Term Paper: Business Environment in China

Pages: 5 (1710 words)  ·  Style: MLA  ·  Bibliography Sources: 2  ·  Topic: Economics  ·  Buy This Paper

China

Throughout much of history, China has been a major economic force. The country has been the world's largest economy for 18 of the past 20 centuries (Patten, 2005). Until the 15th century, China had the higher income per capita and was the world's technological leader (the real great leap forward). Up until 1820, China was responsible for 33% of the world's gross domestic product (GDP). However, things took a dramatic downturn between that time and the early twentieth century when China accounted for only 9% of the word's GDP (Gupta, 2008). According to Gupta (2008), the reason for the decline in economic dominance was China's missing out on the industrial revolution that made Europe and America prosperous. During this time, China's rules imposed international trading restrictions and tightened their controls on new technologies (the great leap forward). Today, however, China has regained its footing by changing its ways. Since 1978, when Deng Xiaoping, China's de facto leader, implemented economic reform, its GDP has grown by an average of 9.5% a year, three times the rate in the United States, and faster than in any other economy in the world (the real great leap forward, 2004).

The goal of Chinese economic reform was to help finance the modernization of the mainland Chinese economy. Previous efforts such as the socialist command economy supported by Communist Party of China conservatives and the Maoist attempt at a Great Leap Forward from socialism to communism in China's agriculture had failed (Economic reform in the People's Republic of China)

Reform during the last quarter century has changed China's economy from a centrally planned system that was largely closed to international trade to a more market-oriented economy that has a rapidly growing private sector (China, the World Fact Book). "Reforms started in the late 1970s with the phasing out of collectivized agriculture, and expanded to include the gradual liberalization of prices, fiscal decentralization, increased autonomy for state enterprises, the foundation of a diversified banking system, the development of stock markets, the rapid growth of the non-state sector, and the opening to foreign trade and investment." (China, the World Fact Book) in 2005, China sold minority shares in four of its largest state banks to foreign investors and made refinements in foreign exchange and bank markets. China is currently increasing its focus on narrowing the gap between rich and poor people in China (Economic reform in the People's Republic of China).

Economic reform has been a huge success (China, the World Fact Book). It has contributed to a more than a tenfold increase in GDP since 1978. Measured on a purchasing power parity (PPP) basis, China in 2007 stood as the second-largest economy in the world after the United States, although in per capita terms the country is still lower middle-income and there is still substantial underemployment and unemployment in rural areas. The country enjoyed a positive current account balance of $363.3 billion in 2007 with exports of $1.221 trillion and imports of $917.4 billion. Still, the country is confronted with a number of new challenges.

Now that China's economy is more open than it used to be, it is more exposed to the economic conditions of other countries than it has been in the past (Balfour, 2008). Back in 2001, exports accounted for just 8.4% of China's GDP and today it's soared to around 40%. The European Union is China's biggest export market, with 20%, just ahead of the United States. with 19%, while Japan and the rest of Asia with 25%. Some are concerned that the faltering economy of some trading partners, particularly the United States will have negative implications for China. Others believe that the linkage between the economies aren't going to make much difference for China because: a) domestic content only accounts for 25% of exports; b) the sector that is most likely to get significantly hurt is light manufacturing, which accounts for only about 6.5% to China's total employment; c) the export sector only accounts for 5% of total investment in China; d) China has amassed more than $1.5 trillion in foreign exchange, giving it plenty of ammunition for economic stimulus policies; e) investment, loan and consumption growth remain strong; and f) the Chinese have high rates of savings which would cushion the effects of a downturn (Balfour, 2008).

In addition to concerns about linkages to other economies, China receives mixed reviews regarding its World Trade Organization (WTO) membership (2006 report to Congress on China's WTO compliance, 2006). The WTO's purpose is to supervise and liberalize international trade. On the positive side of China's progress since joining the WTO, the country has repealed, revised or enacted more than one thousand laws, regulations and other measures in an effort to comply with WTO standards. and. each year, China has reduced its tariff rates, eliminated non-tariff barriers, expanded market access for foreign services providers and improved transparency. On the negative side, China still pursues industrial policies that rely on trade-distorting measures such as local content requirements, import and export restrictions, discriminatory regulations and prohibited subsidies. Specifically, China limits market access for non-Chinese origin goods and foreign-service providers, and provides substantial government resources to support Chinese industries and increase exports. In some instances, China's only goal for its industrial policies simply appears to be protecting less competitive domestic industries from competition. China has also had problems with full liberalization of trading rights. It continues to maintain import and distribution restrictions on several types of products, including foreign publications such as books, periodicals and audio and video products that reduce and delay market access for these copyrighted products. Another issue involves China's commitment to open its market for sales away from a fixed location, known as "direct selling." China has moved slowly in this area, subjecting foreign direct sellers to unwarranted restrictions on their business operations.

Critics of China accuse the country of intentionally undervaluing its currency to help sell more exports and to attract foreign directed investment (Navarro and Chien, 2006). China's major goals are to grow its economy quickly and to keep people employed. An undervalued currency helps China meet its goals because it makes exports cheaper and gives China a competitive edge. It also makes United States exports to China more expensive. Having an undervalued currency is a big magnet for companies that want to build manufacturing in China, so China doesn't want to change that policy -- it would mean fewer exports sold and less foreign investment.

China's shortcomings in enforcing intellectual property rights (IPR) laws have also created serious problems for its trading partners as well as for many of its own domestic industries. In July, 1994 China passed copyright implementing regulations that make copyright infringement a criminal offense; violations can be imprisoned for up to seven years or even executed in some cases (a brief chronology of China's intellectual property protection). In February 1995, China entered into the U.S.-China IPR Enforcement agreement in which China promised to markedly reduce piracy, to improve enforcement at the border, and to open its markets for United States computer software, sound recordings and movies (a brief chronology of China's intellectual property protection). Despite these laws pirated goods continue to swamp China. Some critics assert that the government is more interested in managing the politics of the problem than curbing the reality (Goodman, 2004). Others believe that Chinese authorities are simply overmatched in a country of 1.3 billion people where the concept of private property is neither fully understood nor valued, let alone the abstract notion of intellectual property (Goodman, 2004). Still, according to Goodman (2004) enforcement is spotty and authorities often shield factories from raids, protecting jobs over intellectual property.

Deterioration in the environment - notably air pollution, soil erosion, and the steady fall of the water table, especially in the north - is another consequence of China's economic development (China, the World Fact Book). China continues to lose arable land for farming. Only in 2007 did China begin serious efforts to improve environmental conditions, tying the evaluation of local officials to environmental targets, publishing a national climate change policy, and establishing a high-level leading group on climate change, headed by Premier WEN Jiabao (China, the World Fact Book). The Chinese government is adding energy production capacity from sources other than coal and oil as its double-digit economic growth increases the demand for energy (China, the World Fact Book). Chinese energy officials in 2007 agreed to purchase five third generation nuclear reactors from Western companies. and, the Gorges Dam project to increase power generating capacity was completed in 2006.

China's reform efforts since the late 1970's have been a tremendous success. The company is clearly moving in the right direction, but has more work to do in meeting its WTO commitments to fully liberalize trading rights. Appropriate currency valuation as well as curbing the effects of economic development on its resources and on its environment are also challenges China must solve. However, China will resolve these issues. China's success will compel the country to… [END OF PREVIEW]

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