rise has been regarded as a cliché .a lot of effort has been spent in studying the implications of such a rise to the rest of the world and particularly the United States and East Asia. China’s rise began in the late 1970s whereby the open door policy and reforms were initiated and adopted. From that time, there have been dramatic cultural, social, political and economic changes which have been witnessed in this nation. The rise of China is a continuous process which has not yet come to an end it is predicted that it will continue for some time. This paper discusses the history of the rise of China and mainly focusing on the economic issues that the investors should consider when contemplating investing in China. History on the rise of China Economic reforms were initiated by Deng Xiaoping in 1979, at this time China was rather a closed society. The nation was conservative since it had gained power in 1949, and the government being communist, limited the number of its trading partners. Analyzing china historically, the nation began with open trade, then the nation went the Silk Road, thereafter there was the period of discouraging trade, and finally the bits experienced in the Qing and Ming dynasties. The economic reforms in the beginning, concentrated on agriculture, thereafter, China started to open up to the world cautiously. The nation put up 5 unique economic zone, 3 were located in the Guangdong province which were initiated in 1980. The remaining economic zones were established as the reforms progressed. With time there arose a transition evident in the economy which was centrally planned. By 1992, the reform programs in China’s economy graduated to the period of socialist market economy. In 2001, the transformation to trade that was open, resulted to the admission of China into the World Trade Organization, this was after a lot of consultations (Brown 2000). The coastal parts which are densely populated have over time proved to be most valuable in terms of foreign direct investment. In 2000, china initiated a strategy called western development which was aimed at facilitating the development of the regions that are inland. By 2003, the value of China’s foreign direct investment was estimated at $500 billion, this represents a rapid improvement as compared to the 1980s whereby the FDI was below $ 19billion (Harm 2002) The economic success of China hasn’t been limited to raw growth economically, in 1991; the foreign trade has increased to about $ 166 billion. This indicated that China had shifted to the major trading partners in the world. The exports by China increased from about from $ 14.8 billion to $85 billion between 1979 and 1992. The exports not only rose, but also such exports were of a higher quality. In 1985, the manufactured goods constituted only 50% of the exports, while in 1991 they were over 75% of the total exports. Foreign investors invested about $11.2 in china’s economy in 1992 alone, in addition, about $57.5 billion worth of investments in future were signed into agreements. FDI in China FDI in China (International construction intelligence, 2004) China has become one of the leading producers of a variety of goods from its foreign investments. Nevertheless, the augmented consumption of basic goods is as a result of the growth experienced in the manufacturing sector. The building of infrastructure that is used in supporting economic growth has raised the consumption of steel and cement. From the time when the reforms were initiated, China’s economy has undergone extraordinary growth. For the last 25 years, the country has had an average yearly growth rate of about 9%. The GDP of the country has risen 5 times to approximately $1,087 per person in 2003. This rapid growth rate has resulted in the increase in consumer goods spending in commodities such as mobile phones, washing machines, refrigerators and televisions. In addition, there has also been an increase in the demand for automobiles. The demand for cars in china has led to the crowded roads and especially in urban areas due to the absence of traffic rules. The mere volume of demand does not in itself indicate that there is potential, but the per capita figures give a clearer picture. In comparison to other countries that are as developed as china, the demand for commodities can only increase in future (Agarwala 2002) China in world economy China in world economy (International construction intelligence, 2004) The functioning of the economy of China The workings of the economy of China that have promoted its rise emerged from the adoption of strategies used by new industrializing economies. This led to China to give priority to sectors and industries that produced rapid growth with limited investments by the government. To begin with, China gave back land to her farmers; this resulted in the improved output, income, and productivity with little investments by the state. The role of the state was mainly restricted to issuing legal guidance and utilizing the current administrative framework to enforce the decision making process. Thereafter, China focused on the promotion of foreign investment. Even though the rules and incentives that regulated foreign investment have necessitated continuous evaluation, they were effective in attracting investments. The other approach adopted by China was on the concentration on medium and light industries, whereby small investments led to higher outputs. Similar to Hong Kong and Taiwan that had supplied the world economies with consumer electronics, toys, shoes and garments in the 1960s, China swiftly became a universal supplier of similar products in the 1990s. Similar to other Asian economic takeoffs, the strategies adopted by China led to the heightened production of consumer goods, foreign exchange earnings, exports, personal income, and growth. Currently, the push and pull factors in China’s economy have influenced the growth further. The crucial pull factor in china is that it is a cheap place for one to carry out business. The abundant labor, operating cost, and low start up cost attracts industries particularly the labor intensive ones. The nation provides investment incentives such as export/import incentives, land and lower taxes. In addition, the government offers large subsidies for improvements in infrastructure. The admission to the WTO, led to the increased attractiveness of manufacturing and offshore procurement. This resulted in the increase of aggregate volume of exports and imports from $509.7 billion to $851.2 billion from 2001 to 2003 (Schmitt 2009) In terms of the push factors, there are numerous. One is that China is still changing meaning there are higher risks associated with this. The rule of law remains a crucial matter as the protection of rights regarding intellectual property and sanctity of foreign contracts is still an issue of worry among investors. In spite the rapid rates of growth, there exists a number concerns with regards to the economy. There are slow reforms in the state owned businesses. As compared to the companies that are not owned by the state, the increase in productivity is much slower and the performance of the economy is slower. The government is trying to eliminate the uncompetitive companies, and particularly the environmentally unfriendly and large energy consumers. The push factors has resulted in the problems in the financial systems that entangled with the enterprises that are state owned. Loans that are given to the state owned companies that are non-profitable have resulted in the buildup of bad loans. The funds that have been moved by China to banks are being sold as loans which are non-performing to the asset management organizations before public offerings. The rates of saving are categorized as some of the highest worldwide which is advantageous, but, there is increasing unemployment. Downsizing and privatization of the enterprises that are state owned is blamed for this. In addition there might be some imbalance due to the shift from an economy that is centrally planned to one that is market oriented. The other critical issues are on quality control, procurement, and the quality of the labor force. An investor should consider quality matters as they can increase the cost, this requires an investor to understand and investigate the normal quality of a product or service. This means that the investor should consider the environment, health and safety standards (Yang 2003). The issue of corruption is also important; the goal of the Chinese government is to improve its transparency. However, there are still corruption cases in the government, the people of China are ethical, nevertheless, the such ethics are applied differently and it is crucial for one to comprehend this. Conclusion It is evident from the rise of China that the Chinese people place very high expectations on the foreign investors. The open door policies that have been adopted since the late 1970s, was and still is the desire to get the required foreign technology and equipment. The WTO agreement is expected to be the political lever that is intended to assist in the achievement of the mandatory internal reforms. The objective of a Chinese and foreign investor in a joint venture might be quite diverse. This therefore, means that it is necessary that the expectations are united. Recommendations Since the 1970s there are a number of values that have been developed and which facilitated the rise of China. In attempting to be successful in China, investors need to put into consideration the following crucial issues; 1. Embrace and comprehend the culture of the people of China. 2. Portray a strong commitment to the economy of China. 3. Establish good working relationship with the people of China. 4. Acknowledge the fact that institutions are still transforming and that this transformation will continue. References Agarwala, R 2002, The rise of china threat or opportunity? University of Michigan, Bookwell. Brown, M 2000, The Rise of China. The MIT press, Cambridge. Pg 3-45. Harm, Z, & Tseng, W 2002. Foreign Direct Investment in China; Some Lessons for Other Countries. International Monetary Fund, Washington, DC. International construction intelligence 2004. The rise of China; 25 years of Globalization. Hanscomb means report. Vol.16, No. 9. Schmitt, G 2009, The rise of China; essays on the future competition. Encounter books, New York. Yang, Y 2003, China's Integration into the World Economy: Implications for Developing Countries. International Monetary Fund, Washington, DC. Read More