Chinas Growing Economy

China’s Growing EconomyAfter North America, Europe, and Japan, the area of China, Taiwan, and Hong Kong is a fourth growth pole in the world economy (Jue 108) which in 1994 was expected to double in size by 2002. Today, the growth rate is still on track to fulfill that prediction. Recent Chinese economic policies have shot the country into the world economy at full speed. As testimony of this, China’s gross domestic product has risen to seventh in the world, and its economy is growing at over nine percent per year (econ-gen 1). Starting in 1979, the Chinese have implemented numerous economic and political tactics to open the Chinese marketplace to the rest of the world. Chinese reform measures even anticipated the rush of foreign investment by opening newly expanded industries to out-of-country investors. As trade expands globally and countries within geographical proximity and of similar cultural descent and philosophies ally themselves in order to better compete on a world level, we are seeing the development of increasing number of geographical trade alliances, whatever the underlying reasons behind each. The alliances that have been in place for a while are proving to be very successful in competing in the international markets, stimulating the economies of nearly all of their member states. Effects of this change in economic strategy by a world power can be felt by practically every nation of the globe involved in international trade. The change in the amount of imports and exports to and from China will increase the demand on countless markets. Also, with all the foreign investment China is receiving, the socialistic republic will only grow more and more interdependent upon the world economy. However, the impressive growth rate of China’s economy is not without its shortcomings. Problems such as inflation and inefficient state-owned enterprises plague the rise of the Chinese economy.
When China opened its economic borders 19 years ago, environmentalists spoke of the efficiency of their farming systems and how they used hardly any organic fuels in the production of food for their people relative to some of the other countries of the world-most notably the United States. What they neglected to mention, however, that one farmer at the end of one rake struggling to feed his family kept fuel consumption very low indeed. It was not, by any stretch, efficient.

Matching conditions still exist today. Rumors of the wonderful prosperity of the south and eastern provinces have reached the more isolated-and less prosperous-interior provinces. Those current farmers who would travel in order to be more prosperous themselves are often stopped at the borders of industrial growth and made to turn back. Everyone in China seemingly wants a share, but the industrial provinces can physically support no more drain on their existing housing and infrastructures, and they are finding themselves unable to enhance their current positions despite their economic prosperity.
When examining an issue, it is imperative to honestly look at all sides, and not all of China’s sides are forthcoming. The country has indeed become more open toward foreign investment, and in fact openly courts it. China have been known to have placed several restrictions on the multinational companies that have opened operations within their borders, but they are generally not so restrictive as to be prohibitive. For example, after IBM accepted China’s conditions regarding the true ownership of IBM’s facilities and environmental rulings, it seemed that all of the rest of the world wanted to join in.

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Deng Xiaoping called China’s entrance to and courting of the industrialized world crossing the river by feeling for the stones (The Economist 26). In feeling for the stones, China’s already realized economic transformations have vastly improved the lives of hundreds of millions of people (The Economist 26)- Chinese people. Economic measures instituted by Deng Xiaoping have been grouped together, under the general term of gradualism, but many observers now say that in order for China to continue its double-sized growth over the long term and to rectify the problem of the state industries that are losing billions of dollars, economic shock therapy needs to be administered, and quickly.
But the current plan of China’s President Jiang Zemin and his advisors includes no such shock therapy. It does include, however, divesting the government of all but one thousand of the more than three hundred thousand state-owned businesses that have cost the Chinese government $85 billion in looses over the past ten years. The following chart shows the distinctions of several of China’s economic indicators, and their changes since 1987.

Table 1. Selected Economic Indicators
(Billions of dollars)
Factor 1987 1997 Change
Gross Domestic Product 300 610 610
Merchandise Exports 30 180 150
Foreign Investment 2 48 46
Hard Currency Reserves 25 128 103
Losses of State-Owned Industries 3 88 85
(Business Week, Sept. 1997)
From the preceding chart, the growth in China’s GDP over the past ten years in nearly indefinable. Other indicators are highly favorable, with the economy’s only apparent problem being that of the losses of the state-owned industries. The losses incurred over the past ten years could have served extremely well in furthering the quality of life of the Chinese people, rather than simply supporting the workers in those industries. Those workers represent no small percentage of the Chinese population- there are 100 million workers in those state supported industries that have lost so much money (Clifford et al.).

The plan of action proposed by Jiang Zemin in rebuilding the Chinese economy includes:
? Restructuring state enterprises. Already responsible for a third of the country’s industrial output, these could be converted to public corporations. When these companies become shareholder-owned companies, it opens the door to foreign competition. Government holdings can be at the level of minority shareholder.

? Strengthening financial markets. Set up the equivalent of our SEC and allow annual capital-generating stock listings in Shanghai and Shenzhen. (China already has a start on regulating securities exchanges (Reuter’s).)
? Selling state assets. Currently, there are 305.000 state-owned businesses. The government would retain 1,000; the remaining would be sold. Those that cannot be sold will be allowed to go bankrupt.

? Building social services. Literally millions of Chinese citizens stand to lose their jobs through the sale and conversion of state-owned businesses. This action is intended to both replace some of those state-owned enterprises and provide assistance to those affected in the form of training, housing, and pensions design.

? Cutting trade tariffs. Though China is not a member of ASEAN, the country does aspire to join the World Trade Organizations (WTO) by the year 2000. Tariffs must be reduced to 15 percent by that time in order for China to be eligible for WTO membership (Business Week). Even while concentrating on internal adjustments, the government apparently intends to work toward that end.

Jiang’s objective is to build a complete market system which will give China a chance to grow at an average of 6.5 percent annually for about 25 years and come forth as a $5 trillion modern industrial superpower (Clifford et al.). If the President is able to succeed with his plan of action, the impact will be tremendous for the global economy of the 21st century. Hong Kong, the center of the Chinese capitalism, could have the opportunity to be side-by-side with London, Tokyo, and New York as financial centers. As long as Chinese individuals move in on global bonds and stock markets to help finance everything, like superhighways to steel mills, China could take part in even more parts of the world’s capital.
The main goal for China’s modern foreign policies is the development of the Chinese infrastructure. The significance of improved communication and transportation cannot be over-stressed. Economically, enhanced means of communication and transportation allows more expedient supply of demand scheduling. Two of the latest Chinese reform measures to aid in the development of the country are the Provisional Regulations on Direction Guide to Foreign Investment and the Catalogue Guiding Foreign investment in China. Both these policies place specific industries including telecommunications, machinery, and electronics on top priority. Funding for these projects come from foreign investments and appropriations from the Chinese government in the form of grant financing, and legislative or administrative support.
Yet another example of the Chinese emphasis on industrial based growth is far reaching goal of having just under 100 million telecommunication lines by the year 2000. China’s Central Ministry of Posts and Communication said that in order to complete this major task China will enlist the aid of major overseas suppliers and create manufacturing plants within the nation. AT&T, Motorola, Northern Telecom, Alcatel, Ericsson, NEC, and Siemens are just a handful of the multinational companies which hold a considerable share of the Chinese telecom market, once again proving that China is becoming a party to interdependence.
The Chinese pharmaceutical market, much like Chinese industrial markets, is experiencing rapid growth due to reforms in China’s economic strategy. The nation’s government has decided to lower import tariffs and remove the necessity of an import license to bring pharmaceuticals into the country. Also, patented foreign drugs, such as
Tylenol, are now being protected from counterfeiting by administrative action. The result of these provisions are overseas contractual investments totaling $1.5 billion in the past five years, and income from the medical industry’s exports reaching 2.6 times the amount five years ago, according to Zheng Xiaoyu, director of the State Pharmaceutical Administration (moftec.gov). The pharmaceutical market’s growth is another example of the economic progress China has made.

Even after accounting for all the economic benefits recognized by the world, the Chinese still come out as the country with the most gains. However, there are more motives behind China’s market reforms than just purely economic. On the political front, China is fast becoming an integral part of international organizations. The government is making a conscious effort to reenter GATT (General Agreement on Tariffs and Trade), realizing the importance of creating a favorable trading status among foreign nations. Slowing this progress, the 124 nations strong trade bloc has requested that numerous conditions must be met by China before the nation can become a member of GATT once again. Several of these provisions are the elimination of import prohibitions, restrictive licensing requirements and other controls or restrictions; lifting of all restrictions on access to foreign exchange and full convertibility of the Chinese currency (fmprc.gov). Other important key themes behind China’s Open Door policies are economic and technological cooperation with the West (fmprc.gov) and that China’s government no longer supports Third World revolution. Instead, China realizes that cooperation with developing countries would be far more practical.

Although Chinese foreign policies is aimed at opening the nation’s economy to the world, it neglects the agricultural market almost entirely, with the exception of technical contracts. These contracts are designed to improve the transfer of technologies to improve crop yields. Technical Contracts are made between farmers and village economic cooperatives and a wide variety of offices and technical personnel from different administrative levels (fmprc.gov). The funding for the technology used by the agricultural industry can be traced to extension stations of political parties, finance bureaus, or local insurance company. Since the groups funding technical contracts are nothing more than investors, a portion of the profits from increased production due to the technological advancements are returned to these groups. However, the technology providers also bear the risk of investors, if output and economic returns can’t reach prescribed figures, the extension administrations have to make up the losses(fmprc.gov).

Like all good things, China’s formidable economic growth had its downsides. There are a few detriments like inflation, an under-aided agricultural market, government inefficiency, and geographically uneven development. High inflation, caused by a demand for more exchange medium on the Chinese market is causing Chinese currency to depreciate relative to other national currencies. Currency conversions and management remains a sticking point for many businesses wishing to invest in China. There has been some movement in Asia toward a more uniform level of currency exchange, but not so much that it has affected the difficulties in trading with China. And, a lack of emphasis on the agricultural market is causing that sector of the Chinese economy to fall behind, and soon the supply of agricultural products will fall below the demand for these goods, resulting in a shortage. Another problem is also the inefficiency of large, state-owned production facilities can be explained by excess bureaucratic red tape and corruption. Finally, there has been an uneven distribution of development between the land-licked, western section of China and the industrialized east-coast, consequently causing ineffective land use.

A lot of China’s economic problems seem to be internal, and connected with supporting the massive population while divesting the government of money-losing businesses. Indicative of the overall industrial health of China is the amount of tax the country collected through their industrial and commercial tax in August, 1997. The total collected was $6.5 billion-a 12.9 percent increase over the same period in 1996. Included in the overall tax is a business tax, which grew by 49.5 percent in August, 1997 alone. There are hundreds of American businesses wanting to take advantage of the growth of China’s business sector. Several US- based, multinational companies already have entered the Chinese market, and now the smaller entrepreneurs would like to be included, too. One of the keys to this movement is that China now claims an emerging middle class, most of which wants American goods (Cross 25). US-China trade has increased by fully 90 percent since 1990, reaching $64 billion in 1996. Before Hong Kong reverted to Chinese ownership and rule, US businesses used Hong Kong agents to negotiate with the Chinese government. Now, however, Hong Kong is the international administrative arm of the Chinese government (Barnathan 30). Such negotiations are less certain and requires either the services of an international trade consultant, or at the very least, more than a passing glance at US government-generated tips on doing business in China (Cross 25).

Jiang announced that the unorthodox brand of market-driven socialism that has propelled China this far needs a radical overhaul. In one of the most sweeping sets of policy changes since the late Deng Xiaoping unleashed the forces of modernization in 1978, Jiang announced that the state sector is in for a wrenching downsizing (Clifford et al.). Of course, his plan to restructure carries with it the risk of opposition among the worker’s, particularly those that will be left to fend for themselves. Historically, each governmental liberalization of the past has resulted in a wave of capitalistic activity. Market driven socialism and totally free markets are two very different entities, and the Chinese government is faced with decisions of how much control they will levy on a freer market system. Indeed, Jiang’s plan is so sweeping that it could unleash perhaps the largest wave of corporate restructuring, mergers, and acquisitions the world has ever seen (Clifford et al.).

Certainly, China is poised to become the world’s next economic super power. Their success in attaining that status will depend largely on how they collectively deal with their existing and future economic issues, however. China recognizes the necessity of radical changes in some of their current practices, most notably the ownership and operation of state enterprises.

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