Economy of People's Republic of China

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Introduction

In the recent years, there are incredible s about the economy of People's Republic of China (PRC). China was having an average rate of 10% economic growth during the period of 1990-2004. (Wu, 2004) One of the best measurements on the growth of economy is the Gross Domestic Product (GDP)[1] at nominal value. The China's GDP grew 10% in 2003, 10.1% in 2004, and 10.4% in 2005. It was a highest growth rate in the world. In 2007, People's Republic of China was having US$3.25 trillion GDP in nominal value. It is the forth-greatest s of GDP in nominal among the nations after the US, Japan and Germany. (CIA World Factbook, 2007) Moreover, China had a total trading of US$1.76 trillion in 2006. It makes China become the third largest trading nation after the US and Germany. (Dong, 2008)

Because of the dynamic economic growth in China, there are uncountable numbers of business theories applied to the Chinese economy and tried to explain and analyse the factors of the growth. However, we can rarely find the analysis about the Chinese economy done by the mathematical or the statistical ways. It is a pity that we only have mathematical and statistical analysis for the developed countries such as the United States, the United Kingdom and Japan, but not China as the importance of the Chinese economy nowadays should not be overlooked. Therefore, in this paper, the determinants of firm's performance in China are going to be investigated. In the sample cross-sectional data, there are 4,600 manufacturing firms in three industries which are the seafood processing industry, footwear industry and telecommunication industry in the year of 2004.

The Framework

Before investigating those 4,600 Chinese firms in the sample, it is essential for us to first look at the bank system, taxation system and consumption, investment and savings structure in China.

In China, most of the banks, financial institutions are state governed. The People's Bank of China and the Ministry of Finance are having the financial and fiscal control while both of them are under the authority of the State Council[2]. Since 1950, the Central Bank of China took the function of other central and commercial banks. Besides issuing currency[3] and controlling circulation, it is also disbursing budgetary expenditures. (Kueh, 1993) Besides the state governed financial institutions. There are other financial institutions such as China Development Bank, Agricultural Bank of China and China Construction Bank. They are providing ordinary commercial transactions and acting as savings bank and providing capital funds for public. (Wu, 2004) Enterprises and individuals can go to the banks to obtain loans outside the state plan, and it is a major source of financing both for start-up companies and for the modernization, expansion and privatization of business.

The taxation system is greatly affecting China's economic and social development. In this socialist market economy, China has set up a streamlined taxation system since 1994. The tax revenue of China exceeded 4.94 trillion yuan in 2007. The total revenue is mainly come from the VAT, consumption tax, business tax and enterprise income tax.

It is surprising that China has an extremely low percentage of personal consumption in its GDP. In the year 2007, the personal consumption in percentage of the GDP was only 41%. It is a relatively low when comparing with that in UK 65% and that in US 70%.[4] The low consumption-to-GDP ratio indicated that China is having high ratio of savings as the same time. It could be come up with a economical argument arguing that the Chinese economic growth would be slow down as people are not willing to spend. However, the savings in China were actually reinvested to the private sector. It is one of the major factors of the economic growth in China because of the high savings, high investments behaviour. Moreover, the increase of internal savings is also due to the government guidance to bank lending, while the government has steadily removed itself from intervening directly in the economy. (Aziz, 2004)

Empirical Approach

In this part of the paper, empirical approach is applied to explain relationship among the productivity of a firm (indexed by i) and other factors which are proved to be related. We formulate a model as follow:

Prod. = max [0, sizei + agei + trainingim + assetsi + schoolim + Di + ], (1)

(Continued)

When training is the expense spent on the employees, school is the level of education of the employees, D is the industrial, time and region dummy and is the random error term.

Basically, we would first consider the age, size and its industrial dummy of the firm when we are finding out the productivity of a firm. They are the general factors which could be a measurement applied to all firms typically. As the sizes[5] of a firm grow larger, the production capacity would be larger. It is because the small firms might be more likely to encounter the problem of having insufficient assets such as production lines and machineries to meet the production target. Small firms might also have the problem of insufficient working capital as they could hardly get a better credit period and discounts. All these factors would be restrictions of enlarging the productivity.

The age of a firm is also an essential factor looking into. It is a risky action for banks or other financial institutions to lend money to those new-established firms. Therefore, the cost of borrowing of smaller firms would be higher as higher interest rates would be put. Moreover, it is beneficial for a firm to obtain good reputations in running the business.

When we are mentioning about the productivity, the training of employees could be reasonably related. Again, it is beneficial for a business for a firm to spend more on training the employees. Insufficient spending on training workers would cause the problems of small productivity, poor quality, high labour turnover and higher risk of having accidents in the workplace. (Marcouse, 2005) Besides training of employees, the education level of employees should not be omitted as knowledge and practical experience are both essential for high quality of labour. Having high quality of labour is another way to improve the labour productivity while the output per labour could be ensured.

When we come across to the productivity, the industrial dummy would be taken into account. Taking an example in this paper, there are firms in three types of industries are going to be observed which are seafood processing industry, footwear industry and telecommunication industry. The first two of them are obviously considered as labour-intensive industries. In contrast, the third one is a capital-intensive industry. On one hand, the productivity of a firm in a labour-intensive industry would be highly depending on the average output per worker. On the other hand, the productivity of a firm in a capital-intensive industry would then be highly depending on the efficiency and utilisation of the machineries and the factories. Therefore, the industrial dummy has to be investigated when the productivity is being observed.

The Data

In the sample data of this paper, there are 4600 manufacturing firms in the year of 2004 which are collected by the Chinese National Statistics Bureau. The separated data is going to be investigated in order to explain the relationship among the variables. It is interesting to observe the behaviour of different types of ownerships in China and also the types of industries. Moreover, the effect of advertising, having high education background and high skill level of employees, training cost would also be looked in.

Firstly, the behaviour of those three industrial sectors is going to be investigated. In China, according to the data set, the firms are highly employed in the seafood processing industry and the telecommunication industry comes after. The bar chart below shows the number of firms in particular industries.

It is found that there is 52.2% of firms are in seafood process industry, 6.2% are in that of footwear and 39.6% are in that of telecommunication. It is also found that the percentage of firms having employees above average in seafood processing industry is 22.9%, that in footwear industry is 44.2% and that in telecommunication industry is only 16.1%. It is proved that the footwear industry is highly labour-intensive and the telecommunication industry is not as its demand of labour is less than the others.

When we are considering the industrial dummies, the value of the total assets of the firms might also be interested as firms in a particular industry could be capital-intensive. When the percentage of firms having total assets value above average among the firms in the data is being generated, it is proved that the telecommunication industry is absolutely capital-intensive. It is found that the telecommunication industry has more than 23% of firms having above average s in their total assets value, while that in seafood processing industry is 15.4% and that in footwear industry is only 8.5%.

By using the regression method, it is found that there is a positive relationship between firm age and its size. When the size is being mentioned, it would be usually interpreted by the number of employees of the business. By using the data, we can comment that every one-year age of a firm would bring 4% increase of employees - 4% increase of firm size in other words. It could be explained by the rapid economic growth in China in the recent years. As the firms run longer, the size of the firms generally increased. Besides pointing out the relationship between the size and the age of the firms, there is also a positive relationship between the size and their profitability while it could be measured by the rate of ROE[6]. It is found that, averagely, firms would have 1.1% increases in ROE by having 1% more employees. It could be explained by the high efficiency and high productivity of the large firms which have more employees.

It is surprising that there are 75.2% of firms in China are spending nothing on advertisement. This problem could be most obvious be found in the footwear and seafood processing industries while more than 80% of firms in these industries are not intended to advertise. However, it is found that there is a positive relationship between the advertising expenses and the industrial sales value. In 2006, spending on advertising has been estimated at $155 billion in the US[7] and $385 billion worldwide[8]. Firms would take benefit from building up better brand image by advertising. It could be done on television, radio, cinema, magazines, newspapers, and even the Internet. (Marcouse, 2005) The phenomenon in China, a developing country, could be cause by the conservative marketing strategy.

When we look into the labour educational level and labour skills qualification, it shows that the high labour educational level and high labour skills qualification would bring positive effect to the business. For the labour educational level, it is found that every master degree holder would bring 6.5% increase of sales value to the business. The R-squared suggests that 5.36% of the variations in the logarithm value of sales values explained by the variations of the number of workers who are master degree holder. For the labour skills qualification, it is also found that every employee who has a high professional qualification would bring 2.4% increase of the sales value. The R-squared suggests that 4.27% of the variations in the logarithm value of sales values explained by the variations of the number of workers who have high professional qualifications.

In 2007, China was the second exporter in worldwide which had a total export value of US$1,220 billion[9]. After China, the US had the total export value of US$1,148 billion and UK had that of US$442 billion. The export activities become a more concerned issue in worldwide nowadays as countries are having different opportunity cost in producing with the limited resource. People may ask what factor would bring a higher amount of export. It is interesting that the amount of export is positively related to the innovativeness. In the data set, as innovativeness could be identified by new product sale, 1% of new product sales would bring 8.13% increase in the value of export.

According to the data again, there are 2,683 firms out of 4,527 are spending nothing on training their labour. It occupied 59.2% of the observed firms. It is suggested that business should offer sufficient basic training to their employees. It can ensure the labour productivity and the quality of products. Moreover, the chance of labour having accident in the workplace would also be decreased and hence maintain the labour morale. To improve this problem, the government may increase the subsidies to the firms. It is found that every 1% of subsidy increase would lead to an increase of money spending on training 9.6% in average. It shows that the businesses are generally prepared to spend money on training workers if they are subsidised.

Conclusion

To sum up, China is a developing country and its economic is growing rapidly in these years with many data supported such as GDP and export volume. It is explained that the productivity of firms is mainly depending on the firms' size, age, industrial dummies, amount of money spent on training, total assets and the education level of employees. Apart from the data explained by the business theories, there are many interesting variables are being investigated according to the data used in this paper. In the data set, there are variables taken out and observed to explained their relationship. The table below summarised the results.

Variables

Relationship

Coefficient

Number of employees (log)

Positive

4%

Age of firms

ROE (log)

Positive

1.1%

Number of employees (log)

Industrial sales value

Positive

75 yuan RMB

Advertising cost

Industrial sales value (log)

Positive

6.5%

Number of master degree holder

Industrial sales value (log)

Positive

2.4%

Number of high professional qualification employees

Export volume (log)

Positive

8.1%

New sales volume (log)

Training cost (log)

Positive

9.6

Subsidies form government (log)

* Logarithms (log) form of variables is being used to study the elasticity effects of the findings.

“Asia's fastest growingcountry (China) is planning to quadruple its GDP to US$4 trillion by 2020, with the per capita GDP reaching US$3,000.” Chinese President Hu Jintao said.

We look forward to seeing the economic growth in the next ten years and how the Chinese coop with the economic risk cause by the financial crisis recently. However, China is often being criticised that the humanity rights are disparaged. It is suggested to increase the minimum wages rate. Also, the Chinese government should encourage firms to provide sufficient training to the labours in both the private and public sectors.

Appendix

Do File

***generate log value***

gen lexport = log(export+1)

gen lage = log(age+1)

gen lunionmember = log(unionmember+1)

gen lta = log(ta+1)

gen lanfa = log(anfa+1)

gen lia = log(ia+1)

gen ltraining = log(training+1)

gen lsubsidy = log(subsidy+1)

gen lads = log(ads+1)

gen ltws = log(tws+1)

gen ltbef = log(tbef+1)

gen lemployee = log(employee+1)

gen lmaster = log(master+1)

gen lcolleage = log(colleage+1)

gen lhighsch = log(highsch+1)

gen lmidsch = log(midsch+1)

gen lhiprof = log(hiprof+1)

gen lmidprof = log(midprof+1)

gen lelemprof = log(elemprof+1)

gen lnewsales = log(newsales+1)

***Find out the number of firms in particular industries***

count if sector == "seafood process"

count if sector == "footware industry"

count if sector == "telecom equipment industry"

***Find out the mean of employees***

sum employee

***Find out the number of firm which has employees above average***

count if sector == "seafood process" & employee >=279

count if sector == "footware industry" & employee >=279

count if sector == "telecom equipment industry" & employee >=279

***Find out the mean of total assets***

sum ta

***Find out the number of firm which has employees above average***

count if sector == "seafood process" & ta >=423

count if sector == "footware industry" & ta >=423

count if sector == "telecom equipment industry" & ta >=423

***Find out relationship between age and size of firms***

reg lemployee age

***Find out the relationship between size and ROE***

reg lROE lemployee

***Find out the number of firms having no advertising***

count if ads==0

count if sector == "seafood process" & ads==0

count if sector == "footware industry" & ads==0

count if sector == "telecom equipment industry" & ads==0

***Find out relationship between isv and ads***

regress isv ads

***Find out relationship among isv, edu level and prof***

reg lisv master

reg lisv hiprof

**Find out relationship between export and innov.***

reg lexport lnewsales

***Count the number of firms don't spend money on training***

count if training == 0

***Find out relationship between training and subsidy***

reg ltraining lsubsidy

Bibliography

Aziz, J (2004). Rebalancing China's Economy: What Does Growth Theory Tell Us?

Dong Zhixin (2008) "China's GDP grows 11.4% in 2007, fastest in 13 years". ChinaDaily (2008-01-24).

Griffiths, WE. Hill, RC. Guay, CL. (2002) Using EViews for Principles of Econometrics. John Wiley & Sons, Hoboken

Gujarati (2007). Basic Econometrics. Lightning Source UK Ltd, London. P.14

Hendry, DF. (1993). Econometrics Alchemy or Science? Blackwell, Oxford

Johnston, J. DiNardo, J. (1997) Econometrics Method. McGraw-Hill Book, Singapore

Marcouse, I. (2005) Business Studies, Pearson Longman, London

Pindyck, RS. Rubinfeld, DL. (1998) Econometric Models and Econometrics Forecasts. McGraw-Hill Book, Singapore

Wall, N. Marcouse, I. Lines, D. and Martin. B (2003). Economics & Business Studies Handbook. Hodder Arnold, London

Werner, J. LeRoy, SF. (2001) Principles of Financial Economics. Cambridge University Press, Cambridge

Woolridge, J. (2006) Applied Principles of Finance

Wu, Jinglian (2004). Understanding and Interpreting Chinese Economic Reform. South-Western.

Y.Y. Kueh (1993). Economic Trends in Chinese Agriculture: The Impact of Post-Mao Reforms. Clarendon Press

[1] GDP is the sum of total value of a nation's output over a year. It includes total value of new goods and services produced in the country, regardless of by whom. (Wall, 2003: 130) (Gujarati, 2007: 14)

[2] The State Council is the chief administrative authority of the People's Republic of China. I t is chaired by the Premier of China.

[3] The currency of China is denominated as the yuan and commonly abbreviated as RMB.

[4] Sources: OECD; CEIC Data Company Ltd; desks

[5] According to the European Union's definition, small firms are defined as those having fewer than 50 employees, medium firms are those having between 50 and 250 employees and large firm are having more than 250 employees. (Wall, 2003: 280)

[6] ROE refers to the return on equity. It is calculated by the Net Income in the financial year divided by the firm's total equity. (Woolridge, 2006)

[7] Source from TNS Media Intelligence

[8] Source from Global Entertainment and Media Outlook: 2006-2010, a report issued by global accounting firm PricewaterhouseCoopers

[9] Source from The World Factbook, accessed 30 March 2007, Rank Order - Exports

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