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1.1 Nature of China’s economy
China began its economy reform as early as 1978 after the death of Chairman Mao who brought this country safety, socialism and victories over the Japanese and the US in the wars but poverty and ideology conflicts as well in the post war period, the economy reform started with the hope of improving people’s life by introducing the foreign investment. But the nature of its economy for the first five years had not changed fundamentally; the planned economy model was still overwhelmingly used in the economy. After the successful trials in the special economy zones in the coastal cities for 10 years, turning point finally came in 1993 with the government’s decision to replace the planned economy system with a modern market system (Qian & Wu 2000). China’s joining of the (World Trade Organization) WTO in 2001 after 15 years’ negotiations represented the world’s recognition of Chinese economy reform and it also further push the Chinese economy to reform and opening up. Three years after being a member of the WTO, in 2004 New Zealand was the first country that granted the Market Economy Status and later 97 countries gradually also offer the admission to the world’s most populous economy (Maguire 2010). But the three major economy partners of China which are European Union, United States and Japan have not so far granted the Market Economy Status.
1.2 Key transformations
1.2.1 Role of state
Before the economy reform, socialist planned economy was prevailing in the mainland of China and under the economy plan system the government directed the economy by controlling the production and distribution of goods and services (Nove 1987). By the progress of the economy and political reform for more than 30 years the Chinese government had made great achievements in reducing the influence of the government.
One of the most important strategies in removing the participations of the government in the economy field is the reform of the state owned enterprise which controlled the whole economy in the planned economy period when the private business as a sign of capitalism was not allowed to exist. Except the core industries in which the government still possess strong power through the control by the large state owned enterprises, in the rest industries the medium and small state owned enterprises had been privatized. Some investigations pointed out that the state owned business now contribute to less than 30 percent of the GDP growth in China (Zhou 2009). Another strategy is the “Build up service oriented government by transformation of government functions” which was clearly pointed out in the Seventeenth National Congress of the Communist Party of China in 1997, and the four new major functions for the government are: economy adjustment, market supervision, social management and public service (Yang 2008).
1.2.2 Financial system
Banking system is an important component of the financial system in China, but in the last century while the economy of mainland of China was undergoing a period of unbelievably high growth rate led by the vivid private business that had previously been banned for since the set up of People’s Republic of China, the banking industry was mainly dominated by the four largest state owned banks. But these four state owned banks were struggling with the non-performing loans of which most were borrowed to the state owned enterprises (Allen, Qian & Qian 2005). Three channels were used to reform banking industry. The first channel is the encouragement of introduction of private banks to increase competition in the industry; the second channel is the privatization of the state-owned banks; the last channel is that the central government and the central bank have been injecting great amount of foreign reserves into the four major state owned banks to increase their capital reserve which enable them to become listed companies.
Another important component of the financial system is the capital market. In 1990, two domestic stock exchanges Shanghai Stock Exchange and Shenzhen Stock Exchange were set up to fund the economy by encourage investment. But the scale of the two stock markets are not large enough compared to the much bigger economy scale. Moreover, the stock markets are driven by insider trading and so they are not efficient enough to fund the business.
1.2.3 Labor system
Chinese higher education constitutes an important component of the labor force in China and there are two conflicting trends in the Chinese higher education developing. The first trend is the fast growth of the number of college students. From 1998 to 2005, the number of students enrolled in the colleges increased by 4.7 times to 5.04 million. And in 2006 the number of the Chinese college students was over 23 million with an enrollment rate of 21%, exceeding that of the United States to be ranked the first in the world. (Tang 2007) The second trend that comes together with the growth of the number of the college students is the quality of the college graduates which had raised a lot of concerns. The decrease of the quality on one hand sourced from the dramatic growth of the number of the students enrolled and on this downgrade is also enhanced by the unequal distribution of the opportunities between the urban areas and the rural areas.
1.2.4 Social and cultural conventions
The traditional Confucianism advocates that the interest of the group and country exceed the personal interests, and in time before the economy reform people were touched to sacrifice to the county if need, but this belief that deeply rooted in the people that lived in the 1970s and 1980s had changed basically with the economic growth. In a recent Reuter survey about the popularity of money worship of 23 selected countries, China, Japan and Korea were found to share the no.1 title (Unknown 2010) which meant that the people in these three countries believe most that money is the most powerful thing and measurement of all behaviors. It seems that the rising China also undergoes the similar social and cultural changes that appeared in the developing countries that most developed countries had been experiencing before such as the United States.
1.3 From low cost to high value added business
1.3.1 Policy guidance
When the economy crisis that started in the United States in late 2008 also hit the oversea investment of the Chinese government who is still the largest debtor of American, the Chinese government had turn the oversea investment back to the domestic side. The Chinese government planned a serious investment totaled 4000 billion to revive 10 industries: steel, auto mobile, textile, equipment manufacturing, shipping, electronic information, light industries, petrochemical, non ferrous metal, and logistics (Yin 2009). Take the first two industries as examples. The guideline policy for the governmental investment in the steel industry will be to eliminate the outdated production capacity and encourage the export of the high end products by raising the rate of export rebate of these products. And for the auto mobile industry, the policy is to encourage the building of the Chinese auto brand and also encourage the merge and acquisition of the large auto manufactures from 14 to less than 10. More over the government also reduced the purchase tax of the cars that are less than 1.6 in output volume by 5% to encourage the manufacturers to invest more R&D effort on the more energy saving cars. These policies show the government’s intension to induce the industries change from a low end business to high value added business.
1.3.2 Industry upgrade and restructure
Except for the government’s policy encouragement, almost every industry feels the need to upgrade the business to increase the competitiveness of companies as the country is losing its low cost advantage. Early in 2005, data had shown that the Chinese workers had been earning USD 500 more than the Indian workers, and the managers earned more than 2 times than their Indian counterparts (Zhou 2005). With the losing cost leadership to some Asian countries and African countries, the over competition drove the business to upgrade to the high end products manufacturing. A number of large Chinese multinational enterprises grow up in this fierce competition.