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Economic Reform Occurring in China

Free Essays of Economics Globalization has violently struck nations, capturing the attention of entrepreneurs, politicians, scholars, voters, workers, and farmers around the world. Some perceive it as a promoter of global economic development, while others see it as a disaster. The purpose of reform in China was to create socialism with Chinese features. The revolution in China’s economy occurred, turning it from a country lacking foreign investment and experiencing low levels of international exchange and trade into a chief recipient of foreign investment, trade, and high foreign exchanges in relation to the country’s levels of national production. Various indicators show that Chinese economic welfare has indicated an upsurge in the last three decades. Economic reform in China towards becoming a market-oriented economy started in 1978, and it has been seen as very successful ever since. A government should play a major role in enhancing the economic freedom of a country. For instance, Brazil should have become an economic superpower, but economic progress was thwarted by government regulations and people never wanted to pay high shipping tariffs. After entering WTO, China experienced rapid growth, becoming the 2nd largest economy in the world and the largest trading country, while developing its indigenous capacity; a large number of multinational investors relocated their production activities to shores in China. Although exports, investments, and growth surged dramatically, the country’s economy increasingly shifted in a state-centered direction. This paper discusses the nature of economic reform taking place in China and its effects on China and the global economy.

Important Terminology

Economic Democracy

This system promotes constant dialogue and balance of labor, economic forces, management, and labor unions. It seeks to establish an alliance between workers, managers, and CEOs, and it promotes the economy mix. Economic democracy is more apparent in the USA. It is important to note that the USA is not social democracy, although there many of its habits in this country. Apparently, China still evolves to become a fully functioning economic democracy.

Utilitarianism

This is a form of social democracy that insists on using the best action to maximize utility. Unlike socialism, this system acknowledges individual liberty. John Stuart, a utilitarian, believed in the existence of economic equality. He believed in connecting this social democracy with faith because his religion had a strong influence in England. China transforms from socialism to embracing certain features of utilitarianism

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East Asian Model of Capitalism

This notion refers to an economic system where the government investments are channeled to specific sectors of the economy for the purpose of stimulating the growth of various industries existing in the private sector. Generally, it is used in reference to the East Asian model of development like South Korea, Japan, Taiwan, and Singapore. This model spurred rapid economic growth and development in China as it served as an example of how the market economy could perform. Recently, this term has been employed in classifying the modern economic system in China. Notable aspects of this model include direct support for enterprises owned by the state in strategic factors, control of state finance, high-level reliance on the export market to grow the economy, and high savings rate. This model is different from the economies like Britain that are centrally planned; therefore, the state mobilizes its own resources in the creation of required industries, which would eventually be under state operation and ownership. Therefore, this model stirred economic growth in China after the Chinese leaders noted the amount of progress it brought in those Asian countries.

Market Oriented Investments and Economic Democracy

Recent market-oriented reforms in China’s economy include currency devaluation and reduction of interest rates to help grow the domestic economy as well as the global one. These reforms reduced trade barriers to allow foreign investments and liberalization as well as different measures of preferential treatment. Thus, market-oriented investments in China birthed economic democracy.

Foreign Direct Investment in China

This notion refers to controlling business enterprise owners in a country by an individual or entity in a different country. In 2006, China surpassed the USA to become the single largest country benefiting from inflows of Foreign Direct Investments in the world. Foreign investors were attracted to China due to the rapidly growing and enormous size of its market, an unlimited supply of skilled labor and low cost of wages, and modern infrastructure. A positive correlation exists between infrastructures such as transport connections to external markets, electric power infrastructure and communication and inflows of FDI. The main reason why the coastal area attracts the largest inflows of FDI that the coastal cities have a superior infrastructure.

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Socio-Economic Reform Dynamics

Despite emerging from the economic autarky and isolation of the Maoist period following the start of the regime of modernist Deng Xiaoping, only until 1993, China managed to rise to become a top entity in international trade and FDI. Initially, the economy was driven by the large-scale expansion of industries that produced mass-consumer products for consumption in the domestic market. However, the new urbanization strategy was built around the establishment of consumer society around metropolitan towns through urbanization investments and infrastructure. In the process of creating consumer society, socio-economic dynamics underwent tremendous deterioration with a sharp increase in income disparities. For instance, the Gini coefficient of China has registered an increase at a slow rate over the last three decades from relative egalitarian 0.2 to unequal 0.5. This rate of change is unprecedented at any point in the world’s history. The seriousness of inequality is depicted in the fact that in the efforts to enhance international competitiveness, China exceeded the socio-economic inequality levels in Latin American countries that had been the global leaders in inequality. Unlike many Eastern Asian countries, China has failed to attract large sums of “hot money” as almost all FDI stock is channeled to productive sectors of the economy. Opening the Chinese economy to FDI can be considered one of the landmark economic reforms to have spurred economic growth in the USA.

As a general view on the growth experience in China, promoting industries producing exports in the process of economic liberalization has come out as the most successful way for the country to generate sustainable economic growth when global markets stay at satisfactory levels. Presently, a regime of international trade is carefully embedded in the planned coexistence of the protectionist import regime with a relatively liberalized system of export promotion. To this point, the inflows of FDI and export-oriented entrepreneurs were offered enough support in order to increase the production capacity at the domestic level to cater to export markets. On the other hand, domestic producers were shielded from quotas, foreign competition, high tariffs, state-set exchange rates, absence of currency convertibility and limited access to financial markets. In retrospect, the vital Foreign Direct Investment export nexus, as well as the planned management of the FDI regime, has always been the engine that powered rapid episodes of economic growth in China. It made average rates of growth per year stand at 8% by increasing Gross Domestic Product per capita in the areas concentrating on export-oriented production. In summary, this milestone was achieved by positively changing foreign currency researcher and balance of payments through job creation, hoisting the whole factor productivity, upgrading skills, and augmenting technology transfers and supporting measures to modernize enterprises.

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Rapid Expansion of International Trade

A noteworthy aspect is the rise of China to prominence in the global economy has been the expansion of international trade. The country’s imports and exports have grown at a rate of 15% per annum since 1979. The annual world trade expansion over this period of time is 7%, thereby making China an excellent performer. This process has been enhanced by trade reforms and many opening in the economy that has contributed to a surge in FDI and increased cooperation with the world trading systems. Other economies in Asia, such as Korean, Japan, Singapore, and emerging Asian economies, have been able to maintain higher rates of growth in exports on average. For example, Singapore stands at number four in the world financial standings, while Hong Kong stands at number three as 22% of the world’s economy is based in this country. Therefore, the expansion of international trade increased China’s stake and voice in global economy politics.

Fiscal Policy

As the Chinese economy continues to open up, domestic macro-economic policies will play a big part in mitigating vulnerability to external shock. The nature of the Chinese economy is one with an exchange rate that is rightly managed, thereby making fiscal policy a matter of sheer importance. Despite not facing immediate fiscal sustainability concerns, the government is likely to face future obligations. These obligations include the rising expenditure pressures for health, social programs and education, losses in the banking system dominated by the state, and the need for funding China’s pension system. Therefore, the country’s fiscal policy is strong enough to prevent economic shocks in the short term.

Banking System Reform

Banking systems in China are the chief sources of financial intermediation. Thus, state-owned banks are the main dominants in the banking system, and they provide an official source of financing for organizations because of the thinness of the stock market and the state’s lack of corporate bond market. Loans from banks have been the source of support for high levels of investments that have significantly contributed to the growth performance of China to date. Reforms in the banking systems contrast the way the USA raised its economy through the banking system. For instance, Keynes informed Roosevelt that his plan never pumped enough stimulus money into the economy so he needed to invest in states and regional government, and once they had revenue access, they would create banks that could pump money into businesses and create jobs. Ultimately, through government, Roosevelt managed to create jobs and the strength of the dollar increased in the 1930s even with great desperation. However, the banking sector in China still requires more reforms to allow economic freedom and competition.

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Price System/Economic Freedom

The main objective of this reform in the price system was to decontrol prices that were determined administratively to allow market forces to determine prices. Minus prices determined by the market, state-owned enterprises hardly receive the right signals to make economic calculations in choosing inputs and outputs. The established two-tier system was meant to provide incentives for companies to increase outputs and economize inputs to generate profit. Additional outputs can be sold at market prices. In this system, the increased demand for certain outputs by the market could be met, using allocated inputs, thereby prompting the rise of prices and producers manufacturers more goods, using expensive inputs available on the market. In manufacturing more inputs, companies have to meet the cost of inputs at market prices, thereby economizing on the way they use inputs. Because prices of inputs and outputs bought and sold at marginal cost and marginal revenue of an enterprise affect margin cost and marginal revenue of a company, optimal decision regarding the future of enterprise is made by relying on these prices. Receiving a certain amount of inputs at a cost below the market prices is equal to receiving a certain amount in the form of government subsidy. Surrendering a certain amount of outputs below the price of the market leads to payment of lump-sum tax. Pricing is an important factor in supply and demand, and the reform in pricing systems is an important gesture in efforts to foster economic freedom in China.

Development of Non-state Sectors

Apart from state-owned enterprises, China has three other enterprises, namely overseas-funded, collective and individual enterprises. Collective enterprises include rural and urban collectives. Some retail stores previously owned by the state and urban factories have so far been given to collective ownership. To enhance the efficiency of retail stores in urban areas, they were leased out to collective owners. Enterprises in towns and villages have been established by the local governments that wanted revenue increase. These are the avenues for income generation following a successful agricultural reform. Unemployed labor could be employed in production in non-agricultural sectors. Local governments had human resources, land, and capital to create these enterprises. China had long been dominated by socialists’ policies, and the development of the non-state sector is an important step towards ushering a new economic era in China.

Implications of China’s Economic Reform

While the country transforms from socialism, essentially dominated by the state, towards becoming a market-driven economy in its competitive framework, this economy is conditioned to excessive reliance on export markets, thereby triggering a widening in the inequality gap between rural and urban populations and between inner and coastal areas. The country transforms into a social democracy, and socialists believe that the government should not interfere with the market and it needs to allow a mixed economy. Profound reforms in the economy have involved a new industrial revolution, but the transition has taken place from being conventional socialism to operating under market socialism, which entails simultaneous activities of deindustrialization. Although rapid growth and economic reform have been a significant aspect of continued political legitimacy for this regime, they have also contributed to social dislocations and class reformulations. The decision to join WTO was partially prompted by the economic need to ensure stability in market access, more so by achieving normal and permanent trade relations with the United States and securing the opening of foreign markets for Chinese exports. However, in the process of accessing WTO, during China’s first decade as a member country, its developmental priorities drastically changed in a way that necessitated a revision of its development strategy. In other words, the main concern of the public policy recently has changed from dealing with inflexibilities on the labor market and socio-economic inequalities to focusing on a growth model that relies less on export markets and more on domestic consumption.

China at the Global Platform

In recent decades, economic reforms have transformed China into a global shop floor and an important factor in the flow of trade as it assumes more than 10% of global exports, and more than 90% of China’s exports lie in the manufacturing sectors. The average rate through the country’s Gross Domestic Product grew in the last 20 years after the reformat 9.6% per annum. Chinese GDP of over $11 trillion makes it’s the world’s second-largest economy, and it is predicted that it will surpass the US economy in 2050. China has also overtaken the United States of American to become the world’s largest recipient of FDI and non-stock shares, and it has huge foreign currency reserves in the US currency, thereby becoming a principal financer of trade deficits and American budgets. As the world’s largest exporters, manufacturers from China have mainly aimed at advancing their markets to include America, Europe, and key Asian markets such as South Korea and Japan. Therefore, China is an influential player in the global economy and continues to rival the USA.

China is the world’s largest importer due to its massive need for imports to service intermediary components and goods required in the manufacturing industry. China’s main import partners include the European Union, Japan, South, and North Korea, and the United States. Chinese export-based trade capacity and manufacturing sector demonstrate China’s strength in the world economy, especially around the triad regions, namely the EU, the USA, and developed Asia-Pacific. This means that any radical slowdown in the economy of China might have profound consequences on the world economy through trade, production, and finance links. In terms of China’s global governance, its traditional tendency after joining WTO has been focused on intense bilateral diplomacy to promote trade liberalization and trade relations. Its steadfast policy (characterized by the Confucian legacy) in multilateral organizations has always been based on silence and only voicing concerns if sensitive matters of national interest are at stake. Therefore, China’s gradual rise in the global platform can be credited to radical reforms that have improved its business relations with other countries.

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Recently, Chinese leaders have publicized the launch of a new growth model meant to rebalance the Chinese economy. The new balance would act in favor of domestic consumption by promoting minimal dependence on import-intensive investment. Consequently, the period of 2015-16 is projected to feature even lower rates of growth of 6-7%. These figures are represented in the graph above.

Inauthentic Market Reform

The gradualist approach in China often receives undeserved praise. The pledges made by the government on future reforms are unreliable. For instance, the state promised to rebalance consumption and investment in 2004 when the country experienced an increase in public investment. However, since then, the imbalance has deteriorated. Nominal steps are undertaken in 2013 included capital account opening, increasing access to markets and lifting price controls: all of them were linked to the role of foreign input in the economy. So far, none has occurred. Additionally, the obsession with the growth of GDP continues, thereby inhibiting the possibilities of achieving the rest of economic goals. Another seeable distortion is the fresh emphasis on free trade zones. Free trade zone is undoubtedly a misnomer since they have focused on Shanghai rather than finance, more so the freedom to move money inside and outside the country through an open account. Therefore, some of the economic reforms in China may not reform certain aspects of the economy in the long term.

The European Union’s Decision to Deny China ‘Market Economy Status’

This decision by the European Union is a part of the continuing trend over practices in trade among countries. Several accusations have been leveled of China in connection to dumping goods on export markets by charging prices below the one set on the domestic market or less than production cost. This strategy has been apparent in the steel sector. Therefore, the decision to deny ‘market economy status’ allows countries to impose retaliatory tariffs easily. If the status was granted, the countries would have to use tariffs to refer prices on the Chinese markets to detect that dumping takes place. In the present political climate in the USA and Europe, increased attention is paid to the results of unfair practices in trade and the decision of the EU could be anticipated. In short, Brexit prompted the EU policymakers to monitor the consequences of Chinese practices in the future.

Conclusion

This paper discusses the nature of economic reform taking place in China and its effects on China and the global economy. Political leaders in China face a daunting list of economic, social, and political challenges in their efforts to advance their ambitious agenda to national reform. The paper has analyzed important aspects relevant to mechanisms, through which a non-market economic structure of China influences the global commercial environment. Reforms in China’s price systems, market structures, banking, and party ownership will not change China’s primary economic institutions and the work of the economy. Even if the country implements Third Plenum and related reforms as recently announced, China’s economy will still function under a broad involvement of the state in finance and control over key prices and economic decisions.

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