Chinas Government Economic Policy Impact on World economy

Nowadays, China’s economy is huge and expanding rapidly. According to the research data, in the last 30 years the rate of Chinese economic has been growth, which was averaging 8% in Gross Domestic Product per annum. In the year of 2010, the China’s GDP is totaled about $6 trillion, which the amounts to the fastest pace annual growth, and ranked up to 2nd in the world, right after the United State. We want to research on how the China’s government policy can affect the world economic since the China has the potential to replace the U.S market. Reforms began with the phasing out of collectivized agriculture, and expanded to include the gradual liberalization of prices, fiscal decentralization, increased autonomy for state enterprises, creation of a diversified banking system, development of stock markets, rapid growth of the private sector, and opening to foreign trade and investment. Besides that, this paper uses the descriptive data to explore the China and the way they affect the world economy. Finding has shown that the China boosted up economy affect the world economy especially due to the international trade, investment and manpower.

Background

Since 1979, China has reformed and opened its economy. A centrally-plan system has change to a more market-oriented one that plays a major role in the global economy. The Chinese leadership has adopted a more pragmatic perspective on many political and socioeconomic problems, and has reduced the role of ideology in economic policy. China’s ongoing economic transformation has had a profound impact not only in China but in the world. The market-oriented reforms China has implemented over the past two decades have unleashed individual initiative and entrepreneurship. China today is the fourth-largest economy in the world. (traveldocs.com)

In the 1980s, China tried to combine central planning with market-oriented reforms to increase productivity, living standards, and technological quality without exacerbating inflation, unemployment, and budget deficits. China has renewed its support for state-owned enterprises in sectors it considers important to “economic security,” explicitly looking to foster globally competitive national champions. China pursued agricultural reforms, dismantling the commune-system and introducing a household-based system that provided peasants greater decision-making in agricultural activities. The government also encouraged nonagricultural activities such as village enterprises in rural areas, and promoted more self-management for state-owned enterprises, increased competition in the marketplace, and facilitated direct contact between Chinese and foreign trading enterprises. China also relied more upon foreign financing and imports. (traveldocs.com)

During the 1980s, these reforms lead to average annual rates of growth of 10% in agricultural and industrial output. Rural per capita real income doubled. China became self-sufficient in grain production; rural industries accounted for 23% of agricultural output, helping absorb surplus labor in the countryside. The variety of light industrial and consumer goods increased. Reforms began in the fiscal, financial, banking, price-setting, and labor systems. By the late 1980s, however, the economy had become overheated with increasing rates of inflation. At the end of 1988, in reaction to a surge of inflation caused by accelerated price reforms, the leadership introduced an austerity program. (traveldocs.com)

China’s economy regained momentum in the early 1990s. During a visit to southern China in early 1992, China’s paramount leader at the time, Deng Xiaoping, made a series of political pronouncements designed to reinvigorate the process of economic reform. The 14th Party Congress later in the year backed Deng’s renewed push for market reforms, stating that China’s key task in the 1990s was to create a “socialist market economy.” The 10-year development plan for the 1990s stressed continuity in the political system with bolder reform of the economic system. (traveldocs.com)

Following the Chinese Communist Party’s Third Plenum, held in October 2003, Chinese legislators unveiled several proposed amendments to the state constitution. One of the most significant was a proposal to provide protection for private property rights. Legislators also indicated there would be a new emphasis on certain aspects of overall government economic policy, including efforts to reduce unemployment, to rebalance income distribution between urban and rural regions, and to maintain economic growth while protecting the environment and improving social equity. The National People’s Congress approved the amendments when it met in March 2004. The Fifth Plenum in October 2005 approved the 11th Five-Year Economic Program aimed at building a “harmonious society” through more balanced wealth distribution and improved education, medical care, and social security. (traveldocs.com)

Recently, the Chinese President Hu Jintao said that, the economy is developing in the right direction under the government’s macroeconomic controls and the government would maintain the continuity and stability of its economic policies to make them more targeted and flexible according to conditions. (chinaembassy.org)

China is known as the second largest economy in the global economy. The rich of the resources and the growth of the population have made the China become the second largest economy because they export their goods and services to the other countries. The rapid shift of the China economy has increasing their economic growth and it attracted the foreign investor to make their investment in China. Thus, the China economic condition will bring out the huge impact to the world economy. This is because the other countries make the transaction with China direct and indirectly. (bloomberg.com)

Government economic policy can be defined as the policies that implemented by the government which to attempts to influence their economy (Encyclopedia Britannica, 2011). It provides an overview of four key areas, which included macroeconomic objectives, fiscal policy, monetary policy and supply-side policy. BNet has defined the term world economy as the global marketplace that has grown up since the 1970s, in which goods can be produced wherever the production costs are cheapest.

As government has to develop and manage economy level of China, there are different economic policies has been accomplished. Within these policies, growth of economy developments in the country can effect to world economy. To examine the effects of economy policies through world economy, the three main objectives are: (i) to investigate the implication of international trade of China to world economy, (ii) to investigate the effects of investments in China to the world economy and (iii) to investigate the effects of manpower of China to world economy.

RESEARCH MOTIVATION AND SIGNIFICANCE

From this research paper, not only our group members had the benefit of better understanding in China’s government policy in effecting the world economy but also those who has read our research paper (college’s student, businessman, researcher, citizens, and lecturers) and also those friends and lecturers who have help us in the process of doing this research. Moreover, from this research paper is that everyone who had read or involved in this research paper understand and had acknowledge the influences of China’s government policy such as trade policy, open-market policy, monetary and fiscal policies, and many more in effecting the world economic. Moreover, we realize that the influence and power of China market is getting stronger from time to time and maybe can dominate the world economic. We want to research on how china’s government policy effect the world economic because of china’s economic is booming and has the potential to replace the U.S market. China’s trade policy includes import and export, investment policies and manpower which can affect the world economy. A well-functioning multilateral trading system has contributed considerably to China’s sustainable economic growth and development. China’s foreign direct policy encourage oversea investors to invest in new energy, environment protection, high-tech, modern service advanced manufacturing sectors. Because of china’s population, china has the advantage of developing labor intensive industries. China’s huge labor supply and lower labor cost makes China relatively competitive in the world market and attractive for foreign direct investment thus led to economy growth.

SCOPE OF RESEARCH

China open market policy, monetary policy and fiscal policy brings huge impacts in international trade, investment, and manpower of the local and the world economy. Through the open market policy and monetary policy, multinational companies and foreign companies starting to import material and products from China. While due to China’s monetary policy that applied, currency Yuan is lower, thus, the exports of China are low too. Most of the countries such as U.S are being agitated badly. But on the other side, countries such as Japan are getting benefit after the open market policy applied, Japan and other country managed to import material in lower price compare to the other supplier. Open market policy bring impact too in the manpower of the world economy, it can be seen that the population of China are boom, thus, country who will like to invest will prefer China as the cost of manpower is low.

LITERATURE REVIEW

Nordin (2009) affirmed that Malaysia never spared from the effects of the superlative success of China’s economic development. China boosted its trade relations with the world and Malaysia by joining to the World Trade Organisation (WTO) in 2001. This proceeds to the relationship between China and Malaysia. In 2004, China was Malaysia’s fourth largest trading partner, third largest export market and largest source of imports. Malaysia exports a lot of products to China and so under the gloomy global economic scenario, China is still the bright side on Malaysia’s trade horizon. The China economic reforms and opening up China to the outside world and this help to transformed China’s society. According to the Feng (2006), the China government strengthened its political capacity during the politics-centric period of the Cultural Revolution and moderated its political grip during the time when economic reforms become the dominant priority. China government encourages foreign trade and investment through joint ventures with US, Korea and the rest of the world.

Alexis (2007) showed that, the Asian financial crisis in 1997 affected Shanghai Stock Exchange (SSE) had its largest percentage loss and the loss was felt across the entire world. China’s market shares decreased and people worldwide and foreign investors were affected by this boomed. The China forced to devalue its currency to protect the competitiveness of its export for those of the ASEAN nations, which exports become cheaper relative to China. According to the Nicholas (2009), China increases its imports and exports over these years led to an expansion of their shares in the international market due to China’s product competitiveness in global. China has a huge advantage which they can adjust to market changes very rapidly and they have flexibility in their labor markets. So they can fulfill the demands from the worldwide with contribute the outputs greatly to the world such as US, and Japan.

However, Perkins (1988) stated that the China brings a lot of impact to world economy. For example, the world demand for resources will definitely increase, and these resources will come from imports. Besides that, the study also discovered that Chinese government realize that the foreign trade, enterprise and agricultural has the effect on the world economy. Grain is an important strategic good. So, the China’s policy transaction will also have major consequences for the international grain market and world securities. Moreover, In China politics have more often driven economics than the reverse. A slowdown in growth in the future could feed political discontent and generate opposition to reform, and even the most rapidly growing development nations experience periods of stagnation and it will cause the world economic to slowdown.

However, according to Brockmann, Delhey, Welzel and Yuan (2008), happiness in China decrease although the material living standard is improved a lot. The unbalance income among the China people causes the low satisfaction. In 1978, China government launched a reform program to fight the poverty and to liberalize the economy, and yet the China become the great astounding growth which is more than 8 percent of the annual rate in the past 30 years. The incredible government policy helps million of Chinese out of scarcity and turn down the number of rural poverty. In addition, Li, Chen and Wu (2010) stated that establishment of legal institutions can influence development of the economics in China and can be the driven in order to solve the poverty struggle in some areas.

However, the life satisfaction fell in both urban and rural China and in every income group. No matter how, this is still cannot deny the power of China in increasing the economic, because of the lower costs in labor, land and energy. China’s government attracts a lot of investor to plant in the operations in China. Nordin (2009) also stated that Malaysian exporters must fully understand and capitalize the China’s imports demand, so that the business relationship can be last long and China is definitely a good bet for them during the current crisis.

China’s economic and social structure is changing quickly and the balance of the urban-rural development is a very important point of the further development of the whole economy. According to Chen (2010), China is a rare country in the world because they managed to growth the GDP within eight years with a considerable number. China not only growth their GDP with the technology skill, but they also implement all kinds of agricultural subsidies to farmers, for saving the farmers money, in the same way increasing the GDP by focus in infrastructure construction and social development of rural areas. Shen, Huang, Zhang and Rozelle (2010) have shown that both reforms in the financial system in general and rural financial sector in particular reflect the changing needs of the economic system. Firm profitability, local government involvement, and bank competition had played critical roles in shaping the process of rural financial reform in China. Based on the evidence from survey, had show that as these factors have changed, the financial sector has evolved with them.

According to the Qian (2003) mentioned, the rise of non-state sector in China’s economy is facing enormous opportunities to participate in the ongoing economic restricting, expansion of foreign trade, use of foreign funds, and increasing exchanges with international enterprises and research and development institutions. The China government helps non-state companies go global and have been granted the right of exporting and importing. The private companies have been allowed to join in the ongoing reform of SOEs and allowed to enter the international capital market. This political system has stimulating the world economy through cooperation with China.

Montinola, Qian and Weingast (1995) stated that economic system faces a fundamental dilemma: not only does it depend on the political system for specifying and enforcing property rights and contracts, but it also depends on the political system to protect the market from political encroachment. It also emphasize on decentralization and the incentives of local governments in the success of economic reform. Montinola, Qian and Weingast (1995) also show that there are also considerable competition among regions– provinces, townships, cities, special economic zones, and developmental zones–for foreign capital. Two of the main ingredients in this competition are: first, the laws, regulations, and taxes that promote economic development, including secure property rights and private returns (known as the “software”); and second, infrastructure (such as transportation and port facilities) and access to markets (known as the “hardware”). There are now over one thousand zones designed to attract foreign capital.

According to Hassard, Morris, Jackie and Yuxin (2010), reform of economics in China is significantly caused by the transformation of organizational restructuring and different types of organizations management. In reform process, there are two systems involving which is modern enterprise system (MES) and group company system (GCS). Furthermore, Liu and Garino (2001) said that, the government of China has reform economy by using various strategy and approaches. A trial and error strategy can stimulate the mind of their policy makers. Besides, it can develop the experiences which valuable in determine the results of reform process. In order to reduce the shortages of supply, dual price system has being the main tool in the prices market. By the end of the plan, there is a full liberalization market economy be develop.

Furthermore, according to The Economist (2004) the growth of the world economy has been led largely by the booming corporate investment in China. However there are also risk in world economy and one of them is a hard landing in China. China’s soaring economy might suffer a hard landing as its investment boom turns to bust. A slump in china would badly hurt the rest of Asia and dent global confidence. The China government reluctant to use the usual macroeconomic policy tools of a market economy, such as letting the exchange rate rise and raising the interest rates; instead it has relied mainly on administrative controls to curb lending and investment.

According to Elwell, Labonte and Morrison (2007) China maintains a number of inefficient and distortionary policies, such as government financial support of SOEs, industrial policies intended to promote the development of pillar industries, and an undervalued currency. In effect, this improves the world economy and the U.S terms of trade because it means a given level of U.S exports can obtain more imports. However, China’s economic policies such as subsidies to as state sector, an undervalued currency, and low wages, threaten U.S jobs, wages, technology edge and living standards, it is projected that China will surpass the United States and become the world’s largest economy.

According to study reported by Zhu (2010) indicated that China’s adoption of the opening up policy over the past three decades has meant that China has become both deeply involved in and tremendously influenced by international society. These influences, and the concomitant problems, issues and challenges, have stimulated Chinese academic circles to reflect on China’s relationship to the international community and its policy choices. The new policy which is the reform and opening-up policy has opened China’s door to the world and the world to China. China would have greatly benefited from the policy. However, there have been setbacks and doubts along the way. Doubts were expressed about China building a cooperative relationship with international system.

According Eichengreen and Tong (2006), China’s growing importance as an assembly platform for exports of manufactures, a destination for foreign investment, and a consumer of imported technology, raw materials and industrial goods and tend to be reshaping the balance of global supply and demand. Economist has expressed that China’s troubling trade surplus with America has increased and lead to the total deficit of America. Japan, China, South Korea, Taiwan, Singapore are all pursuing export-led strategies. Moreover, China’s mounting trade surplus with the United States could benefit America in the end.  If a company that was manufacturing a low cost item for exports to the United States in, say Thailand, shifts its base of manufacturing to China because manufacturing costs are cheaper in China, that does not have a down side impact on U.S. markets because the jobs already were not in the United States. Montinola, Qian and Weingast (1995) study stated that experimentation, learning, and adaptation all follow from the inception of local political freedom over the economy. Local governments compete with one another for factors and in the international market for exports.

According to Fleisher and Chen (1996), have stated that the estimated rate of return to investment in human capital in China appears to be quite high in comparison to the return to investment in physical capital. The study estimated that one variable subject to direct policy control, investment in higher education, helps explain the pro-ductility gap and exhibits a very high rate of return, greater in noncoastal provinces. The investment in infrastructure has a moderate rate of return that is higher in coastal provinces. In addition, Kriz (2010) also acknowledged that China’s success in innovation will have important implications for developed nations both economically and geo-politically. China’s more creative human capital can be unleashed within the dynamic of a command economy. The Chinese specific innovation policy is focused on four key components, which are financial policy, business innovation support structure, the legislative actions and human resources policy.

3PL is becoming a source for companies to gain competitive advantages by reducing logistics cost, enhancing core competency, and improving service quality. Wang, Huo, Lai and Chu (2010) study the performance drivers of third-party logistics (3PL) in mainland China and to disseminate Hong Kong 3PL providers’ experience to mainland China’s peers. While the operations emphasis of low cost may still is effective for mainland China’s 3PL providers, it may result in worse financial performance for Hong Kong 3PL providers. In mainland China, low- cost emphasis is affected by local competition, but not by operational challenges, while it is influenced by both local competition and operational challenges in Hong Kong. Operational challenges have a positive impact on low-cost emphasis in Hong Kong, but no impact in mainland China.

According to Shoham, Malul and Rosenboim (2010), global savings rate that settled can be affecting the future of economic growth in a particular state. Construction of cultural for a state can affect the rate of savings and it can force the upward and downward savings level. In China, the higher level of saving rates is because of the uncertainty avoidance, power distance, higher collectivism and the surplus of current account. Due to this factors, China become a state with the admirable of others state. It is always at the top which have a more stable economic growth. Lau and Li (2002) stated that a peaceful, prosperous, open, and stable China is win-win for both the U.S. and China and for the rest of the world as well.

DISCUSSION

The Effect of International Trade of China to World Economy

Workers at Ningbo Rifeng Electric Appliance Company have been working more than 12 hours per day; they are keeping on overtime in recent days. According to the general manager of the company, their company produces different types of flashlights, headlights that are sold to Europe, America, Middle East and Africa yet they have too much order to manage. In addition, numerous made in China products are shipped to the world, making contributions in improving people’s lives. The win-win situation happens when the China’s exports increase. In 2009, China surpassed Germany and become the world’s largest exporter. This situation results because of the cost of manufacturing which is lowest and cheapest in China.

China with the huge amount of population, cause the operation costs to be low and decrease the cost of products. These help China to have a lot of international trade with world. According to Yu Xiao Hua, the associate professor, people from western countries rely their daily life on the cheap products from China to subsidize their low-income. China played a critical role in fighting the financial crises by providing people in other countries with a large quantity of quality and less costly daily necessities. Agriculture such as grain is the main demand for the world. Due to Perkins (1988), China brings a lot of impact to world economy by accomplish the world demand for this resources. Besides, China is the foremost country in providing the business process outsourcing for internal activities and external activities. Appearances of modern technologies have supportive in China export products. It can help and reduce the problems of distribution and huge expenses for internal coordination.

China has limited resources natural resources and most of the demand in these resources are comes from import. For example, in 2008, the years of Olympic in Beijing, China, the percentage of China import increase sharply. The limited resources such as gasoline, diesel and charcoal cause the China to import all those things in a big amount as the store up reserves. This causes the rising prices for all resources in whole world. Besides that, great demand of China is to accomplish the necessary of foreign country manufacturers. China has import a lot of natural resources and materials for expand their production. According to Nordin (2009), China has become the third largest of export market and the largest of imports for Malaysia in 2004. He also stated that Malaysian exporters must fully understand and capitalize the China’s import demand; so that the business relationship can be last long and China can be a good bet during the current crisis. Plastics, raw materials and natural resources are the typical of China import products.

Mechanisms are changes in the prices of good with the expectation that the largest price falls will be for goods where production relies on unskilled labour, such as textiles and garments. As China increases the exports of such goods, so the price will fall, this will contracting production and employment of unskilled labour in other countries. China can affect other countries to gain or lose depending on their trade patterns.

According to Greenaway et al. (2006), in some countries in Latin America, 60 to 70 percent of exports are directly threatened by China’s rise because of a similar export product mix. For examples, the phasing out of the WTO Multi-Fibre Agreement in 2005, which had previously limited China’s exports of clothing and textiles, raised concerns for Bangladesh and Sri Lanka whose export sectors are dominated by these goods. While China rises to imports from its Asian neighbours, this has not been enough to offset displacement of their exports in third country markets.

Benefits of international trade for China are clear. China makes money from exports, and invests the capital in buying more raw materials or invests more heavily in business or infrastructure. The relationship between the export and import is positive, because in the global market system, a country’s ability to import is dependent on its ability to export. The increase of China’s exports means new markets and opportunity. The China’s market is open and conducive because exports to China are better than to other countries. Venables and Yueh (2006) said that China with the huge amount of population and never fail to drop the percentage of it export, however, EU’s export dipped 30 percent in 2009 while export to China only declined 16 percent. In addition, U.S. export dropped 22 percent in October 2009; in contrast export to China only declined 9 percent.

The Effects of China Investment to the World Economy

Nowadays, China plays a main role in the investment part, as any of the policy that applied will affect the world’s economy. Prior 1970, China is still in the Soviet Union style command economy. But beginning in 1970, China had applied the free market reforms, and began opening up to the world in terms of trade and investment.

According to Djeri-wake Nabine (2009), nearly 70% of Nigeria’s rural population is dependent on agriculture with it serving as the major source of income for them. The main crops that have produced are – beans, cashew nuts, groundnuts, cola nut, melon, palm oil, rubber and rice. The richness of natural resources had attracted foreigners and traders from different parts of the world in Nigeria. China’s increasing need for energy sources and raw material to fuel its rapidly growing economy is one of the foreign investor. In the other hand, Chinese foreign direct investment (FDI) inflows to Nigeria are due to the Nigeria Labor Force performance and contribute to the Nigeria economic development.

According to Fung et al. (2002), FDI to China accounts for 1/4 to 1/3 of total FDI inflow to developing countries. Thus, FDI has become an important source for China’s investment in fixed assets. On 1995, the average size of a FDI projects ranges between U.S. $2.4 and 3 million, this showed that China’s new emphasis on capital intensive, high-tech and infrastructure investments. China invests in local by opening up special economic zones (SEZs) in the southeast part of China at the beginning of the reform.

Manufacturing, infrastructure, and real estate are the factors that made the investment in China developed quickly in the past few years. According to Barnett and Brooks (2006), manufacturing investment is strongly correlated with liquidity, largely reflecting retained earnings and the growth of residential real estate investment and house process is also related to rising real household incomes and a decline in real mortgage interest rates. Moreover, Barnett and Brooks (2006) found that monetary policy could play a role in restraining investment, including by draining excess liquidity and raising interest rates.

Even though there are many foreign firm invest their capital in China, there is a small amount of western firms who had invest in China had sold their shares to the Chinese-owners. According to The Economist (2010), Vodafone sold its stake in China mobile, BP, Exxon and Shell and AAB (a Swiss-Swedish conglomerate) took strategic stakes in PetroChina and Sinopec (two big Chinese oil companies). And Western Banks bought shares of the leading Chinese state banks when they were listed. In return, these western firms wanted access to China’s huge domestic market. However, it did not work out that. China Mobile has a market value half as large again as Vodafone’s. PetroChina is much bigger than BP. Both Chinese firms are now rich enough to buy whatever expertise they want. BP, Shell, ABB and Exxon all sold their holdings in state-owned Chinese firms. Thus, when China’s state-owned Agricultural Bank was listed, no big Western bank bought a significant stake.

The Effect of Labor in China to the World Economy

Since the adoption of the reform and opening up policy, China’s continued and rapid economic growth has benefited from the labor advantage provided by the continuous transfer of surplus rural labor. That surplus rural labor has been employed to accomplish the development of manufacturing in the state. As we know, China is the world’s largest exporter of textiles and clothing. The textiles industries have contribute a large portion in China’s gross domestic product. While maintaining stable growth in export to overseas markets such as United State, Japan, Hong Kong, and Europe, China has also made progress in opening up new market in others parts of the world (Liu and Sun, 2004). Employment in the textile and clothing sectors is projected to be increasing year by year, in other mean the unemployment will be decreasing.

China’s abundant low cost labor has led multinational corporations to shift their export-oriented, labor intensive manufacturing facilities to China. This process has lowered prices for consumers, boosting