Globalization in China as it relates to MacroEconomics - Essay Example

(U.S. Commercial Service) China has been doing an admirable job of attracting foreign direct Investment (FDI), which has made it a powerful force to reckon with in the World Economic scene. In 2004, China kept its place as one of the top two destinations in the world of FDI adding $64 billion. Over $564 billion of FDI has been invested in China since it opened to the world in 1979.Executives overwhelmingly consider China to be the undisputed top FDI destination for the third year in a row in 2004.

About 40% of global investors expressed a more positive outlook on China's economy, four times the number of executives who had a dimmer view of China. The path to economic liberalization has been a difficult but fruitful one for China. It has triumphed due to its determination and commitment to open up its markets to foreign investors. A Business Week article in 2001 stated that "after two decades of steady but halting reforms, Beijing is now racing to dismantle the last vestiges of a command economy".

Let us trace the FDI history in China. Since late 1978, China has carried out massive economic reforms in an effort to restructure its economy to be more market oriented. FDI was one of the primary goals of its reforms. The government has over the years slowly liberalized the restrictions on FDI to gain technology transfer, modern management skills and foreign exchange. The government's first move to entice FDI was taken in 1979 with the Equity Joint Venture Law. This law allowed the legal entry of FDI and provided a statutory basis for the establishment of joint ventures in China.

But Investment was allowed in only designated Special Economic Zones (SEZs) and was encouraged via tax incentives. As investments grew, additional laws were required. In 1983 another law was issued which provided greater details on all joint ventures in FDI. The government also expanded the SEZs in 1984.Then it passed Foreign Exchange Balance Provisions and Encouragement provisions in 1986, which facilitated FDI and allowed firms to solve foreign exchange problems. (Jun Fu, November 2000). In 1994, China conducted a new round of FDI reforms.

It abolished the official exchange rate and adopted a market rate. It also abolished the exchange quota retention system. In 1996, the government adopted IMF article A that removed all restrictions on foreign exchange transactions. All these reforms went a long way to boost investor confidence. In the November 1999 US-China WTO Accession Agreement, China agreed to several ground breaking reforms. (Sandra Berkun, 2001). Some of them were:China will phase in trading rights and distribution services over three years, and open up sectors relating to distribution services such as repair and maintenance, warehousing, trucking and air-courier services (US-China Business Council).

China committed to allow FDI in its telecommunications industry.Increased access in banking, insurance and securities will be phased in the next five years resulting in full market access in all activities and regions. China also promised national treatment for foreign banks and minority ownership in domestic security firms and more insurance businesses.(Lardy ,1998)Increased access for professional services including accounting, consulting, engineering, medical and Information Technology. (Lardy,